CA Foundation Business Economics Study Material – Factors of Production

CA Foundation Business Economics Study Material Chapter 3 Theory of Production and Cost – Factors of Production

Factors of Production

Land:

Generally, land means earth’s surface.
However, in economics land refers to all the free gifts of nature i.e. natural resources. Land includes natural resources:

  1. on the surface of earth; E.g. Soil, forest, plots of land, etc.
  2. below the surface of earth, E.g. mineral deposits, etc. and
  3. above the surface of earth, E.g. climate, sunshine, rain, etc.

Land has the following characteristics

  1. Primary Factor. Land is the original and primary or natural factor of production. It provides various natural resources for production.
  2. Free Gift of Nature. Land is the creation of nature and not man made. It is a free gift of nature to mankind.
  3. Inelastic Supply. Land is fixed in supply. Its supply cannot be either increased or decreased by any human efforts. However, its supply is relatively elastic from the point of view of a firm.
  4. Lacks Geographical Mobility. Land cannot be moved bodily from one place to another. However, land is said to be mobile in the sense it can be put to many alternative uses.
  5. Passive Factor. Land does not yield any result unless human efforts and capital are employed.
  6. Heterogeneous. Land differs in nature, fertility, uses and productivity from one place to another.
  7. Permanent. It means that land cannot be destroyed. The productive power of soil is original and indestructible according to RICARDO.
  8. Diminishing Returns. The land is subject to the Law of Diminishing Returns more quickly in the cultivation of land.

Labour:

  • Labour in economics means any work whether physical or mental done in exchange for some monetary reward.
  • Anything done out of love and affection is not labour in economic sense.

Labour has the following peculiarities (characteristics) which makes it different from other factors:

1. Labour is inseparable from labourer

  • All other suppliers of factors can be separated from the factors which they supply. E.g. Land can be separated from its owner.
  • However, the labourer cannot be separated from the work which he performs. E.g. A doctor has to attend his patients in person. Labour is connected with HUMAN EFFORTS.

2. Human Factor

  • It is a live factor of production. Hence, labour has feelings and temperament.
  • So it is very much affected by surroundings, working, conditions, motivation, leisure, recreation, working hours, etc.

3. Highly perishable

  • Labour cannot be stored for future use. It is highly perishable.
  • A day lost without work means a day’s work gone forever.
  • Hence, labourer has weak bargaining power and has to accept even low wages.

4. The labourer sells his services and not himself

  • In the labour market it is labour which is brought and sold and not the labourer.

5. Heterogeneous

  • Labour power differs from labourer to labourer.
  • Labour power depends upon physical strength, education, skill, training, efficiency, etc.
  • Hence, labour can be classified as unskilled, semi-skilled and skilled labour.
  • The skilled labour is called as human capital.

6. Mobile

  • Labour is a mobile factor.
  • Labour is much less mobile than capital.
  • Labourer is human being and hence has attachment with his family, custom, religion, culture, etc. and so is hesitant to move from one place to another.

7. Active Factor

  • Labour is the most active factor of production. Other factors are made operative with the use of labour.

8. Labour has sociological characteristics.

  • Employment of labour involves problems relating to labour welfare.
  • E.g. Social security like provident fund, gratuity, medical benefits, pension, etc.
  • Other factors do not have such characteristics.

9. Supply curve of labour is backward sloping.

10. The supply of labour is inelastic in short run.

Capital:

  • In ordinary language, capital is used in the sense of money.
  • But in economics the term ‘Capital’ means man made stock of goods like factories, machines, tools, equipments, raw materials, dams, canals, transport vehicles, etc. which are used in production.
  • Thus, ‘Capital’ in economics is used in the sens(e of real capital i.e. capital goods.
    Capital has therefore, been rightly defined as “produced means of production” and as “man made instrument of production”.

Land and labour are primary or original factors of production. But capital is produced by man working with nature to help in the production of further goods. Following are the main characteristics of capital: –

1. Capital is man made
Capital is not produced by nature. It is artificial as it is produced by man.

2. Capital is productive
Use of capital increases the overall productivity in a given process. It provides tools and implements to labour for production.

3. Supply of capital is elastic

  • The supply of capital can be adjusted to demand.
  • The stock of capital depends on capital formation.
  • Thus, by raising the rates of savings and investments the supply of capital can be increased.

4. All capital is wealth

  • Capital is that part of wealth which is used in further production of wealth.
  • Hence, capital has all the characteristics of wealth like utility, scarcity, transferability and price.

5. Capital is a passive factor
It alone is unable to produce anything. It is ineffective without the use of labour and land.

6. Capital is the most mobile factor.
It has both place as well as occupational mobility.

7. Capital is durable
Physical capital assets like plant and machinery, factory buildings, etc. last over a long time in the process of production. However, they are subject to depreciation.

8. Capital involves social cost

  • In the creation of capital, the money to be used for present consumption has to be diverted.
  • Sacrifice of present consumption and enjoyment of the people is treated as a social cost.

Types of capital

CA Foundation Business Economics Study Material Factors of Production 1

  • Fixed Capital. Those durable physical assets which can be repeatedly used in the process of production for long periods are called fixed capital. E.g. Machinery, Plant, Tools, Factories, Railways, etc.
  • Circulating or Working Capital. Working capital refers to those goods which are used up in the single act of production. Such goods are used only ONCE in production. E.g. raw materials, power, fuel, etc. They are single use producer’s goods.
  • Sunk Capital. Sunk capital is the capital which is used to produce only one single commodity. It can be put to a single specialized use only. E.g. A brick kiln can be used only to bake brick and nothing else. Sunk capital therefore, lacks occupational mobility.
  • Floating Capital. Floating capital is that which can be put to several uses. E.g. electricity, money, leather, etc.
    Real Capital. Real capital refers to the physical capital goods like machinery, raw material, factory buildings, etc. which help in production.
  • Human Capital. The human capital is in the form of people who are equipped with education, skills, training, good health, etc. A faster economic growth can be achieved with the accumulation of human capital.
  • Tangible Capital. Tangible capital is one which can be seen and touched. E.g. machinery, tools, etc. in other words, it is real capital.
  • Intangible Capital. It cannot be seen or touched. It can only be felt. E.g. goodwill, etc.
    Money Capital. It is in the form of shares, debentures, bonds, stock certificates, etc. Money is invested in expectations of returns.
  • Individual Capital. Capital resources having personal or private ownership of an individual or group of individuals is called individual capital. E.g. Tata Enterprises.
  • Social Capital. The capital which is owned by the society as a whole is called as social capital. E.g. roads, railways, schools, dams, canals, etc.

Capital Formation

  • Capital formation means a sustained increase in the stock of real capital in a country.
  • It is thus, an addition of capital goods like machines, tools, factories, transport facilities, power, etc. in the country.
  • Such capital goods are used for further production of goods and thus increases the production capacity of the country.
  • Capital formation is also known as investment.
  • Capital formation plays an important role in the development of an economy generally, higher the rate of capital formation, more economically developed an economy would be.

There are mainly three stages of capital formation which are as follows:-

1. Savings
Savings represents that part of income which is not consumed. Level of savings in a country depends on – (i) ability to save, and (ii) willingness to save.

(i) ability to save

  • Ability to save depends upon the income of an individual.
  • Higher the income, higher is the savings.
  • This is because with the increase in income the propensity to consume falls and propensity to save increases.
  • This is true in case of both the individuals and the economy.

(ii) willingness to save

  • A person with ability to save must also have willingness to save.
  • Willingness to save depends upon individual’s concern about future. If a person is foresighted and wants to make future secure, he will save more.
  • Willingness to save also depends upon family affection, desire for the growth and promotion of business, desire for prestige and power habits, sound banking system, stability in the money value, State’s taxation policy, etc.

2. Mobilization of Savings.

  • The money so saved by the households must enter into circulation i.e. must be mobilized and make them available to the businessmen or entrepreneurs who require it for investment purposes.
  • This requires a network of banks, financial institutions (like UTI, IDBI, etc.), insurance companies, etc.
  • Such facilities help to promote high rate of mobilization and canalization of savings.

3. Investments

  • The final stage is the investment of savings into capital assets like machinery, tools, buildings, dams, etc.
  • Investment requires a large number of honest, dynamic, daring, efficient and skilled entrepreneurs in the economy.
  • Investments also depends upon the factors like expected profits, rate of interest, size of market, stability in the money value, internal peace and security, fear of foreign aggression, etc.

Entrepreneur:

  • The most important factor in production i.e. enterprise is provided by entrepreneur.
  • An entrepreneur is a person or group of persons who bring together the different factors of production i.e. land, labour and capital at one place; combine them in right proportions; initiate the process of production by making them work together and bear the risks and uncertainty involved in it.

He is therefore also called the organizer, the manager or risk bearer. An entrepreneur performs the following functions:-

1. Initiating a business enterprise

  • The first function of an entrepreneur is to start a business. For this he brings together the different factors of production like land, labour and capital.
  • He pays them their respective remuneration i.e. rent for land, wages to labour and interest to capital.
  • Any surplus left after factor payment is his reward i.e. profit which is not fixed.
  • If his planning goes wrong he may also incur losses.

2. Risk and Uncertainty bearing

  • Main function of an entrepreneur is to bear risk and uncertainty. According to Prof. F. H. Knight there are two types of risks namely –
    1. Foreseeable or insurable risks e.g. risk of fire, thefts, accidents, etc.
    2. Unforeseeable or non-insurable risk e.g. technological risks due to inventions, fluctuations in demand due to change in fashion etc., trade cycles, changes in govt, policies, etc.
  • Foreseeable risks can be predicted and hence can be insured. Such risks do not cause uncertainty and thus do not give rise to profits.
  • Unforeseeable risks involve uncertainty and give rise to profits.
  • True entrepreneurship lies in bearing non-insurable risks and uncertainties.

3. Innovations

  • Prof. Joseph A. Schumpeter considers innovation as the true function of the entrepreneur.
  • Innovation refers to all those changes in the production process the objective of which is to reduce the cost of production and increase profits.
  • Innovations in wider sense includes introduction of new or improved production methods, a new machine, a new plant, use of a new source of raw material, change in the internal organizational set-up, etc.
  • Such innovations give rise to profits but temporarily because once these are adopted by other firms, the profits could disappear.
  • Hence, entrepreneur has to continuously introduce new innovations and contribute to technological progress and economic growth of the country.

Enterprise’s objectives and constraints
Earning profit is considered to be the prime objective of every business. However, earning profit cannot be the only objective of the business because an enterprise functions in the economic, social, political and cultural environment. Hence, an enterprise has to set us objectives in relation to such environment. The objectives of an enterprise are as follows:

1. Organic objectives: The basic purpose of all kinds of enterprises is to SURVIVE and EXIST i.e. to stay alive. This is possible only when it is able to recover its costs and earn profits. Once the enterprise is assured of its survival, it will aim at growth and expansion.

  • Growth as on objective has gained importance with the rise of professional managers. H.L. Marris’s and other economists assert that managers of a corporate firm are interested in maximizing the growth rate rather than in profit maximization.
  • Owners are interested in profits, capital, market share and public reputation.
  • For growth and expansion of the firm it is necessary that adequate profits are made so as to provide internal funds for further investment.
  • Growth and profit are both positively related to the size of the firm. Both of the objectives converge in one namely A STEADY GROWTH IN THE SIZE OF THE FIRM.
  • Managers prefer balanced rate of growth over profits. The growth rate and growth is measured in terms of sales, number of branches, number of employees, etc.

2. Economic Objectives: The basic and important objective of every business is to earn profit. Accordingly therefore, the firm determines the price and output policy in a j manner that profits can be maximized.

  • Investors expect sufficient returns from their company. Similarly, creditors and employees are also interested in profitable enterprise.
  • The definition of profits in economic sense has different meaning than accountants’ definition of profits.
  • Accounting Profit = Total Revenue – Accounting Cost (Explicit Cost)
  • Economic Profit = Total Revenue – Economic Cost (i.e. Explicit + Implicit Cost)
  • Profit maximization objective has been criticized because all firms do not aim to maximize profits. E.g.-
    (i) Some firm try to achieve SECURITY with reasonable level of profit.
    (ii) Some firms may try to MAXIMISE SALES (Prof. Baumol)
    (iii) Some economists point that owners and managers of a company try to MAXIMISE THEIR UTILITY rather than profit.

3. Social Objectives: A business enterprise is an integral part of society. It lives in a society. It cannot grow unless it meets the needs of the society. It makes use of resources of society. Therefore, it owes something to society. Some of the important social objectives j of business are-

  • To maintain continuous and desired quantity of unadulterated goods of standard quality.
  • To avoid unfair trade practices.
  • To avoid profiteering and anti-social practices.
  • To create opportunities for gainful employment for the people in the society. A business should specially consider the handicapped, disabled and poor people.
  • To avoid air, water or noise pollution.

4. Human Objectives: Employees are precious resources who contribute abundantly to the success in business. Therefore, the overall development of its employees, keep them motivated and taking care of employees should be major objectives of an organization. The common human objectives are-

  • To provide fair deal to the employees at different levels.
  • To provide good working conditions.
  • To pay competitive and satisfactory wages and salaries.
  • To impart training to employees and keep updating their knowledge.
  • To provide opportunities to employees in decision making process on the matters affecting them.

5. National Objectives: An enterprise should try to fulfil the nations need and aspirations. It should work towards implementation of national plans and policies. Some of the national objectives are- .

  • To remove inequality of opportunities and provide opportunities to all irrespective of caste and religion to work and to progress.
  • To produce according to national priorities.
  • To help country achieve self-sufficiency in production of all types of goods and thus reduce dependence on other countries.
  • To provide education and training to young men to bring about skill formation for achieving growth and development.
  • All the enterprises have multiple objectives and therefore, the need to set priorities by balancing of the objectives.

In the pursuit of the above objectives an enterprise’s action may get constrained in following ways-

  • Lack of knowledge and information about many variable that affect business.
  • Constraints may be experienced due to governments’ restrictions on the production, price and movement of factors.
  • There may be infrastructural bottleneck.
  • Changes in business and economic conditions; change in government policies about location, prices, taxes, etc.; natural calamities like fire, flood, famine, etc.
  • Constraints are also faced due to inflation, rising interest rates, unfavourable exchange rate, capital and labour costs, etc.

Enterprise’s Problems
A business enterprise face many problem from its start, through its life time till it is closed down. Following are the main problems:

1. Problems relating to objectives: An enterprise functions in the economic, social, political and cultural environment. Therefore, it has a set of many objectives in relation to its environment.

These multifarious objectives many times conflict with one another. Hence, the enterprise faces the problem of choosing and striking balance between them.
E.g.- Social responsibility objective may run into conflict with expansion of production activity resulting in pollution.

2. Problems relating to location and size of the plant: An enterprise has to decide about ‘ the LOCATION of its plant. In doing so, it has to consider many costs like cost of labour, facilities and cost of transportation to decide where its plant should be located.

Another problem faced is about SIZE of the firm, whether it should be a small scale or large scale unit. Before deciding upon the scale of operations several aspects will have to be considered like technical, managerial, marketing, financial, etc.

3. Problems relating to selecting and Organising physical facilities: A firm has to decide about the nature of production process to be used and the type of equipments required for it. This will depend upon the require^ volume of production
This choice will be based on-
(i) the evaluation of costs of different equipments, and (ii) efficiency
It has also to prepare layout of plant.

4. Problems relating to Finance: A firm also has to do good financial planning. For this an enterprise will have to determine-

  • amount of funds required,
  • demand and cost of its products,
  • profits on investments, and
  • capital structure

5. Problems relating to Organisation Structure: An enterprise faces problem relating to organizational structure. It has to divide the total work of the enterprise by creating different departments in order to carry on the specialized functions by each department. It has to clearly define the roles and relationships of all positions also.

6. Problems relating to Marketing: For survival and growth, a firm has to properly do marketing of its products and services.

  • It has to identify its actual and potential customers, tools of marketing, etc.
  • After identifying the market, the firm has to decide upon product, promotion, price and place aspects.

7. Problems relating to Legal Formalities: Many legal formalities are to be carried out at the time of formation, during the life time and at closure.
E.g.- assessing various taxes and paying, maintenance of records, filing various returns, adhering to laws formulated by Govt., etc.

8. Problems relating to Industrial Relations: This problem relates to winning worker’s co-operation, enforcing discipline among workers, workers participation in management, dealing with trade unions, etc.

 

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Test Questions

1. The process of economic liberalization in India began mainly in
(a) 1990
(b) 1991
(c) 1992
(d) 1993

2. Partial or complete sale of a public sector enter-prise is called
(a) liberalization
(b) privatization
(c) globalization
(d) none of them

3. Integration of national economies into a world economy is known as :
(a) privatization
(b) globalization
(c) liberalization
(d) all of them

4. Give the full forms of the following:
(a) ADRs
(b) GDRs
(c) FCCBs
(d) FDI

5. The initial trigger for the policy of economic liberalization in India in 1991 was
(a) foreign exchange crisis
(b) shortage of cash
(c) overpopulation
(d) none of them

6. Which of the following is an example of industrial reforms:
(a) delicensing of industry
(b) simplification of licensing products
(c) permission to public sector units to raise capital from the capital market
(d) all the above.

CA Foundation Business Economics Study Material – Monopoly

CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Monopoly

MONOPOLY

Introduction:

  • ‘Mono’ means single and ‘Poly’ means seller.
  • So monopoly refers to that market structure where there is a single firm producing and selling a commodity which has no close substitute.
  • As there is no rival firms producing close substitute,
    – the monopoly firm itself is industry, and
    – its output constitutes the total market supply.

Features of Monopoly Market:

Following are the main features of the monopoly market:

  1. Single seller and Large number of buyers
    • There is only one seller or producer of a commodity in the market but there are many buyers.
    • As a result, the monopoly firm has full control over the supply of the commodity.
  2. No close substitutes.
    • The commodity sold by the monopolist generally has no close substitutes.
    • Therefore, the cross elasticity of demand between monopolist’s commodity and other commodity is zero or less than one.
    • As a result monopoly firm faces a downward sloping demand curve.
  3. Restrictions to entry for new firms.
    • The monopoly firm controls the situation in such a way that it becomes difficult for new firms to enter the monopoly market and compete with monopoly firm.
    • There are many barriers to the entry of new firm which can be economic, institutional or artificial in nature.
  4. Price maker
    • A monopoly firm has full control over the supply of the commodity
    • Price is solely fixed by the monopoly firm.
    • So, a monopoly firm is a “price maker”.

Sources of Monopoly:

The sources of monopoly may be listed as follows:

  1. Patents, copyrights and trade marks.
    • Legal support provided by the government to promote inventions, to produce a particular commodity, etc. by granting patents, copyrights, trademarks, etc. creates monopoly.
  2. Control of raw materials.
    • If one firm acquires the sole ownership or control of essential raw materials, then the other firms cannot compete.
  3. Economies of large scale.
    • The monopoly firm may be very big and enjoy economies of large scale of production.
    • The cost of production is therefore low, hence it may supply goods at low prices.
    • This leaves no scope for new firms to enter the market.
  4. Government control on entry
    E.g. – In defense production; public utility services like water, transportation, electricity, etc.
  5. Business combines.
    • Monopolies are created by forming cartels, pools, syndicates, etc. by the firms producing the same goods to control price and output.

Average Revenue and Marginal Revenue Curves under Monopoly

  • Monopoly firm constitutes industry.
  • Therefore, the entire demand of the consumers faces the monopolist.
  • The demand curve of a monopoly firm is the same as the market demand curve of the commodity.
  • As the demand curve of the consumers for a commodity slopes downward, the monopolist faces a downward sloping demand curve.
  • This means that monopolist can sell more quantity only by lowering the price of the commodity
  • The demand curve facing the monopolist is also his average revenue curve. Thus, average revenue curve of the monopolist slopes downwards
  • As the demand curve i.e. average revenue curve slopes downwards, marginal revenue curve will be below it.

CA Foundation Business Economics Study Material - Monopoly 1
CA Foundation Business Economics Study Material - Monopoly 2

  • In the figure above, AR curve of the monopolist slopes downward and MR curve lies below it.
  • At a quantity OQ, average revenue ie. price is OP (=QT) and marginal revenue is QK which is less than average revenue OP (=QT).

Thus, in case of monopoly —

  1. AR and MR are both negatively sloped curves,
  2. MR curve lies half way between the AR curve and the Y-axis,
  3. AR cannot be zero i.e. AR curve cannot touch X-axis,
  4. MR can be zero or even negative i.e. MR curve can touch or cut the X-axis.

Short Run Equilibrium of the Monopoly Firm (Price – Output Equilibrium)

  • A monopolist will produce an output that maximizes his total profits.
  • A monopolist will maximize his total profits when —
    1. Marginal Cost = Marginal Revenue (MC = MR), and
    2. Marginal cost curve cuts the marginal revenue curve from below.
  • When a monopoly firm is in the short run equilibrium, it may find itself in the following situations —
    1. Firm will earn SUPER NORMAL PROFITS if its AR > AC;
    2. Firm will earn NORMAL PROFITS if its AR = AC, and
    3. Firm will suffer LOSSES if its AR < AC.

1. Super Normal Profits (AR > AC):
The monopoly firm would earn super normal profits if at the equilibrium output AR > AC.

CA Foundation Business Economics Study Material - Monopoly 3
CA Foundation Business Economics Study Material - Monopoly 4

2. Normal Profits (AR = AC):
The monopoly firm would earn normal profits if at the equilibrium output AR = AC.

CA Foundation Business Economics Study Material - Monopoly 5

3. Losses (AR < AC):
The monopoly firm would suffer losses, if at the equilibrium output its AR < AC.

CA Foundation Business Economics Study Material - Monopoly 6

If monopoly firm’s AR > AVC or AR = AVC, it can continue to produce though it suffer losses at the equilibrium level of output. .

Long Run Equilibrium of a Monopoly Firm:

  • The long run equilibrium of the monopoly firm is attained where its MARGINAL COST = MARGINAL REVENUE ie. MC = MR.
  • The monopoly firm can continue to earn super normal profits even in the long run.
  • This is because entry to the market for new firms is blocked.
  • All costs are variable costs in the long run and these must be recovered.
  • This means that monopoly firm does not suffer loss in the long run.
  • However, if it is unable to recover variable costs, it should shut down.

Fig. Shows the long run equilibrium of a monopoly firm.

CA Foundation Business Economics Study Material - Monopoly 7

  • Thus, we find that monopoly firm continue to earn super normal profits in long run.
  • A monopoly firm does not produce at the lowest point of LAC curve ie. does not produce at optimum level because of absence of competition.
  • In other words, it operates at sub-optimum level and therefore, does not produce optimum output.

Price Discrimination:

  • A monopoly firm is also the industry.
  • A single firm controls the entire supply.
  • Therefore, the firm has the power to sell the same commodity to different buyers at different prices.
  • When the firm charge different prices to different customers for the same commodity, it is engaged in price discrimination.
    E.g. – Electricity supplying firm charge higher rate per unit of electricity from industrial units than domestic consumers.

Conditions for price discrimination:
Price discrimination is possible under the following conditions:

  1. Existence of two or more than two sub-markets.
    • The monopolist should be able to divide the total market for his commodity into two or more sub-markets.
    • Such division of market may be on the basis of income, geographic location, age, sex, etc.
    • E.g. on the basis of income, a doctor may charge high fees from rich patients than from poor.
  2. Different markets should have different price elasticity of demand.
    • The difference in price elasticity of demand in different markets enables the monopolistto discriminate among customers.
    • He can charge higher price in inelastic market and lower price in elastic market.
  3. No possibility of resale.
    • It should not be possible for buyers to purchase the commodity from a cheaper market and sell it in the costlier markets.
    • In other words, there should be no contact among the buyers of the two markets.
  4. Control over supply.
    • The supply should be in full control of the monopolist.

Price-output determination under price discrimination

  • Suppose a discriminating monopolist sell his output in market ‘A’ and market ‘B’.
  • Market ‘A’ has less elastic demand and market ‘B’ has more elastic demand.
  • Suppose the monopolist has only one production facility then he is faced with the questions—
    • How much to produce?
    • How much to sell in each market?
    • How much price to charge in each market?
  • The monopolist will first decide profitable level of total output (ie. where MR = MC) and then allocate the quantity between two markets.
  • The condition for equilibrium here would be —
    1. MC = MRa = MRb. It means that MC must be equal to MR in individual markets separately.
    2. MC = AMR (aggregate marginal revenue). It means that the monopolist must be in equilibrium not only in individual markets but also when the two markets are treated as one.

The process of price determination under price discrimination is shown in the following figure —

CA Foundation Business Economics Study Material - Monopoly 8

  • In the fig. – MC curve intersect the AMR curve at point E
  • Point E shows the total output is OQ.
  • When a perpendicular EH is drawn, it intersect MRa at E1 and MRb at E2. These are the equilibrium point of market A and B
  • Point Et shows that quantity sold in market A is OQ1 and the price charged is OP1
  • Point E2 shows that quantity sold in market B is OQ2 and the price charged is OP2
  • Price charged in market ‘A’ is higher than in market ‘B’.
  • Thus, a discriminating monopolist chargers a higher price in the market ‘A’ having less elastic demand and a lower price in the market ‘B’ having more elastic demand.
  • The marginal revenue is different in different markets.

E.g. – Suppose the single monopoly price is Rs. 40 and elasticity of demand in market A and B is 2 and 4 respectively.

CA Foundation Business Economics Study Material - Monopoly 9

  • It is clear from the above example that the marginal revenue is different in different markets when elasticity of demand at the single price is different.
  • MR is higher in the market having high elasticity and vice versa.
  • In the above example, since marginal revenue in market ‘B’ is more, it will be profitable for monopolist to transfer some units of the commodity from market ‘A’ to ‘B’.
  • When monopolist transfers the commodity from market A to B, he is practicing price discrimination.
  • As a result, the price of commodity will increase in market A and will decrease in market B.
  • Ultimately the marginal revenue in the two market will become equal.
  • When marginal revenue becomes equal in the two markets, it will no longer be profitable to transfer the units of commodity from market A to B.

Objectives of Price discrimination:
To earn maximum profit; to dispose off surplus stock; to enjoy economies of scale; to capture foreign markets etc.

Degrees of price discrimination:
Pigou classified price discrimination as follows:

  1. first degree price discrimination where the monopolist fix a price which take away the entire consumer’s surplus,
  2. second degree price discrimination where the monopolist take away only some part of consumer’s surplus. Here price changes according to the quantity sold. E.g. large quantity sold at a lower price,
  3. third degree price discrimination where the monopolist charges the price according to location customer segment, income level, time of purchase etc.

 

CA Foundation Business & Commercial Knowledge Study Material – Objectives of Business

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Objectives of Business

Every business enterprise has certain objectives which regulate and generate its activities. Objectives are needed in every area where performance and results directly affect survival and prosperity of a business. Various objectives of business may be classified into four broad categories as follows:

ca-foundation-business-commercial-knowledge-study-material-objectives-of-business-1

Economic Objectives

Business is basically an economic activity. Therefore, its primary objectives are economic in nature.

The main economic objectives of business are as follows:

  1. Earning profits –
    A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit. Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources. Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.
  2. Creating customers –
    Profits are not created by God or by the force of nature. They arise from the businessman’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. In the words of Drucker, “There is only one valid definition of business purpose; to create a customer. The customer is the foundation of business and keeps it in existence. It is to supply the customer that society entrusts wealth-producing resources to a business enterprise”. No business can succeed without providing customers value for their money. Business exists to satisfy the wants, tastes and preferences of customers. In order to earn profit, business must supply better, quality goods and services at reasonable prices. Therefore, creation and satisfaction of customers is an important economic objective of business. Business creates customers through advertising and salesmanship. It satisfies the needs of customers by producing the required goods and services and by creating utilities.
  3. Innovations –
    Business is an organ of dynamism and change. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world. Innovation is not confined to the invention of a new machine. It comprises all efforts made in perfecting the product, minimising the costs and maximising benefits to customers. It involves improvements in management, production, selling servicing, methods of personnel and accounting, etc. Business firms invest money, time and efforts in Research and Development (R&D) to introduce innovations. They develop new technology, introduce new designs and new tools and processes to minimise costs and to satisfy ever increasing wants of customers. In order to create customers business has to explore new markets and attract more customers. It has also to retain old customers by providing better services to them.

Social Objectives

Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits. According to Henry Ford, “the primary aim of business should be service and subsidiary aim should be earning of profit”.

The social objectives of business are as follows:

  1. Supplying desired goods at reasonable prices –
    Business is expected to supply the goods and
    services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business to avoid malpractices like hoarding, black marketing and misleading advertising.
  2. Fair Remuneration to employees –
    Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees in recognition of their contributions. Such sharing of profits will help to increase the motivation and efficiency of employees. It is the obligation of business to provide healthy and safe work environment for employees. Good working conditions are beneficial to the organisation because these help to improve the productivity of employees and thereby the profits of business. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.
  3. Employment Generation –
    Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and the Government is unable to offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society. If unemployment problem increases, the socio-economic environment cannot be congenial for the growth of business activities.
  4. Fair return to investor –
    Business is expected to pay fair return to shareholders and creditors in the form of dividend and interest. Investors also expect safety and appreciation of their investment. They should be kept informed about the financial health and future prospects of business.
  5. Social welfare –
    Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY, Help Age, and others which render services to weaker sections of society.
  6. Payment of Government Dues –
    Every business enterprise should pay tax dues (income tax, GST, excise duty, customs duty, etc.) to the Government honestly and at the right time. These direct and indirect taxes provide revenue to the Government for spending on public welfare. Business should also abide faithfully by the laws of the country.
    Thus, businessmen should pursue those policies and take those actions which are desirable in terms of the objectives and values of our society.

Human Objectives

Business is run by people and for people. Labour is a valuable human element in business. Human objectives of business are concerned with the well-being of labour. These objectives help in achieving economic and social objectives of business. Human objectives of business are given below:

  1. Labour welfare –
    Business must recognise the dignity of labour and human factor should be given due recognition. Proper opportunities should be provided for utilising individual talents and satisfying aspirations of workers. Adequate provisions should be made for their health, safely and social security. Business should ensure job satisfaction and sense of belonging to workers.
  2. Developing human resources –
    Employees must be provided the opportunities for developing new skills and attitudes. Human resources are the most valuable asset of business and their development will help in the growth of business. Business can facilitate self-development of workers by encouraging creativity and innovation among them. Development of skilled manpower is necessary for the economic development of the country.
  3. Participative management –
    Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Such participation will also provide valuable information to management for improving the quality of decisions. Workers’ participation in management will usher in industrial democracy.
  4. Labour management cooperation –
    Business should strive for creating and maintaining cor¬dial employer-employee relations so as to ensure peace and progress in industry. Employees should be treated as honourable individuals and should be kept informed.

National Objectives

National objectives of business are as follows:

  1. Optimum utilisation of resources –
    Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.
  2. National self-reliance –
    It is the duty of business to help the Government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic independence. This requires development of new technology and its application in industry.
  3. Development of small scale industries –
    Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.
  4. Development of backward areas –
    Business is expected to give preference to the industriali-sation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers specific incentives to the businessmen who set up factories in notified backward areas.
  5. Control over pollution –
    Rapid industrialisation has resulted in air, water and noise pollution. Business is responsible for reducing the adverse effect of business on the quality of life. It must make proper arrangements for the disposal of smoke, effluents, wastes, etc. to protect the health and life of people, animals and birds.

BUSINESS OBJECTIVES AT A GLANCE

Economic Objectives

  1. Earning Profit
  2. Creating customers
  3. Innovations

Social objectives

  1. Quality goods at fair prices
  2. Fair remuneration to employees
  3. Generating employment
  4. Fair return to investors
  5. Social welfare
  6. Payments of taxes

Human Objectives

  1. Labour welfare
  2. Developing Human Resources
  3. Participative management
  4. Labour management Cooperation

National Objectives

  1. Optimum utilisation of resources
  2. National self-reliance
  3. Development of small scale units
  4. Development of backward areas
  5. Pollution control

Role of Profit in Business

Profit earning is essential in business due to the following reasons:

  1. Incentive – Profit is the driving force behind every business. It inspires people to start an enterprise and to work hard for making it successful. Profit is the reward for, undertaking the risk of business.
  2. Survival – Profit is essential for the survival of business and it ensures the continuity of an enterprise. In the absence of profits, an enterprise will eat up its own capital and ultimately close down. With the help of profits business can replace obsolete machinery and equipment and thereby maintain its capacity to create wealth. According to Drucker, “profit is the risk premium that covers the costs of staying in business”. Profits help business to face trade cycles and other shocks. Profits are also required to reward various factors of production.
  3. Growth – Profits is the biggest source of capital for expansion and growth of business. It serves as a means of self-financing. In addition, profits enable business to attract capital from outside. Nobody likes to invest money in a loss making enterprise.
  4. Measure of efficiency – Profit is considered to be the index of success in business. People judge the performance of an enterprise on the basis of profits earned by it.
  5. Prestige and recognition – A loss making business enjoys no goodwill. Profits provide economic power and status to businessmen. Higher profits increase the bargaining strength and credit worthiness of business. Moreover, only a profit making business can provide service to society.

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Thus, profit earning is an essential and desirable objective of every business. But mere money chasing is not business. According to Drucker, “the problem of any business is not the maximisation of profit but the achievement of sufficient profits to cover the risks of economic activity, and thus, to avoid loss. The businessmen who keep their customers, employees, investors and the society satisfied, will definitely earn good profits”. Urwick has very aptly summed up the relevance of profit motive in business as “earning of profits cannot be the objective of a business any more than eating is the objective of living”. A business cannot survive without profit just as a person cannot live without food. But profits cannot be the sole purpose of business just as eating is not the aim of life. However, profits must be earned by satisfying the wants of customers and after paying workers their dues. In the words of Arvind Mafatlal, “no business or industry is run philanthropically. It has to make a profit for further growth. But this profit cannot be at the expense of labour and the community at large”.

Economic and social objectives of business are not contradictory. They go hand in hand in the long run. No business can earn profits without satisfying customers and other sections of society.

Similarly, business cannot render service without earning profits. Thus, the real objective of business is to earn profit by serving the interests of consumers, employees, investors, Government and the society as a whole.

Objections against Profit Maximisation

Despite their indispensable role in business, profits cannot be the be-all and end-all of business.

The profit maximisation objective is undesirable on account of the following reasons:

  • Profit maximisation overstresses the end result and overlooks the means employed to achieve the profits. It considers profit as the ultimate goals of business rather than a means to the real end. The ultimate aim of business should be social welfare. If profit maximisation is considered as the ultimate aim of business, businessmen might try to maximise profits by socially undesirable means such as profiteering, black-marketing, hoarding, exploitation of workers and consumers, etc.
  • Profit maximisation overstresses the reward for owners and ignores the interests of other stakeholders. Profit is the reward for capital and profit maximisation gives the impression that a business concern is the domain only of owners. In reality, no business can succeed without the fullest co-operation of labour, consumers, Government and the community at large. Profit maximisation objective overlooks the stake of these groups in business.
  • Profit maximisation misguides managers to the point where they may endanger the survival of the business. In order to maximise current profits, managers may undermine the firm’s future. They may ignore research and development, executive development, pushing of the most easily saleable products, and other long-term investments. Such activities threaten the long-term success of the enterprise.
  • Profit maximisation has capitalistic overtones. The advocates of socialism decry the goal of profit maximisation on the ground that profit maximisation results in the exploitation of poor by the rich. It also accentuates inequalities in the distribution of income and wealth.
  • Profit maximisation is inconsistent with the modern trends in business. Diffusion of share
    ownership, professionalisation of management, growth of institutional shareholding and the emergency of a distinctive technostructure are some of these trends. The main goal of the technostructure (control by managers and technologists), is survival and growth of business. Profit maximisation may endanger long term growth and, therefore, the technostructure prefers long-term growth. These professionals regard profit maximisation as unrealistic, inappropriate and even immoral.

A truly successful business can be built only if the objective of service to the society is constantly followed. If this is done profits will come automatically, but if the whole emphasis is on making money business may not survive and succeed for a long period. The guiding principle of business should be profit through service. Every business should provide a proper balance between profit motive and social service.

CA Foundation Business & Commercial Knowledge Study Material – Nature of Business, Profession and Employment

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Nature of Business, Profession and Employment

NATURE OF BUSINESS, PROFESSION AND EMPLOYMENT

Meaning and Nature of Business

Business is an activity, in which different persons exchange something of value, whether goods or services, for mutual gain or profit. It is an organised or systematic activity involving the satisfaction of human wants. Business involves regular or recurring purchase and sale of goods and services with the purpose of earning profits through the satisfaction of human needs. Repeated dealings rather than a single isolated transaction constitute business. Business may be distinguished from other activities by the fact that goods and services created or purchased are meant for sale and not for personal consumption.
Various experts have defined business in different ways. Some of the popular definitions of business are given below:

  • L.H. Haney : “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”.
  • B.O. Wheeler – “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”
  • L.R. Dicksee – “Business is a form of activity pursued primarily with the objective of earning profits for the benefit of those on whose behalf the activity is conducted.”
  • James Stephenson – “Economic activities performed for earning profits are termed as Business”.
  • Keith and Carlo – “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”.
  • Urwick and Hunt – “Business is any enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for.”
  • R.N. Owens – “Business is any enterprise engaged in the production and distribution of goods for sale in market or rendering services for a price.”

The salient features of business are given below:

  1. Creation of utilities – Business makes goods more useful to satisfy human wants. It adds time, place, form and possession utilities to various types of goods. In the words of Roger, “a business exists to create and deliver value satisfaction to customers at a profit”. Business enables people to satisfy their wants more effectively and economically. It carries goods from place of surplus to the place of scarcity (place utility). It makes goods available for use in future through storage (time utility).
  2. Dealings in goods and services – Every business enterprise produces and/or buys goods and services for selling them to others. Goods may be consumer goods or producer goods. Consumer goods are meant for direct use by the ultimate consumers, e.g., bread, tea, shoes, etc. Producer goods are used for the production of consumer or capital goods like raw materials, machinery, etc. Services like transport, warehousing, banking, insurance, etc. may be considered as intangible and invisible goods. Services facilitate buying and selling of goods by overcoming various hindrances in trade.
  3. Continuity in dealings – Dealings in goods and services become business only if undertaken on a regular basis. According to Peterson and Plowman, “a single isolated transaction of purchase and sale will not constitute business. Recurring or repeated transaction of purchase and sale alone mean business.” For instance, if a person sells his old scooter or car it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings is an essential feature of business.
  4. Sale, transfer or exchange – All business activities involve transfer or exchange of goods and services for some consideration. The consideration called price is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them. For example, if a person cooks and serves food to his family, it is not business. But when he cooks food and sells it to others for a price, it becomes business. According to Peter Drucker “any organisation that fulfills itself through marketing a product or service is a business”.
  5. Profit motive – The primary aim of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.
  6. Element of risk – Profit is the reward for assuming risk. Risk implies the uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment. Changes in customers’ tastes and fashions, demand, competition, Government policies, etc. create risk. Food, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.
  7. Economic activity – Business is primarily an economic activity as it involves production and distribution of goods and services for earning money. However, business is also a social institution because it helps to improve the living standards of people through effective utilisation of scarce resources of the society. Only economic activities are included in business. Non-economic activities do not form a part of business.
  8. Art as well as science – Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

Meaning and Nature of Profession

The term profession means an occupation which involves application of specialised knowledge and skills to earn a living. The persons who are engaged in profession are called professionals. They render personal services of a specialised nature to their clients. The service is based on professional education, training and experience. Professionals receive fee for their services. Chartered Accountancy, medicine, law, tax consultancy are examples of professions. .

The main features of a profession are as follows :

  1. Specialised body of knowledge – Every profession has a specialised and systematised body of knowledge. Members of the profession are required to learn this knowledge.
    Restricted entry – Entry to a profession is allowed only to those who have completed the prescribed education and have passed the specified examination.
  2. Formal training – A profession provides facilities for formal education and training to those who want to acquire professional qualification.
  3. Professional association – Every profession has its own association. A professional associa¬tion is a statutory body and its membership is essential. The association regulates entry in the profession, grants certificate of practice, formulates and enforces code of conduct. For example, The Institute of Chartered Accountants of India (ICAI) regulates the accountancy profession in India.
  4. Service motive – Professionals are expected to emphasise services to their clients rather than economic gain.
  5. Code of conduct – The activities of a professional are regulated by a formal code of conduct. The code is prescribed by the professional association of which he is a member.

Names of various Professions and their Respective Associations are given below:

S.No. Professions Professional Professional associations
1. Medical Profession Doctors Medical Council of India
2. Law Profession Lawyers Bar Council of India
3. Accounting Profession Chartered Accountants The Institute of Chartered Accountants of India (ICAI)
4. Company Secretary Profession Company Secretaries The Institute of Company Secretaries of India (ICSI)
5. Cost Accounting Profession Cost Accountants The Institute of Cost and Works Accountants of India (ICWAI)
6. Engineering Profession Engineers The Institution of Engineers (India)

Meaning and Nature of Employment

Employment means an economic activity, where people work for others in exchange for some remuneration. The persons who work for others are called ’employees’. The persons or organisations which engage others to work for them are called ‘employers’. The remuneration by an employer to his employee is known as wages or salary. The employee performs the work assigned to him by his employer as per the terms and conditions of employment. There is an oral or written agreement between the employer and the employee. The employee acts under the guidance and control of his employer. The employer may be a Government (department) undertaking or a private firm. Employment thus includes all types of jobs in Government offices and private enterprises. When a professionally qualified person works as an employee he is also said to be in employment. For example, a doctor may be employed in a hospital, a chartered accountant may be working as an accountant in a company and a lawyer may serve as a law officer in a bank.

The main features of employment are as follows:

  • In employment, a person works for others called employer.
  • An employee provides personal service.
  • There is a service agreement or contract between the employee and the employer. It contains the terms and conditions of employment.
  • The employee has to obey the order of the employer.
  • No capital investment is made by the employee.
  • The employee gets wage or salary for his/her service.

Various examples of employment are as follows:

  • A teacher teaching in a school or college.
  • An engineer employed in Municipal Corporation of Delhi.
  • An accountant working in the accounts department of a company.
  • A person working as the plant manager of a factory.
  • A nurse or doctor working in a hospital.

Distinction between Business, Profession and Employment

  1. Mode of establishment – A business enterprise is established when an entrepreneur takes a decision to carry on some business activity. In a profession, on the other hand, the membership or enrollment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service.
  2. Nature of work – A business exists to provide goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.
  3. Qualifications – No formal education is compulsory in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In case of employment, the qualifications required depend upon the nature of the job. .
  4. Main objective – In business, the basic motive is to earn profits. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why, a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.
  5. Investment – Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering services. There is no need for capital in case of employment.
  6. Risk – There is an inherent element of risk in business and profession but practically no risk is involved in case of employment. There can be loss in business but in profession and employment return is never negative.
  7. Reward – Profit is the reward of a businessman while professional fee is the reward of a professional. The reward in case of employment is wage or salary. Wage/salary and fee are more regular and fixed than profits.
  8. Transfer of interest – It is possible to transfer ownership interest in business. But no such transfer is possible in case of profession and employment.
  9. Public advertisement – The success of a business depends upon public advertisements. But professionals are prohibited from giving public advertisements. There is no need for public advertisements in case of service.
    In spite of the above differences, there is a closed inter-relationship between business, profession and service. A large business enterprise employs a large number of persons in order to achieve its objectives. It also requires the services of professional experts such as chartered accountants, lawyers, architects, cost accountants, etc. Modern business has become very complex. Trained and experienced managers and other experts are required for efficient business operations. Professionals and other employees provide the necessary manpower for efficient running of business concerns. Thus, business, profession and employment are complementary to one another.

CA Foundation Business & Commercial Knowledge Study Material – Economic and Non-Economic Activities

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Economic and Non-Economic Activities

Every human being is busy in some activity or the other throughout the day. Every person gets up from bed in the morning, brushes his/her teeth, takes bath and eats breakfast. Then a child goes to School or College to study. An adult goes to work on the job and a housewife works at home. In the evening a person comes back home, watches television, eats dinner and goes to bed at night. All these activities in which a person engages from morning to evening are known as ‘human activities’.

ECONOMIC AND NON-ECONOMIC ACTIVITIES

All human activities may broadly be classified into two categories:

  1. Economic activities and
  2. Non-economic activities

Economic activities are undertaken with the object of earning money and acquiring wealth. These activities result in the production of economic goods and services. Business is an economic activity but it differs from other economic activities such as those of an employee, and self employed persons like doctors, lawyers, chartered accountants, etc.

ca-foundation-business-commercial-knowledge-study-material-economic-and-non-economic-activities-1

Non-economic activities are inspired by sentiments and emotions such as love for the family, desire to help the poor and love for the country. These activities are not undertaken for monetary gain but for one’s satisfaction and happiness.

Economic Activities

Economic activities refer to all those human activities which are undertaken to earn a living and thereby satisfy human wants. The main object of these activities is to earn income and create wealth. The money earned through work is used to satisfy wants. For example, a teacher teaches in a school or college, a doctor attends to patients in his clinic and a shopkeeper sells goods to his customers. Economic activities are concerned with the production, distribution and exchange of goods and services. These activities create utilities and result in the production of wealth. Economic activities are also called occupations.

The main characteristics of economic activities are as follows:

  1. Economic motive – Economic activities are undertaken to earn money and acquire wealth The main motive behind these activities is to make an economic gain. These activities are performed by human beings for earning livelihood.
  2. Productive – Economic activities involve production, distribution and exchange of goods and services for satisfying human wants. These activities are directly related to creation of wealth.
  3. Economic resources – Economic activities make use of economic resources such as land, labour, capital, etc.
  4. Rational use – Economic activities require proper allocation of scarce resources so as to obtain maximum output from them. These activities involve optimum utilisation of land, labour, capital and other factors of production. Welfare of society can be maximised when best possible use of resources is made.
  5. Economic growth – Economic activities determine the level of economic development of a country and the standard of living of its citizens.
  6. Legally valid – Human activities performed for economic gain are called economic activities only when they are lawful. Unlawful activities such as gambling, black marketing, theft, dacoity, smuggling etc., are opposed to public interest. Therefore, these activities cannot be called economic activities.
  7. Socially desirable – Economic activities are desirable for society. They must be in accordance with the expectations and norms of society.

Examples of economic activities

  • Production of goods by a manufacturer in a factory.
  • Distribution of goods by a wholesaler to retailers.
  • Selling of goods by a retailer to customers.
  • Transportation of goods and passengers by railways/roadways/airlines/ships.
  • Storage of goods by a warehouse keeper.
  • Acceptance of deposits and lending of money by a banker.
  • Insurance of risks by an insurance company.
  • Advertising and publicity of goods by an advertising agency.
  • A clinic run by a doctor.
  • Legal services provided by a lawyer in a court.
  • Audit services provided by a chartered accountant in his office.
  • Working of a Government officer.
  • Services of a teacher in a school/college.
  • Working of a farmer in his fields to self his produce.
  • Working of a nurse in a hospital.

Economic Activities at a Glance Characteristics

  1. Economic motive
  2. Productive
  3. Rational use
  4. Economic resources
  5. Economic growth
  6. Legally valid
  7. Socially desirable

Examples

  1. Manufacturing goods in a factory.
  2. Selling goods in a shop.
  3. A doctor treating patients in his clinic.
  4. A lawyer providing legal advice in his own office.
  5. A professor teaching in a university.
  6. A clerk working in a Government office.

Non-Economic Activities

Activities which are undertaken to satisfy social, religious, cultural and sentimental requirements are called non-economic activities. The object of these activities is not to earn monetary gain or reward. People engage in non-economic activities for reasons of love, sympathy, religion, patriotism, etc. For example, a mother looks after her children, a student donates blood, an old man goes to temple daily, a rich man donates money to Prime Minister Relief Fund, a young man helps a blind girl to cross the road, etc.

It is the object of any activity that distinguishes between economic and non-economic activities. The primary objective of economic activities is to earn livelihood and create wealth. On the other hand, the main objective of non-economic activities is to get some sort of social, cultural, religious or recreational satisfaction. The output of economic activities can be measured in terms of money e.g., the salary of a teacher, the fee of a doctor and the profits of a businessman. But the result of non-economic activities cannot be measured in terms of money.

The same activity may be economic as well as non-economic. For example, a nurse attending a patient in a hospital is an economic activity as the nurse works for a salary. But when the same nurse attends to her sick mother at home it is a non-economic activity because the object is not to earn money. Thus, the activity of the same person may be economic at one-time or place and non-economic at another time or place. The dividing line is not the activity or the person who is doing it but the objective for which it is undertaken.

Thus, non-economic activities are undertaken due to the following considerations :

  1. Love and affection – for example taking dinner with the family, cooking food for family.
  2. Personal satisfaction – for example meditating in a park.
  3. Physical needs – for example morning walk by a person.
  4. Religious obligation – for example praying in a temple.
  5. Social obligations – for example helping victims of an accident, flood or earthquake.
  6. Patriotism – donating blood for injured army men.

DISTINCTION BETWEEN ECONOMIC AND NON-ECONOMIC ACTIVITIES

S.No. Point of Distinction Economic Activities Mon-Economic Activities
1. Objective Economic objective – To earn a living and acquire wealth Sentimental and emotional objectives – To obtain some sort of personal satisfaction.
2. Expectation Money income is expected from these activities Money income is not expected from these activities
3. Relationship Directly related to income and wealth Not related to income and wealth.
4. Measurement of outcome Result can be measured in terms of money Result cannot be measured in terms of Money
5. Logic Guided by rational considerations of cost and benefit Guided by sentiments and emotions without regard to gain or sacrifice
6. Resources Involve proper allocation and optimum use of resources Optimum allocation and use of resources not essential
7. Types or examples Business, Profession and employment Family-oriented, religious, social, cultural and national.

Economic activities are also known as ‘occupations’. Economic activities or occupations may be classified into three broad categories as follows:

ca-foundation-business-commercial-knowledge-study-material-economic-and-non-economic-activities-2

CA Foundation Business Economics Study Material Chapter 5 Business Cycles – MCQs

CA Foundation Business Economics Study Material Chapter 5 Business Cycles – MCQs

MULTIPLE CHOICE QUESTIONS

1. The term business cycle refers to –
(a) fluctuations in aggregate economic activity over time.
(b) ups and down in the production of goods
(c) increasing unemployment
(d) declining savings

2. Expansion phase all but one of the following characteristics.
(a) Increase in national output
(b) Increase in consumer spending
(c) Excess production capacity of industries
(d) Expansion of bank credit

3. Which one of the following is not the characteristic of business cycle?
(a) They are recurrent
(b) They are not at regular intervals
(c) They have uniform causes
(d) All the above

4. The turning points of the business cycle are
(a) Expansion and Peak
(b) Peak and Contraction
(c) Contraction and Trough
(d) Peak and Trough

5. _____ refers to the top or the highest point of business cycle.
(a) Expansion
(b) Peak
(c) Expansion and Peak
(d) None of the above

6. Involuntary unemployment is almost zero in the _____ phase of business cycle.
(a) Expansion
(b) Contraction
(c) Trough
(d) Depression

7. The economy is said to be overheated at the _____ phase of business cycle.
(a) Expansion
(b) Peak
(c) Contraction
(d) Depression

8. Cost of living increases when business cycle is _____
(a) expanding
(b) contracting
(c) at peak
(d) at lowest point

9. There is large scale of involuntary unemployment in the _____ phase of business cycle.
(a) expansion
(b) peak
(c) contraction
(d) none of the above

10. Fall in the level of investments, fall in production, fall in employment, fall stock prices, etc. are found during _____ phase of business cycle.
(a) expansion
(b) boom
(c) peak
(d) contraction

11. All but one are the endogenous factors of business cycle
(a) War
(b) Changes in government spending
(c) Money supply
(d) Fluctuations in investments

12. _____ is the severe form of recession with lowest level of economic activity.
(a) Upswing
(b) Depression
(c) Downswing
(d) Peak

13. Fall in the interest rates is a typical feature of
(a) recovery
(b) boom
(c) depression
(d) contraction

14. During depression _____ industry suffer from excess production capacity.
(a) capital goods
(b) consumer durable goods
(c) non-durable goods
(d) both ‘a’ and ‘b’

15. The great depression of _____ caused enormous misery and human sufferings
(a) 1929 – 33
(b) 1919 – 23
(c) 1940 – 53
(d) 1950 – 63

16. The lowest level of economic activity is called _____
(a) contraction
(b) trough
(c) recovery
(d) none of the above

17. There is end of pessimism and the beginning of optimism at ______
(a) expansion
(b) peak
(c) trough
(d) depression

18. Which of the following is not the features of business cycle?
(a) Business cycle follow perfectly timed cycle
(b) Business cycle vary in intensity
(c) Business cycle vary in length
(d) Business cycle have no set pattern

19. The trough of a business cycle occur when _____ hits its lowest point.
(a) the money supply
(b) the employment level
(c) inflation in the economy
(d) aggregate economic activity

20. Industries that are most adversely affected by business cycles are the _____
(a) Durable goods and services sector
(b) Non-durable goods and services
(c) Capital goods and Non-durable goods sectors
(d) Capital goods and durable goods sectors

21. _____ indicators change before the economy itself changes.
(a) Lagging
(b) Coincident
(c) Leading
(d) concurrent

22. _____ indicators change after the economy as a whole changes.
(a) Lagging
(b) Coincident
(c) Leading
(d) Concurrent

23. Changes in stock prices, profit margins and profits, manufacturing activity, etc. are examples of _____ indicator.
(a) Leading
(b) Lagging
(c) Concurrent
(d) Coincident

24. A variable that moves later than aggregate economic activity is called _____
(a) a leading variable
(b) a coincident variable
(c) a lagging variable
(d) a cyclical variable

25. While _____ indicators forecast economic fluctuation, _____ indicators confirm the trends.
(a) lagging ; leading
(b) lagging ; coincident
(c) coincident ; leading
(d) leading ; lagging

26. A variable that occur simultaneously with the business cycle movements is _____ indicator.
(a) Leading
(b) Lagging
(c) Coincident
(d) Cyclical

27. Coincident indicators show _____
(a) the current state of business cycle
(b) the rate of change of expansion
(c) the rate of change of contraction
(d) all the above

28. At the time of Great Depression of 1930s, the global GDP fell by around _____
(a) 12%
(b) 14%
(c) 15%
(d) 10%

29. Which one of the following is not correct about business cycle?
(a) They occur simultaneously in all industries and sectors
(b) They affect not only output level but also other related variables
(c) They are international in character
(d) None of the above

30. Which of the following describes best a typical trade cycle?
(a) Economic expansions are followed by economic contractions
(b) Inflation is followed by rising income and employment
(c) Economic expansions are followed by economic growth and development
(d) Stagflation followed by rising employment

31. During upswing, the unemployment rate and output _____
(a) rises ; falls
(b) rises ; rises
(c) falls ; rises
(d) falls ; falls

32. Which of the following does not occur during expansion phase?
(a) Consumer spending increases
(b) Employment increases as demand for labour rises
(c) Business profits and business confidence increase
(d) None of the above

33. When aggregate economic activity is declining, the economy is said to be in _____
(a) contraction
(b) an expansion
(c) a trough
(d) a turning point

34. Which one of the following is not an example of coincident indicator?
(a) GDP
(b) inflation
(c) retail sales
(d) New orders for plant and machinery

35. Which one of the following is an example of lagging indicator?
(a) personal income
(b) new orders for plant and equipment
(c) the consumer price index
(d) slower deliveries

36. _____ is of the view that fluctuations in economic activities are because of fluctuations in aggregate effect demand.
(a) Keyens
(b) Schumpeter
(c) Nicholas Kaldor
(d) Joan Robinson

37. High rate of investment brings _____
(a) high level of employment
(b) increase in the aggregate demand
(c) increase in output
(d) all the above

38. If any unemployment exists during expansion phase of business cycle, it is _____ un employment.
(a) voluntary and frictional
(b) technological and structural
(c) frictional and structural
(d) structural and involuntary

39. The most probable outcome of increase in aggregate demand is _____
(a) expansion of economic activity
(b) contraction of economic activity
(c) stable economic activity
(d) volatile economic activity

40. According to _____ a trade cycles is a purely monetary phenomena
(a) Keyens
(b) Hawtrey
(c) Schumpeter
(d) Nicholas Kaldor

41. Optimistic and pessimistic mood of the business community also affects the economic activities is the view of _____
(a) Hawtrey
(b) Schumpeter
(c) Pigou
(d) Keyens

42. According to _____ trade cycles occur due to onset of innovations
(a) Hawtrey
(b) Adam Smith
(c) JM Keyens
(d) Schumpeter

43. Business cycles appear due to present fluctuations in prices affecting the output and employment in future is _____
(a) Cobweb theory by Nicholas Kaldor
(b) Ordinal theory by Allen & Hicks
(c) Cobweb theory by J.M. Keyens
(d) None of the above

44. Production of _____ goods fall during the war times.
(a) arms and ammunition
(b) non-durable and capital
(c) capital and weapons
(d) capital and consumer

45. During war times most of the productive resources are diverted for the production of
(a) capital goods
(b) consumer goods
(c) weapons and arms
(d) service

46. Economic recession is characterized by all of the following except _____
(a) Decline in investments, employment
(b) Increase in the price of inputs due to increased demand for inputs
(c) Investors confidence is shaken
(d) Demand for goods, services decline

47. Production of new and better goods and services using new technology results in _____
(a) expansion of employment
(b) increase in the incomes and profits
(c) boost to economy
(d) all the above

48. Understanding the business cycle is important for business managers because _____
(a) they affect the demand for their products
(b) they affect their profits
(c) to frame appropriate policies and forward planning
(d) all the above

49. Businesses whose fortunes are closely linked to the rate of economic growth called _____
(a) Cyclical business
(b) Capital good business
(c) Both ‘a’ and ‘b’
(d) None of the above

50. If the population growth rate is higher than the economic growth rate it will result in _____
(a) higher income ; lower savings ; lower employment
(b) lower income ; lower savings ; lower investment
(c) higher investment ; lower income ; higher saving
(d) lower income ; lower savings ; higher employment

Answers

CA Foundation Business Economics Study Material Chapter 5 Business Cycles - MCQs answers

CA Foundation Business Economics Study Material – Perfect Competition

CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Perfect Competition

PERFECT COMPETITION

Introduction:

Perfect competition is a market structure where there are large number of firms (seller) which produce and sell homogeneous product. Individual firm produces only a small portion of the total market supply.

Therefore, a single firm cannot affect the price.
– Price is fixed by industry.
– Firm is only a price taker.
– So the price of the commodity is uniform.

Features of perfect competition

Following are the main features of perfect competition:

  1. Large number of buyers and sellers:
    • The number of buyers and sellers is so large that none of them can influence the price in the market individually.
    • Price of the commodity is determined by the forces of market demand and market supply.
  2. Homogeneous Product:
    • The product produced by all the firms in the industry are homogeneous.
      – They are identical in every respect like colour, size, etc.
      – Products are perfect substitutes of each other.
  3. Free entry and exit of the firms from the markets:
    • New firms are free to enter the industry any time.
    • Old firms or loss incurring firms can leave industry any time.
    • The condition of free entry and exit applies only to the long run equilibrium of the industry.
  4. Perfect knowledge of the market:
    • Under perfect competition, all firms (sellers) and buyers have perfect knowledge about the market.
    • Both have perfect information about prices at which commodities can be sold and bought.
  5. Perfect mobility:
    • The factors of production can move freely from one occupation to another and from one place to another.
  6. No transport cost:
    • Transport cost is ignored as all the firms have equal access to the market.
  7. No selling cost:
    • Under perfect competition commodities traded are homogeneous and have uniform price.
    • Therefore, firm need not make any expenditure on publicity and advertisement.

Equilibrium of the Industry:

  • Industry is a group of firms producing identical commodities.
  • Under perfect competition, price of a commodity is determined by the interaction between market demand and market supply of the whole industry.
  • The equilibrium price is determined at a point where demand for and supply of the whole industry are equal to each other.
  • No individual firm can influence the price.
  • Firm has to accept the price determined by the industry.
  • Therefore, the firm is said to be price taker and industry, the price maker.

Equilibrium of the industry is illustrated as follows:

CA Foundation Business Economics Study Material - Perfect Competition

The above table and fig. shows that at a price of ₹ 6 per unit, the quantity demanded equals quantity supplied.
The industry is at equilibrium at point ‘E’, where the equilibrium price is ₹ 6 and equilibrium | quantity is 60 units.

Equilibrium of a firm:

  • We have already seen that under the perfect competition, the price of the commodity is determined by the forces of market demand and market supply le. price is determined by industry.
  • Individual firm has to accept the price determined by the industry. Hence, firm is a PRICE TAKER.

CA Foundation Business Economics Study Material - Perfect Competition 1

  • In the table – the equilibrium price for the industry has been fixed at ₹ 6 per unit through the inter-action of market demand and supply.
  • Table – shows that the firm has no choice but to accept and sell their commodity at a price that has been determined by the industry ie. ₹ 6 per unit.
  • The firm cannot charge higher price than the market price of ₹ 6 per unit because of fear of loosing customers to rival firms.
  • There is no incentive for the firm to lower the price also.
  • Firm will try to sell as much as it can at the price of ₹ 6 per unit.
  • Table – shows that firm’s AR = MR = Price.

CA Foundation Business Economics Study Material - Perfect Competition 2

  • Fig. shows that being a price taker firm, it has to sell at a given price i.e. ₹ 6 per unit.
  • Therefore, firm’s demand curve is a horizontal straight line parallel to X-axis i.e. a perfectly elastic demand curve.
  • We know that price of a commodity is also the AR for the firm.
  • Therefore, demand curve also shows the AR for different quantities sold by the firm.
  • As every additional unit is sold at a given price i.e. ₹ 6 per unit, the MR = AR and the two curves coincides.
  • Thus, in a perfectly competitive market a firm’s AR = MR = Price = Demand Curve

Conditions for equilibrium of a firm:

  • In perfect competition, the firms are price takers and output adjusters.
  • This is because the price of the commodity is determined by the forces of market demand and market supply ie. by whole industry and individual firm has to accept it.
  • Therefore firm has to simply choose that level of output which yields maximum profit at the prevailing prices.
  • The firm is at equilibrium when it maximises its profit.
  • The output which helps the firm to maximise its profit is called equilibrium output.
  • There are two conditions for the equilibrium of a firm. They are —
    1. Marginal Revenue should be equal to the marginal cost i.e. MR = MC. (First order condition)
    2. Firm’s marginal cost curve should cut its marginal revenue curve from below i.e. marginal cost curve should have positive slope at the point of equilibrium. (Second order condition)
  • If MR > MC, there is incentive to produce more and add to profits.
  • If MR < MC, the firm will have to decrease the output as cost of production of additional units is high.
  • When MR = MC, it is equilibrium output which maximises the profits.

CA Foundation Business Economics Study Material - Perfect Competition 3

  • Fig. shows that OP is the price determined the industry and firm has to accept it.
  • At prevailing price OP the firm faces horizontal demand curve or average revenue curve.
  • Since the firm sells every additional unit at the same price, marginal revenue curve coincides with average revenue curve.
  • In the fig. at point ‘A’, MR = MC but second condition is not fulfilled.
  • Therefore, OQ1 is not equilibrium output. Firm should expand output beyond OQ1 because
    – it will result in the fall of marginal cost, and
    – add to firm’s profits.
  • In the fig. at point ‘B’ not only
    MR = MC
    but MC curve cuts the MR curve from below Le. it has positive slope.
  • Therefore, OQ2 is the equilibrium level of output and point ‘B’ represents equilibrium of firm.

Supply curve of the firm in a competitive market

In a perfectly competitive industry, the MC curve of the firm is also its supply curve. This can be explained with the help of following figure.

CA Foundation Business Economics Study Material - Perfect Competition 4

  • The fig. shows that at the market price OP1 the firm faces demand curve D,.
  • At OP1 price the firm supplies OQ1 quantity because here MC=MR.
  • If the price rises to OP2 the firm faces demand curve D2.
  • At OP2 price the firm supplies OQ2 quantity.
  • Similarly at OP3 and OP4 price corresponding supplies are OQ3 and OQ4 respectively.
  • Thus, the firm’s marginal cost curve indicates the quantities of output which it will supply at different prices.
  • It can be observed that the competitive firm’s short run supply curve is identical only with that portion of MC curve, which lies above the AVC.
  • Hence, price ≥ AVC.

Short Run Equilibrium of a Competitive Firm. (Price – Output Equilibrium)

A competitive firm in the short run attains equilibrium at a level of output which satisfies the following two conditions:

  1. MC = MR, and
  2. MC curve cuts the MR curve from below.

When a competitive firm, is in short run equilibrium, it may find itself in any of the following situations —

  1. it break evens i.e. earn NORMAL PROFITS where Average Revenue = Average Cost i.e. AR = AC.
  2. it earns profit i.e. earn SUPER NORMAL PROFITS where Average Revenue > Average Cost i.e. AR > AC.
  3. it suffer LOSSES where Average Revenue < Average Cost i.e. AR < AC.

Normal Profits (AR = AC):
A firm would earn normal profits if at the equilibrium output AR=AC.
CA Foundation Business Economics Study Material - Perfect Competition 5

Super Normal Profits (AR > AC):
A firm would earn super normal profits if at the equilibrium output AR > AC.
CA Foundation Business Economics Study Material - Perfect Competition 6

Losses (AR < AC):
A firm suffer losses, if at the equilibrium level of output, its AR < AC.
CA Foundation Business Economics Study Material - Perfect Competition 7
CA Foundation Business Economics Study Material - Perfect Competition 8

  • When the firm incur losses, a question arises whether it should continue to produce or should it shut down ?
  • The answer to this lies in the cost structure of the firm.
  • Total cost of a firm = Total Fixed Costs + Total Variable Costs
  • Fixed costs once incurred cannot be recovered even if the firm shuts down.
  • Therefore, whether to shut down or not depends on variable costs alone.
  • If AR (Price) > AVC or AR = AVC, the firm can continue to produce even though it suffer losses at the equilibrium level of output.
  • If AR (Price) < AVC, the firm should shut down.

Long run Equilibrium of a Competitive Firm

  • In a perfectly competitive market there is no restriction on the entry or exit of firms.
  • Therefore, if existing firms are earning super normal profits in the short run, they will attract new firms to enter the industry.
  • As a result of this, the supply of the commodity increases. This brings down the price per unit.
  • On the other hand, the demand for factors of productions rises which pushes up their prices and so the cost of production rises.
  • Thus, the price line or AR curve will go down and cost curves will go up.
  • As a result of this, price line or AR curve becomes tangent to long run average cost curve. This wipes out super normal profit.
  • Hence, in long run firms earn only normal profits.

CA Foundation Business Economics Study Material - Perfect Competition 9

  • Fig. Shows that long run LMR = LMC = LAC = LAR = Price
  • The firm is at equilibrium at point E1
  • E1 is the minimum point of LAC curve. Thus firm produces equilibrium output OQ1 at the minimum or optimum cost.
  • In the long run under competitive market —
    – Firms earn just normal profits, and
    – competitive firms are of optimum size because they produce at optimum cost Le. at the lowest point of long run average cost curve.

 

CA Foundation Business Economics Study Material – Determination of Prices

CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Determination of Prices

Determination of Equilibrium Price

  • We know that law of demand reveals, if other conditions remain unchanged, more quantity of a commodity is demanded in the market at a lower price and less quantity is demanded at a higher price. Therefore, demand curve slopes downward.
  • Similarly, the law of supply reveals, if other conditions remain unchanged, more quantity of a commodity is supplied in the market at a higher price and less quantity is supplied at a lower price. Therefore, supply curve slopes upward.
  • Demand and supply are the two main factors that determine the price of a commodity in the market. In other words, the price of a commodity is determined by the inter-action of the forces of demand and supply.
  • The price that will come to prevail in the market is one at which quantity demanded equals 1 quantity supplied.
  • This price at which quantity demand equals quantity supplied is called equilibrium price.
  • The quantity demanded and supplied at equilibrium price is called equilibrium quantity.

The process of price determination is illustrated with the help of following imaginary schedule and diagram.

CA Foundation Business Economics Study Material - Determination of Prices

The above table shows that at a price of ₹ 3 per unit, the quantity demanded equals quantity supplied of the commodity. At ₹ 3 two forces of demand and supply are balanced. Thus, ₹ 3 is the equilibrium price and equilibrium quantity at ₹ 3 is 300 units.

CA Foundation Business Economics Study Material - Determination of Prices 1

  • The equilibrium between demand and supply can also be explained graphically as in Fig.
  • In Fig. the market is at equilibrium at point ‘E’, where the demand curve and supply curve intersect each other. Here quantity demanded and supplied, are equal to each other.
  • At point ‘E’, the equilibrium price is ₹ 3 per unit and equilibrium quantity is 300 units.
  • If the price rises to ₹ 4 per unit, the supply rises to 400 units but demand falls to 200 units. Thus, there is excess supply of 200 units in the market.
  • In order to sell off excess supply of 200 units the sellers will compete among themselves and in doing so the price will fall.
    As a result the quantity demand will rise and quantity supplied will fall and becoming equal to each other at the equilibrium price ₹ 3.
  • Similarly, if the price falls to ₹ 2 per unit, the demand rises to 400 units but supply falls to 200 units. Thus, there is excess demand of 200 units in the market.
  • As the price is less there is competition among the buyers to buy more and more. This competition among buyers increases with the entry of new buyers.
  • More demand and less supply and competition among buyers will push up the price.
  • As a result, quantity demanded will fall and quantity supplied will rise and become equal to each other at the equilibrium price of ₹ 3.

Effects of Shifts in Demand and Supply on Equilibrium Price

While determining the equilibrium price, it was assumed that demand and supply conditions were constant. In reality however, the condition of demand and supply change continuously.
Thus, changes in income, taste and preferences, changes in the availability and prices of related goods, etc. brings changes in demand conditions and cause demand curve to shift either to right or left.
In the same way, changes in the technology, changes price of labour, raw materials, etc., changes in the number of firms, etc. brings changes in supply conditions and cause supply curve to shift either to right or left.

(a) Change (shift) in Demand and Supply remaining constant.

CA Foundation Business Economics Study Material - Determination of Prices 2

  • In Fig.- DD and SS are the original demand and supply curves respectively intersecting each other at point E.
  • At point E, the equilibrium price is OP and the demand and supply (ie. equilibrium quantity) are equal at OQ.
  • When the demand increases, the demand curve shifts upwards from DD to D1D1 supply remaining the same.
    As a result, the equilibrium price rises from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
  • When the demand decreases, the demand curve shifts downwards from DD to D2D2, Supply remaining the same.
  • As a result, the equilibrium price falls from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

(b) Change (shift) in Supply and Demand remaining constant.

CA Foundation Business Economics Study Material - Determination of Prices 3

  • In Fig. – DD and SS are the original demand and supply curves respectively inter-sections each other at point E.
  • At point E, the equilibrium price is OP and the demand and supply (i.e. Equilibrium quantity) are equal at OQ.
  • When the supply increases, the supply curve shifts to the right from SS to S1S1 demand remaining the same.
  • As a result, the equilibrium price falls from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
  • When the supply decreases, the supply curve shifts to the left from SS to S2S2, demand remaining the same.
  • As a result, the equilibrium price rises from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

Effects of Simultaneous Shifts in Demand and Supply on Equilibrium Price

Sometimes demand and supply conditions may change at the same time changing the equilibrium price and quantity. The changes in both demand and supply simultaneously can be discussed with the help of following diagrams:

CA Foundation Business Economics Study Material - Determination of Prices 4

  • In Fig. – DD and SS are the original demand and supply respectively intersecting each other at point E at which the equilibrium price is OP and the equilibrium quantity is OQ.
  • Fig. (a) shows that the increase in demand is equal to increase in supply. The new curves D1D1 and S1S1 intersect at E1. Therefore, the new equilibrium price is equal to old equilibrium price OP. But equilibrium quantity increases.
  • Fig. (b) shows that the increase in demand is more than increase in supply. The new curves D1D1 and S1Sintersect each other at point E, which shows that new equilibrium price OP1 is higher than old equilibrium price OP. But equilibrium quantity increases.
  • Fig. (c) shows that the increase in supply is more than increase in demand. The new curves D1D1 and S1Sintersect each other at point E1 which shows that new equilibrium price OP1 is lower than old equilibrium price OP. But equilibrium quantity increases.

CA Foundation Business Economics Study Material – Meaning and Types of Markets

CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Meaning and Types of Markets

MEANING OF MARKET

  • In ordinary language, a market refers to a place where the buyers and sellers of a commodity gather and strike bargains.
  • In economics, however, the term “Market” refers to a market for a commodity. E.g. Cloth market; furniture market; etc.
    According to Chapman, “the term market refers not necessarily to a place and always to a commodity and buyers and sellers who are in direct competition with one another”.
  • According to the French economist Cournot, “Market is not any particular place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with each other that the prices of the same goods tend to equality easily and quickly”,

The above mentioned definitions reveals the following features of a market:

  1. A region. A market does not refer to a fixed place. It covers a region, which may be a town, state, country or even world.
  2. Existence of buyers and sellers. Market refers to the network of potential buyers and sellers who may be at different places.
  3. Existence of commodity or service. The exchange transactions between the buyers and sellers can take place only when there is a commodity or service to buy and sell.
  4. Bargaining for a price between potential buyers and sellers.
  5. Knowledge about market conditions. Buyers and sellers are aware of the prices offered or accepted by other buyers and sellers through any means of communication.
  6. One price for a commodity or service at a given time.

Classification of Market:

Markets may be classified on the basis of different criteria. In Economics, generally the classification is made as pointed out in the following chart—

CA Foundation Business Economics Study Material - Meaning and Types of Markets 1

TYPES OF MARKET STRUCTURES

Market can be classified on the basis of area, volume of business, time, status of sellers, regulation and control.
The main types of markets can be summed up as follows:

  1. Perfect Competition:
    • Perfect competition market is one where there are many sellers selling identical products to many buyers at a uniform.
  2. Monopoly:
    • Monopoly market structure is a market situation in which there is a single seller of a commodity selling to many buyers.
    • The commodity has no close substitutes available.
    • A monopolist therefore, has a considerable influence on the price and supply of his commodity.
  3. Monopolistic Competition:
    • Monopolistic competition is a market situation in which there are many sellers selling differentiated goods to many buyers.
  4. Oligopoly:
    Oligopoly is a market situation in which there are few sellers selling either homogeneous or differentiated goods.

Table: Features of major types of markets

Points Market Types
Perfect Competition Monopoly Monopolistic Competition Oligopoly
i. Number of sellers Many One Many Few
ii. Product Homogeneous Unique having no substitutes Differentiated Homogeneous or Differentiated
iii. Selling Cost No Negligible High High
iv. Degree of control over price No Control. Price taker. Full control. Price maker Limited due to product differentiation. Limited
v. Demand (or AR) Curve Horizontal straight line parallel to x-axis Downward sloping Downward sloping Indeterminate
vi. Price elasticity of demand Infinite P = MC Small P > MC Large P > MC Small

CONCEPTS OF TOTAL REVENUE, AVERAGE REVENUE AND MARGINAL REVENUE

Total Revenue: (TR)

  • Total revenue may be defined as the total amount of money received by the firm by selling a certain units of a commodity.
  • It is obtained by multiplying the price per unit of a commodity with the total number of units sold.
  • Total Revenue = Price per unit X Total No. of units sold
    TR = P X Q
  • E.g. A firm sells 100 units of a commodity @ ₹ 15 each, then its total revenue is ₹ 15 X 100 units = ₹ 1,500

Average Revenue: (AR)

  • Average revenue is the revenue per unit of the commodity sold.
  • It is simply the total revenue divided by the number of units of output sold.
    CA Foundation Business Economics Study Material - Meaning and Types of Markets 2
  • E.g. A firm earns total revenue of ₹ 2,000 by the sale of 100 units of a commodity, then its average revenue is ₹ 20 (₹ 2000 -MOO units)
  • By definition average revenue is the price per unit of output. To prove it
    CA Foundation Business Economics Study Material - Meaning and Types of Markets 3

Marginal Revenue (MR):

  • Marginal revenue refers to the addition to total revenue by selling one more unit of a commodity.
  • Marginal revenue may also be defined as the change in total revenue resulting from the sale of one more unit of a commodity
  • E.g. If a firm sells 100 units of a commodity @ ₹ 15 each, its TR is ₹ 1,500. Now, if it increases the sale by ten units i.e. it sells 110 units @ ₹ 14 each, its TR is ₹ 1,540. Thus,
    CA Foundation Business Economics Study Material - Meaning and Types of Markets 4
    Where
    ∆TR is the change in total revenue
    ∆Q is the change in the quantity sold
  • For one unit change – MRn = TRn – TRn-1
    Where
    MRn = Marginal Revenue from ‘n’ units
    TRn = Total Revenue of ‘n’ units
    TRn-1 = Total Revenue from ‘n-1’ units
    n = any give number

MARGINAL REVENUE, AVERAGE REVENUE, TOTAL REVENUE AND ELASTICITY OF DEMAND

The relationship between AR, MR and price elasticity of demand can be examined with the formula —
CA Foundation Business Economics Study Material - Meaning and Types of Markets 5
CA Foundation Business Economics Study Material - Meaning and Types of Markets 6
Figure: The relationship between AR, MR, TR & elasticity of demand.

The above figure reveals the following on a straight line demand curve (or AR curve):

  1. When e > 1, marginal revenue is positive and therefore total revenue is rising,
  2. When e = l, marginal revenue is zero and therefore total revenue is maximum, and
  3. When e < l, marginal revenue is negative and therefore total revenue is falling.

BEHAVIOURAL PRINCIPLES

Principle 1: A firm should not produce at all if its total revenue is either equal to or less than its total variable cost.
Principle 2: It will be profitable for the firm to expand output so long as marginal revenue is more than marginal cost till the point where marginal revenue equals marginal cost.
Also the marginal cost curve should cut its marginal revenue curve from below.

 

CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost – MCQs

CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost – MCQs

MULTIPLE CHOICE QUESTIONS

Theory of Production

1. The term production in economics means-
(a) creation of a physical product only
(b) rendering of a service only
(c) creation of economic utilities
(d) none of the above

2. Which of the following is considered production in economics?
(a) Singing a song in a birthday party
(b) Run for fun
(c) Giving tuitions
(d) Helping an old man to cross road

3. Making use of personal skill of doctors, lawyers, actors, etc. results in the creation of-
(a) form utility
(b) place utility
(c) personal/service utility
(d) time utility

4. Making available materials at times when they are normally not available is called conferring of utility of-
(a) place
(b) time
(c) form
(d) service

5. Which of the following statements incorrect?
(a) Man cannot create matter.
(b) Production is an activity of making some-thing material only.
(c) Production can be defined as addition of utility.
(d) Production is any economic utility which is directed towards the satisfaction of the wants of the people.

6. Economic utilities may be created or added
(a) By changing the form of raw materials into finished goods
(b) By transporting goods from one place to another
(c) By making things available when they are required
(d) All the above

7. Which of the following is not a feature of land
(a) Free gift
(b) Limited in quantity
(c) Mobile factor
(d) Indestructible

8. The factor of production which has no reserve price is-
(a) land
(b) labour
(c) capital
(d) all the above

9. Which of the following can be considered as labour in economics-
(a) Singing for pleasure
(b) A teacher teaching his own child at home
(c) Looking after, a sick friend
(d) A teacher teaching in school

10. The supply of land is-
(a) Unlimited
(b) Increased
(c) Decreased
(d) Limited

11. Land in economics means-
(a) Material and Non-material goods
(b) Minerals under the surface of earth
(c) All natural resources available to man for producing wealth
(d) All the above

12. Labour is-
(a) Active factor
(b) Passive factor
(c) Alternative factor
(d) None of the above

13. Which factor loses its value of it cannot find a purchaser today-
(a) Land
(b) Labour
(c) Capital
(d) All the above

14. Supply curve of labour is-
(a) upward sloping
(b) horizontal
(c) backward bending
(d) vertical

15. Income effect when wage rises means
(a) work hours rise
(b) work hours fall
(c) work hours remain constant
(d) work hours first fall and then rise

16. Which of the following statements is not true?
(a) Capital is a produced means a production.
(b) Capital is a man made instruments of production.
(c) Capital is a primary factor of production.
(d) Machine tools, factories, dams, canals, etc. are examples of capital.

17. Tools, machines, etc. are included in-
(a) circulating capital
(b) fixed capital
(c) sunk capital
(d) human capital

18. The capital which belongs to the society as a whole is called-
(a) Individual Capital
(b) Human Capital
(c) Social Capital
(d) Floating Capital

19. Raw material is an example of –
(a) Circulating Capital
(b) Fixed Capital
(c) Tangible Capital
(d) Real Capital

20. Which capital includes education, training, skill, ability?
(a) Human Capital
(b) Individual Capital
(c) Social Capital
(d) Real Capital

21. Goodwill, patent rights, etc. are examples of –
(a) Tangible Capital
(b) Real Capital
(c) Intangible Capital
(d) Human Capital

22. Which of the following statements is true?
(a) Capital Formation involves production of more capital goods.
(b) Capital Formation is also called investment.
(c) To accumulate capital goods, some current consumption is to be sacrificed.
(d) All the above

23. Surplus of production over consumption in an economy in a year is called-
(a) Capital
(b) Capital formation
(c) Stock
(d) Savings

24. The third stage of capital formation is-
(a) creation of savings
(b) mobilization of savings
(c) distribution of savings
(d) investment of savings

25. With an increase in income-
(a) the propensity to consume increases
(b) the propensity to save increases
(c) the propensity to consume remains constant
(d) the propensity to save falls

26. A ____ country has greater ability to save.
(a) poor
(b) developing
(c) rich
(d) under developed

27. An individual’s saving level depends upon-
(a) ability to save
(b) willingness to save
(c) both ‘a’ & ‘b’
(d) only ‘a’

28. The factor which mobilize land, labour and capital; combines them in the right proportion and then organizes the production activity is –
(a) Owner
(b) Labour
(c) Manger
(d) Entrepreneur

29. The reward of all factors of production is usually predetermined (pre-fixed) except-
(a) Land
(b) Labour
(c) Capital
(d) Entrepreneur

30. The reward of an entrepreneur for his efforts and risk-taking is-
(a) Interest
(b) Profit/Loss
(c) Rent
(d) Wages

31. The reward of capital is-
(a) Rent
(b) Interest
(c) Wages
(d) Profit

32. The reward of an entrepreneur i.e. profit is –
(a) predetermined income
(b) residual income
(c) constant income
(d) none of the above

33. The risks which can be anticipated and can be insured against are called-
(a) Insurable risks
(b) Non-Insurable risks
(c) Unforeseeable risks
(d) None of the above

34. The risks like change in demand for a commodity, the cost structure, fashion, technological, etc. which an entrepreneur has to bear are called-
(a) Uncertainties
(b) Insurable risks
(c) Foreseeable risks
(d) Both ‘a’ and ‘c’

35. According to _____ innovations introduced by an entrepreneur give rise to profits.
(a) Prof. F.H. Knight
(b) Prof. Joseph A. Schumpeter
(c) Prof. Paul Samuelson
(d) Dr. Alfred Marshall

36. Which of the following statement is incorrect?
(a) Mobilisation of savings is done through network of banking and other financial institutions.
(b) Land lacks geographical mobility but has occupational mobility.
(c) Entrepreneur is also called the organizer, § the manager or the risk taker.
(d) Labour can be stored.

37. Labour is ____
(a) Human factor
(b) Perishable
(c) inseparable from labour
(d) All the above

38. Leather in a shoe factory is
(a) Fixed capital
(b) Sunk capital
(c) Floating Capital
(d) Circulating capital

39. _____ Cannot be stored.
(a) Land
(b) Labour
(c) Capital
(d) Both a & b

40. Capital that can be used for several purposes or by several industries is
(a) Working capital
(b) Social capital
(c) Floating capital
(d) Human capital

41. Addition to the stock of capital goods in a country means
(a) Capital reduction
(b) Investment
(c) Capital formation
(d) Both (b) & (c)

42. Find the odd out
(a) Capital is man-made
(b) All capital is wealth
(c) Capital is durable
(d) Mobilisation of savings

43. Consider the following groups of items:
(i) Factory buildings
(ii) Plant and Machinery
(iii) Stocks of raw materials
(iv) Wage bills
Which of these are known as working capital?
(a) i and ii
(b) iii and iv
(c) i, ii and iii
(d) ii, iii and iv

44. The production function means relationship between
(a) Cost of input
(b) Cost of output
(c) Physical input to physical output
(d) Wages of profit

45. A production function is an expression of _____ relation between inputs and outputs.
(a) monetary
(b) economic
(c) quantitative
(d) qualitative

46. A short run production function is one in which-
(a) at least one factor is fixed
(b) all factors are fixed
(c) all factors are variable
(d) at least one factor is variable

47. Technically efficient combinations of inputs of those which-
(a) minimizes wastage
(b) maximizes profits
(c) minimises cost
(d) maximises reve¬nue

48. In the short period there is no change in factors.
(a) fixed
(b) variable
(c) human
(d) physical

49. In the period all factors are variable.
(a) short
(b) long
(c) market
(d) secular

50. In its original for Cobb-Douglas production function applies to-
(a) individual manufacturing firm
(b) individual firm
(c) whole of manufacturing in US
(d) None of the above

51. Cobb-Dauglas production function revealed that the increase in the manufacturing production was contributed by labour and capital respectively by-
(a) 3/4 th and l/4 th
(b) l/4 th and 3/4 th
(c) 2/3 rd and l/3 rd
(d) None of the above

52. Cobb-Douglas production-
(a) is linear
(b) is homogeneous
(c) shows constant returns to scale
(d) all the above

53. Cobb-Douglas production function exhibits returns to scale.
(a) increasing
(b) diminishing
(c) constant
(d) negative

54. The above equations shows that-
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 54

(a) One factor is fixed and another variable
(b) Both factors are fixed
(c) Both factors are variable
(d) Both factors are semi-variable

55. The main difference between the short period/ run and the long period/run is that –
(a) in the short period all inputs are fixed, while in the long period all inputs are variable.
(b) in the short run at least one input is fixed
(c) in the short run firm varies the quantities of all inputs
(d) in the long run, the firm uses the existing plant capacity

56. The law of variable proportions is a law of production which takes place in the-
(a) market period
(b) short run
(c) long run
(d) very long period

57. All but one are the assumptions of the law of variable proportions. Which one is not?
(a) There is only one factor which is variable
(b) All units of variable factor are homogeneous
(c) State of technology remains constant
(d) Applies in long run

58. When there is a fixed factor and a variable factor, then the law would be-
(a) law of increasing returns to scale
(b) law of constant returns to scale
(c) law of decreasing returns to scale
(d) law of variable proportions

59. The total quantity of goods and services produced by a firm with the given inputs during a specified period of time is called-
(a) Total Product
(b) Average Product
(c) Marginal Product
(d) Labour Product

60. The amount of output produced per unit of variable factor employed is called-
(a) Total Product
(b) Average Product
(c) Marginal Product
(d) Labour Product

61. The change in TP resulting from the employment of an additional unit of a variable factor is called-
(a) Total Product
(b) Marginal Product
(c) Average Product
(d) All the above

62. The average product of a variable input can be described as-
(a) total product divided by the number of units of variable input
(b) additional output resulting from employment of additional unit of variable factor
(c) the total quantity of goods produced with all inputs
(d) None of the above

63. TP of variable factor is –
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 63

(a) only i
(b) only i and iii
(c) only ii
(d) only ii and iv

64. Initially TP curve increases at an-
(a) increasing rate
(b) diminishing rate
(c) constant rate
(d) maximum rate

65. As more units of variable factor is employed it will-
(a) always increase the TP
(b) always decrease the TP
(c) not always increase the TP
(d) always result in constant TP

66. As long as TP is positive, AP is-
(a) negative
(b) constant
(c) positive
(d) falling

67. AP curve is-
(a) U-Shaped
(b) S-Shaped
(c) inverted U-Shaped
(d) inverted S-Shaped

68. MP curve is the slope of at each point.
(a) AP curve
(b) TP curve
(c) TR curve
(d) AR curve

69. When TP is maximum, MP is –
(a) rising
(b) falling
(c) zero
(d) negative

70. When TP is falling, MP is –
(a) zero
(b) rising
(c) negative
(d) falling

71. MP curve is –
(a) U – shaped
(b) S- shaped
(c) inverted U – shaped
(d) inverted S – shaped

72. When TP is maximum, the slope of TP curve is –
(a) rising
(b) falling
(c) constant
(d) zero

73. TP is the area under the –
(a) AP curve
(b) AR curve
(c) MP curve
(d) MR curve

74. MP is positive so long as TP is-
(a) increasing
(b) decreasing
(c) maximum
(d) negative

75. When TP is rising-
(a) AP and MP are rising
(b) AP and MP are falling
(c) AP and MP may be either rising or falling
(d) Only MP is either rising or falling

76. When MP is negative-
(a) TP and AP are falling
(b) TP and AP are rising
(c) TP and AP are constant
(d) Only TP is falling

77. When MP is at a maximum-
(a) AP = MP and TP is rising
(b) AP < MP and TP is rising
(c) AP > MP and TP is rising .
(d) AP and TP are falling

78. If MP goes on increasing, it should be understood that law of _____ is applying.
(a) increasing returns
(b) decreasing returns
(c) constant returns
(d) diminishing returns

79. If MP goes on decreasing it should be understood that law of _____ is in operation.
(a) decreasing cost
(b) constant cost
(c) average cost
(d) increasing cost

80. When MP is falling, TP will increase at the rate.
(a) constant
(b) increasing
(c) diminishing
(d) normal

81. When average product is maximum, marginal product is equal to-
(a) total product
(b) zero
(c) one
(d) average product

82. MP curve cuts AP curve from-
(a) its top
(b) below
(c) both ‘a’ and ‘b’
(d) neither ‘a’ nor ‘b’

83. The marginal product is maximum at the .
(a) equilibrium point
(b) inflection point
(c) focal point
(d) optimum point

84. The stage of production where the marginal product is greater than the average product is-.
(a) stage of increasing returns
(b) stage of diminishing returns
(c) stage of negative returns
(d) stage of constant returns

85. Which of the following statements reveal the diminishing returns?
(a) The MP of a factor is constant
(b) The MP of a factor is positive and rising
(c) The MP of a factor is falling and negative
(d) The MP of a factor is positive but falling

86. The MP curve is above the AP curve when the average product-
(a) is constant
(b) is falling
(c) is increasing
(d) is negative

87. The actual stage of production under the law of variable proportions is-
(a) stage of increasing returns
(b) stage of diminishing returns
(c) stage of negative returns
(d) stage of either increasing or diminishing returns

88. Reason for rise in both AP and MP curves is-
(a) under utilization of the fixed factor
(b) under utilization of the variable factor
(c) over utilization of the fixed factor
(d) over utilization of the variable factor

89. Reason for fall in both AP and MP curves is-
(a) under utilization of the fixed factor
(b) over utilization of the fixed factor
(c) under utilization of the variable factor
(d) full utilization of the variable factor

90. When AP and MP curves are rising, MP curve rises-
(a) at a faster rate
(b) at a lower rate
(c) at normal rate
(d) at constant rate

91. When AP and MP curves are falling, MP curve falls-
(a) at a faster rate
(b) at a lower rate
(c) at normal rate
(d) at constant rate

92. When AP and MP curves are rising, AP curve _____
(a) lies above the MP curve
(b) lies below the MP curve
(c) co-inside with the MP curve
(d) none of the above

93. The reason for increasing returns to factor is-
(a) Indivisibility of fixed factor
(b) Division of labour
(c) Specialisation
(d) All the above

94. When the ideal factor ratio is violated in short run-
(a) diminishing returns to a factor set in
(b) MP of the variable factor starts falling
(c) TP increases at a diminishing rate
(d) All the above

95. AP increases so long as-
(a) MP > AP
(b) MP < AP
(c) MP = AP
(d) MP is zero

96. AP may continue to even when MP starts declining.
(a) rise
(b) fall
(c) remain constant
(d) fluctuate

97. MP curve cuts AP curve from its top, this means-
(a) MP < AP
(b) MP > AP
(c) MP is rising
(d) MP is zero

98. Increasing MP implies TP is increasing at-
(a) increasing rate
(b) constant rate
(c) diminishing rate
(d) fluctuating rate

99. MP of labour becoming negative implies-
(a) excessive employment
(b) disguised unemployment
(c) over exploitation of the fixed factor
(d) all the above

100. TP starts declining only when-
(a) MP is rising
(b) MP is falling
(c) MP is negative
(d) MP is constant

101. MP of the variable factor may be zero or negative, but AP continue to be-
(a) constant
(b) positive
(c) negative
(d) zero

102. AP decreases when-
(a) MP = AP
(b) MP > AP
(c) MP < AP
(d) None of the

Use the following information of answer questions 103 to 105
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 102

103. In the above equations the fixed factor is-
(a) Labour
(b) Capital
(c) Output
(d) both ‘a’ & ‘b’

104. The MP of variable factor is-
(a) 4
(b) 5
(c) 6
(d) 7

105. In the equation (i) the AP of the variable factor is-
(a) 12 units
(b) 14
(c) 10
(d) 16

Use the following data to answer questions 106 and 107
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 105
TP is Zero level of employment

106. The total product when 5 units of labour are employed is-
(a) 60
(b) 76
(c) 90
(d) 96

107. The average product of 3rd unit of labour is-
(a) 21
(b) 20
(c) 19
(d) 18

Use the following data to answer questions 108 and 109
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 107

108. The total product of 3 units of labour is-
(a) 30
(b) 50
(c) 90
(d) 120

109. The marginal product of 5th unit of labour is-
(a) 10
(b) 20
(c) 30
(d) 40

Use the following data to answer questions 110 and 112
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 109

110. What is the total product when 2 hours of labour are employed?
(a) 160
(b) 200
(c) 360
(d) 540

111. What is the average product of the first 2 hours
(a) 250
(b) 260
(c) 270
(d) 280

112. What is the marginal product of the 3rd hour of labour?
(a) 160
(b) 180
(c) 120
(d) 200

113. Find the odd one out-
(a) law of diminishing returns to factor
(b) law of returns to scale
(c) cost function
(d) production function

114. The production process described below exhibits
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 114

(a) increasing marginal product of labour
(b) increasing returns to scale
(c) diminishing marginal product of labour
(d) constant marginal product of labour

115. Diminishing marginal returns for the first four doses of inputs when all factors of production are increased in the same proportion is revealed by the total product sequence
(a) 50, 50, 50, 50
(b) 50, 100, 150, 200
(c) 50, 90, 120, 140
(d) 50, 110, 180, 260

116. The behaviour of output in response to a change in the scale is studied in the-
(a) Market Period
(b) Short Period
(c) Long Period
(d) Very Short Period

117. In the theory of production the long runs is defined as the period of time in which-
(a) All factors can be varied
(b) No factors can be varied
(c) Some factors are fixed but other can be varied.
(d) None of these

118. If all inputs are increased in the same proportion, then it is a case of-
(i) Short run production function
(ii) Long run production function
(iii) Laws of Variable Proportions
(iv) Laws of Returns to Scale
(a) i and ii only
(b) ii and iii only
(c) i and iv only
(d) ii and iv only

119. In the long run-
(a) all inputs are fixed
(b) one input is fixed and one input is variable
(c) all inputs are variable
(d) two inputs are variable and one input is fixed

120. Law of increasing returns to scale will apply if-
(a) economies exceed the diseconomies
(b) economies and diseconomies are equal
(c) diseconomies exceed the economies
(d) in all the above situations

121. Internal economies accrue when-
(a) an industry develops
(b) an economy grows
(c) foreign trade develops
(d) a firm expands production in long run

122. External economies accrue when-
(a) a firm expands
(b) an individual progress
(c) an industry expands
(d) trade expands

123. If we have constant returns to scale and we increase both labour and capital by 10% output will also increase by-
(a) 20%
(b) 30%
(c) 10%
(d) 5%

124. Find the odd one out-
(a) All factors are variable
(b) A firm can experience returns to scale
(c) Management can be reorganized
(d) Law of variable proportions

125. Economies of scale means-
(a) reduction in per unit cost of production
(b) reduction in per unit cost of distribution
(c) addition to the per unit cost of production
(d) reduction in the total cost of production

126. Linear Homogeneous Production Function is-
(a) Increasing Returns to Scale
(b) Constant Returns to Scale
(c) Diminishing Returns to Scale
(d) Negative Returns to Scale .

127. Internal economies relate to
(a) Marketing economies
(b) Financial economies
(c) Managerial economies
(d) All the above

128. In which of the following cases there is less than proportionate increase in output when all factors are increase-
(a) Constant returns to scale
(b) Diminishing returns to scale
(c) Increasing returns to scale
(d) Increasing as well as diminishing returns to scale

129. Problems like difficulties in management, lack of supervision, higher input cost, etc. due to large scale production leads to-
(a) economies of scale
(b) real economies of scale
(c) diseconomies of scale
(d) Both ‘b’ and ‘c’

130. Benefits like improved organization, division of labour and specialization, better supervision and control, etc. enjoyed by a firm when it expands production leads to-
(a) economies of scale
(b) real economies
(c) diseconomies of scale
(d) both ‘a’ and ‘b’

131. _____ economies are common to all the firms in an industry and shared by many firms or industries.
(a) internal
(b) external
(c) real
(d) all the above

132. _____ economies are related to an individual firm’s own cost reduction effort.
(a) internal
(b) external
(c) real
(d) all the above

133. means all those factors which raise the cost of production per unit when production is expanded by a firm beyond optimal capacity.
(a) External economies
(b) Internal economies
(c) External diseconomies
(d) Internal diseconomies

134. Economies of localization, cheaper inputs, growth of ancillary industries, etc. are examples of-
(a) Internal economies
(b) Internal diseconomies
(c) External economies
(d) External diseconomies

135. _____ economies can be of long term in nature
(a) nature
(b) internal
(c) production
(d) real

136. _____ shows all the input combinations that will produce the same level of output.
(a) Isoquant
(b) Isocost line
(c) Expansion Path
(d) None of the above

137. Isoquant is also called as _____
(a) production indifference curve
(b) is-product curve
(c) equal-product curve
(d) all the above

138. All of the following are the properties of isoquant except-
(a) An isoquant is downward sloping curve
(b) A higher isoquant represents a higher level of output
(c) Two isoquants can intersect each other
(d) Isoquants are convex to the origin

139. An isoquant slopes-
(a) downward to the left
(b) downward to the right
(c) upward to the left
(d) upward to the right

140. In the context of input-output relation _____ means same output produced from different combinations of inputs.
(a) law of variable proportions
(b) ridge lines
(c) law of constant returns
(d) isoquant

141. A higher isoquants denotes a –
(a) higher level of output
(b) lower level of output
(c) same level of output
(d) none of the above

142. An isoquant is _____ indifference curve
(a) buyer’s
(b) producer’s
(c) trader’s
(d) economy’s

143. The rate of which one factor of production can be substituted for the other is known as-
(a) marginal rate of substitution
(b) marginal opportunity cost
(c) marginal rate of technical substitution
(d) marginal cost

144. The slope is iso-product curve show-
(a) MRSxy
(b) MRTSxy
(c) elasticity of an iso-product curve
(d) none of the above

145. An isoquant is-
(a) downward sloping and concave to origin
(b) downward sloping and convex to origin
(c) downward sloping straight line curve
(d) horizontal straight line curve

146. The convexity of isoquants is due to the _____ MRTSxy
(a) increasing
(b) constant
(c) diminishing
(d) none of the above

147. Convexity of an isoquant implies _____ slope.
(a) diminishing
(b) increasing
(c) constant
(d) none of the above

148. MRTSxy is constant then an isoquant is _____
(a) downward sloping and convex to origin
(b) downward sloping straight line curve
(c) right angled curve
(d) downward sloping and concave to origin

149. MRTSxy is increasing then an isoquant is
(a) downward sloping and convex to origin
(b) downward sloping straight line curve
(c) right angled curve
(d) downward sloping and concave to origin

150. A right-angled isoquant denotes that the
(a) two factors are perfect substitutes of each other
(b) two factors are imperfect substitutes of each other
(c) two factors are perfect complements of each other
(d) position between perfect substitutes and perfect complements

151. The MRTSxy is constant if two factors are _____ of each other
(a) perfect substitutes
(b) perfect complements
(c) imperfect substitutes
(d) imperfect complements

152. MRTSxy =
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 152

153. Increasing MRTSxy could happen only when the _____ operate.
(a) law of increasing returns
(b) law of diminishing returns
(c) law of constant returns
(d) law of negative returns

154. Which of the following isoquant indicates that the two factors ‘X’ and ‘Y’ are imperfect substitutes of each other?
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 154

155. At a point near the right hand below the corner of isoquant curve, the MRTSxy of factor ‘X’ for factor ‘Y’ is –
(a) very high
(b) very low
(c) zero
(d) neither high nor low

156. Convexity of an isoquant denotes that the two factors are _____ of each other.
(a) perfect complements
(b) imperfect complements
(c) perfect substitute
(d) imperfect substitutes

157. In order to increase output, if both inputs mustbe increased in fixed proportion, it follows that both the inputs are ____ of each other.
(a) perfect substitutes
(b) perfect complements
(c) imperfect substitutes
(d) imperfect complements

158. _____ is the locus of various combinations of two inputs which a producer can buy with the given outlay and the prices of two inputs.
(a) Isocost line
(b) Opportunity cost line
(c) Production line
(d) Profit line

159. Isocost line is also known as _____
(a) outlay line
(b) price line
(c) producer’s budget line
(d) all the above

160. If the expenditure to be done on purchase of factors increases, the prices of both inputs remaining the same, the firm’s isocost line will –
(a) shift downward
(b) shift upward
(c) remain the same
(d) none of the above

161. The slope of the isocost line can change when the outlay remains the same but the price of –
(a) only one input change
(b) both the inputs change
(c) both inputs remain unchanged
(d) Both ‘a’ and ‘b’

162. The iso-cost line in production optimization is _____
(a) Vertical straight line
(b) Straight line sloping upward towards right
(c) Straight line sloping downwards towards right
(d) Horizontal straight line

163. The slope of isocost line with factor ‘Y’ on the vertical axis and factor ‘X’ on the horizontal axis is –
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 163

164. At equilibrium point, a particular isoquant _____ to isocost line
(a) tangent
(b) perpendicular
(c) parallel
(d) concave

165. Where the slope of isoquant = the slope of isocost line, it is the _____ combination of inputs.
(a) maximum cost
(b) least cost
(c) balanced cost
(d) cost-production

166.
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 166

(a) consumer is in equilibrium
(b) consumer is not in equilibrium
(c) producer is in equilibrium
(d) producer is not in equilibrium

167. Where the isocost line is tangent to an isoquant-
(a) equal amount of factors give equal output
(b) the prices of the factors are equal
(c) the ratio of prices of the two factors equal MRTS
(d) none of the above

168. All but one of the following statements are correct. Find the incorrect statement.
(a) The word isoquant means equal quantities.
(b) The slope of isoquant is called MRTS.
(c) The producer is at equilibrium where MRTSxy = px / py 
(d) A set of isoquant curves is called isocost map.

169. If there is perfect substitution between two factors of production the shape of isoquant is-
(a) linear
(b) non-linear
(c) positively sloped
(d) right angled

170. Condition for the producer’s equilibrium is-
(a) Isoquant should be tangent to the isocost line
(b) At tangency point, isoquant should be convex to origin
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 170
(d) all the above

171. Technically efficient combinations of inputs is those which-
(a) minimizes cost
(b) minimizes loss
(c) maximizes profits
(d) maximizes revenue

172. Internal economies and diseconomies of scale occur due to _____ causes.
(i) endogenous
(ii) exogenous
(iii) internal
(iv) external
(a) i and ii
(b) iii and iv
(c) i and iii
(d) ii and iv

173. External economies and diseconomies of scale occur due to _____
(a) endogenous
(b) exogenous
(c) internal
(d) both (b) and (c)

174. When a large firm takes up advertising and grants higher margin to retailers, it is called-
(a) technical economies
(b) managerial economies
(c) marketing economies
(d) financial economies

175. When a firm’s dependence on external sources of funds increase and it finds difficulty to repay, it is a case of –
(a) financial diseconomies
(b) financial economies
(c) managerial diseconomies
(d) technical diseconomies

176. A firm uses two inputs, labour (L) and capital (K). The firm produces and sells a given output. You have the following information PL = ₹40; PK = ₹ 100; MPL = 40; MPK = 40. What would you say about the firm?
(i) That the firm is operating efficiently
(ii) That, the firm is not operating efficiently
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 176
(a) Only i
(b) Only ii
(c) i and iii
(d) ii and iv

177. A firm can hire additional labour @ ₹ 50 per hour. By hiring 10 more hours of labour output will increase by 3 units. If per unit sells for ₹ 200, should the firm hire the labour? Why?
(a) No ∴ MP of labour < price of labour
(b) Yes ∴ MP of labour > price of labour
(c) Neither ‘a’ or ‘b’
(d) Only ‘a’

178. If MRTSLK,equals 2, then the MPK / MP1
(a) 1/2
(b) 2/1
(c) 1/1
(d) 0/1

179. Suppose that we are producing holes. The only way to get a hole is to use one man and one shovel. What shall be the shape of isoquants?
(a) downward sloping and convex to origin
(b) downward sloping straight line curve
(c) downward sloping and concave to origin
(d) light angled curve

180. You are doing homework. The inputs needed to produce homework is blue ink pen or black ink pen. What shall be the shape of isoquants?
(a) downward sloping and convex to origin
(b) downward sloping straight line curve
(c) downward sloping and concave to origin
(d) right angled curve

181. When 5 units of variable factor are combined with 5 units of fixed factor and MP remains constant at 10 units. Find TP
(a) 30
(b) 40
(c) 50
(d) 60

182. The production function of a firm is- Q = 5L 1/2 K 1/2 What would be the maximum possible output the firm can produce with 100 units of L and 100 units of K.
(a) 500
(b) 400
(c) 600
(d) None of the above

183. The production function of a firm is- Q = 2 L2 KFind the output the firm can produce with 5 units of L and 2 units of K.
(a) 100
(b) 200
(c) 300
(d) 150

184. What will be the output with 10 units of L and 10 units of K, if the production function is Q = 5L + 2K production
(a) 50
(b) 60
(c) 70
(d) 80

185. From the following find out AP and MP of 4th unit of Labour.
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 185

(a) 15 ; 15
(b) 10 ; 15
(c) 10 ; -15
(d) 10 ; -10

Theory of Cost

186. Cost analysis refer to the study of ____ inrelation to different production criteria.
(a) production
(b) cost
(c) price
(d) inputs

187. Cost is a _____ function
(a) direct
(b) derived
(c) both direct and derived
(d) none of the above

188. Theory of costs is restatement of the theory of _____ in monetary terms
(a) demand
(b) consumer’s behaviour
(c) production
(d) all the above

189. _____ costs relate to those costs which involve cash payments by the entrepreneur of the firm.
(a) Accounting
(b) Marginal
(c) Economic
(d) Implicit

190. Accounting costs are also called _____ costs.
(a) economic
(b) implicit
(c) explicit
(d) opportunity

191. Wages paid to labourers, cost of raw-materials purchase, interest on the money borrowed, etc. are examples of _____ cost.
(i) accounting
(ii) implicit
(iii) economic
(iv) explicit
(a) i and ii
(b) iii and iv
(c) ii and iii
(d) i and iv

192. Economic costs includes-
(a) Accounting cost + Explicit cost
(b) Accounting cost + Implicit cot
(c) Fixed cost + Variable cost
(d) Accounting cost + Direct cost

193. Economic costs equals-
(a) Explicit cost + Implicit cost
(b) Fixed cost + Variable cost
(c) Accounting cost + Explicit cost
(d) none of the above

194. _____ costs are the value of foregone opportunities that do not involve any contractual obligation of cash payment.
(a) Explicit
(b) Implicit
(c) Accounting
(d) Hidden

195. _____ includes all payments made to factors of production and opportunity cost.
(a) Accounting costs
(b) Economic costs
(c) Implicit costs
(d) Explicit costs

196. An entrepreneur must recover his _____ cost if he wants to earn normal and abnormal profits.
(a) accounting
(b) implicit
(c) economic
(d) all the above

197. Which of the following are implicit costs?
(i) A shop taken on rent by entrepreneur
(ii) Savings invested to start business
(iii) An individual is both owner and manager of business
(iv) A farmer takes a farm on rent
(a) i and ii
(b) iii and iv
(c) ii and iii
(d) i and iv

198. Which of the following are explicit costs?
(i) A producer borrows money to start a factory
(ii) A producer invests his savings to start a factory
(iii) Wages paid to workers
(iv) An individual is both owner & manager of business
(a) i & ii
(b) iii & iv
(c) i & iii
(d) ii & iv

199. The difference between Economic Cost and Accounting Cost is equal to _____
(a) Implicit cost
(b) Explicit cost
(c) Marginal cost
(d) none of the above

200. All but one is not included in the books of account? Which one?
(a) Taxes
(b) Electricity charges
(c) Cost of raw-material
(d) Imputed salary of owner

201. _____ costs involve actual expenditure of funds on wages, material, rent, etc.
(a) Opportunity
(b) Outlay
(c) Economic
(d) Implicit

202. The cost that a firm incurs in purchasing or hiring, the services of various productive factors is referred to as-
(a) Explicit cost
(b) Fixed cost
(c) Implicit cost
(d) Variable cost

203. Explicit costs are also known as-
(a) Accounting costs
(b) Outlay costs
(c) Out-of-Pocket costs
(d) All the above

204. For an economist, the cost means-
(a) Accounting Costs
(b) Economic Costs
(c) Outlay Costs
(d) Sink Cost

205. Implicit costs are also known an-
(a) Opportunity costs
(b) Imputed costs
(c) Notional costs
(d) All the above

206. Opportunity cost refers to-
(a) money expenses incurred on purchasing or hiring factor, services
(b) the next best alternative
(c) involving cash payment
(d) all the above

207. Opportunity cost refers to-
(a) Cost of opportunity foregone
(b) Comparison between the policy that was chosen and the policy that was rejected
(c) Costs relating to sacrificed alternatives
(d) all the above

208. The cost of one thing in terms of the alternative given up is known as-
(a) Production cost
(b) Accounting cost
(c) Opportunity cost
(d) Real cost

209. Opportunity costs find its application in situations _____
(a) for short run and long run decision making
(b) capital expenditure budgeting
(c) when the supply of input factors is strictly limited
(d) all the above

210. Opportunity costs are a result of _____
(a) Abundance of resources
(b) Scarcity of resources
(c) Technology obsolescence
(d) Cost controls

211. All but one are true about opportunity cost. Which one is not true?
(a) Opportunity costs are recorded in the books of account.
(b) Opportunity costs are applicable to those factors which have alternative uses.
(c) Opportunity cost is also known as ‘alternative cost’
(d) Opportunity cost is also known as ‘displacement cost’

212. If no sacrifice is involved, then the opportunity cost is
(a) very high
(b) very low
(c) zero
(d) both ‘b’ & ‘c’

213. The concept of opportunity cost helps us to know that-
(a) resources are scarce,
(b) resources have alternative uses,
(c) how scarce resources get allocated in different production activities
(d) all the above

214. If you give up a full-time job to go to college, the major cost is –
(a) tuition fees
(b) room and board
(c) the income you could have earned from job
(d) social expenses

215. If a firm’s machinery, has no possible alternative use, its opportunity cost is –
(a) high
(b) low
(c) zero
(d) none of the above

216. If you own a cottage in Shimla which you could rent for August and September to some family for a net gain of ₹ 20,000/- after all expenses and taxes, the opportunity cost of living in it yourself for summer is _____
(a) ₹ 10,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000

217. Cost of getting something involves losing something else means –
(i) accounting costs
(ii) opportunity costs
(iii) explicit costs
(iv) implicit costs
(a) Only i
(b) ii and iii
(c) i and iii
(d) ii and iv

218. The costs which can be identified easily and indisputably with a unit of operation, a product, a department, a plant or a process are called-
(i) direct cost
(ii) indirect cost
(iii) traceable cost
(iv) non-traceable cost
(a) Only i
(b) ii and iii
(c) i and iii
(d) ii and iv

219. _____ costs are not identified readily and indisputably to specific product, process, department, plant, operations, etc.
(a) Indirect costs
(b) Traceable costs
(c) Non-traceable costs
(d) Both ‘a’ & ‘c’

220. Accounting process recognizes-
(a) direct costs
(b) indirect cost
(c) only direct costs
(d) both direct and indirect costs

221. The function which gives least cost combinations of inputs corresponding to different levels of output is called-
(a) Production function
(b) Demand function
(c) Cost function
(d) Supply function

222. Cost functions are derived from _____
(a) Demand function
(b) Supply function
(c) Isoquant function
(d) Production function

223. _____ refers to the functional relationship between cost of a product and the various determinants of cost.
(a) Cost function
(b) Isoquant function
(c) Production function
(d) Supply function

224. In a cost function, the total cost or cost per unit is a/an _____
(a) Dependent Variable
(b) Independent Variable
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ nor ‘b’

225. In a cost function, the prices of factors of production is a/an _____
(a) Dependent Variable
(b) Independent Variable
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ nor ‘b’

226. Which one of the following is the dependent variable in a cost function?
(a) Level of capacity utilization
(b) Lot size of output
(c) Scale of operations
(d) Total Cost

227. Which one of the following is an independent variable in a cost function?
(a) Cost per unit
(b) Total cost
(c) Managerial efficiency
(d) None of the above

228. All but one are independent variables. Which one is not independent variable?
(a) Quantity of output
(b) Prices of factors of production
(c) Per unit cost of production
(d) Time Period under study

229. Which one of the following is not a determinant of the firm’s cost function?
(a) Price of firm’s output
(b) Production function
(c) Price of labour
(d) Rent paid for use of building

230. The functional relationship between output and the long-run cost of production is called _____
(a) Cost function
(b) Production function
(c) Long-run Cost function
(d) Long-run Production function

231. Law of Returns to Scale forms the basis of _____ cost function
(a) Long-run
(b) Short-run
(c) Fixed
(d) all the above

232. A cost function determines the behaviour of cost with change in _____
(a) Output
(b) Input
(c) Technology
(d) Wages

233. Increase in the size of a firm and its production capacity determines _____
(a) Short-run production function
(b) Long-run production function
(c) Fixed production function
(d) None of the above

234. When a firm operates with a given scale of production it affects the _____
(a) Long-run production function
(b) Fixed production function
(c) Short run production function
(d) All the above

235. Find the odd one-
(a) Output
(b) Price of raw-materials
(c) Time period
(d) Total cost

236. The costs which do not change with the level of output are called :
(i) Supplementary Costs
(ii) Money Costs
(iii) Overhead Costs
(iv) Prime Cost
(a) i & ii
(b) ii & iii
(c) i & iii
(d) i, ii, iii & iv

237. The costs which change with the level of output are called _____
(a) Prime cost
(b) Direct cost
(c) Variable cost
(d) All the above

238. The costs which remain constant at all the levels of output are called _____
(a) Supplementary Costs
(b) Fixed Costs
(c) Overhead Costs
(d) All the above

239. Fixed costs includes-
(a) Historical costs
(b) Explicit costs
(c) Implicit costs
(d) Both ‘b’ and ‘c’

240. At zero level of output _____ cost can never be zero.
(a) Variable
(b) Fixed
(c) Direct
(d) Real

241. At zero level of output cost _____ is zero.
(a) Fixed
(b) Overhead
(c) Variable
(d) Real

242. _____ costs are incurred even before production starts
(a) Fixed
(b) Variable
(c) Real
(d) Marginal

243. _____ costs are incurred after the production actually starts.
(a) Fixed
(b) Variable
(c) Marginal
(d) Real

244. At zero level of output Fixed Cost must be greater than Variable Cost.
(a) False
(b) Partially True
(c) True
(d) None of the above

245. Fixed Costs are a function of _____
(a) Time
(b) Output
(c) Both time and output
(d) All the above

246. Variable Costs are a function of _____
(a) Time
(b) Output
(c) Both time and output
(d) All the above

247. _____ costs are directly or positively related to output.
(a) Fixed
(b) Stair-step
(c) Semi-Variable
(d) Variable

248. When production level is zero, then fixed cost is-
(a) zero
(b) negative
(c) positive
(d) equal to variable cost

249. Which of the following indicates fixed costs?
(a) Electricity Bill
(b) Wages to daily labourers
(c) Expenses on transportation
(d) Interest on fixed capital

250. Variable costs include costs of-
(a) Hiring the building for the factory
(b) Purchase of heavy machines
(c) Pay wages to factory manager
(d) Paying for power and fuel

251. Which one of the following is correct?
(a) TC = TFC × TVC
(b) TC = TFC ÷ TVC
(c) TC = TFC + TVC
(d) TC = TFC – TVC

252. Which cost increases continuously with the increase in production?
(a) Average cost
(b) Marginal cost
(c) Fixed cost
(d) Variable cost

253. When output is increased variable cost also rises initially at _____ rate and later at _____ rate.
(a) diminishing; constant
(b) increasing; constant
(c) diminishing; increasing
(d) constant; increasing

254. The costs which are neither perfectly variable, nor absolutely fixed when output level are changed are _____
(a) Variable costs
(b) Semi Variable costs
(c) Stair Step costs
(d) Prime costs

255. _____ costs are independent of the level of output.
(a) Fixed
(b) Variable
(c) Marginal
(d) Semi Variable costs

256. TVC can be calculated as-
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 256

257. TC reflect the behaviour of-
(a) TFC
(b) TVC
(c) AFC
(d) None of the above

258. At zero level of output Total Cost of Production is equal to-
(a) Total Fixed Cost
(b) TotalVariableCost
(c) Marginal Cost
(d) Explicit Cost

259. Total Fixed Cost Curve is indicated by a-
(a) Positively sloped Curve
(b) Vertical Straight Line Curve
(c) Horizontal Straight Line Curve
(d) Negatively sloped Curve

260. Total cost curve shoots from a point on Y-axis means-
(a) we are referring to the short period
(b) we are referring to the long period
(c) we are referring to the market period
(d) we are referring to the secular period

261. In the short period, TC = ∑ MC Is it correct ?
(a) Yes
(b) No, as TC = TFC + ∑ MC
(c) Partially correct
(d) none of the above

262. Total Variable Cost initially rises at a diminishing rate due to-
(a) increasing returns to factor
(b) increasing returns to scale
(c) diminishing returns to factor
(d) diminishing returns to scale

263. Total Variable Cost curve shoots upwards from-
(a) a certain point on quantity axis
(b) a certain point on cost axis
(c) origin
(d) Any of the above

264. TFC curve will be a straight line –
(a) Parallel to X-axis
(b) Parallel to Y-axis
(c) Sloping upward from left to right
(d) Sloping downward from left to right

265. Total Variable Cost curve originate from the point of origin means-
(a) Variable cost is zero at zero output
(b) Variable cost has to be incurred at zero output
(c) Variable cost is diminishing
(d) All the above

266. The total cost curve and total variable cost curve are parallel because-
(a) Vertical distance between the two is total fixed cost which is constant
(b) behaviour of total cost depends upon total variable cost
(c) change in total cost is only due to change in variable cost
(d) all the above

267. The vertical distance between TVC and TC is equal to –
(a) Marginal Cost
(b) Total Fixed Cost
(c) Average Variable Cost
(d) None of the above

268. The fixed cost per unit of output is called-
(a) Average Fixed Cost (b) Total Fixed Cost
(c) Marginal Cost (d) None of the above

269. In the short run, when output of a firm increases, its average fixed cost-
(a) rises continuously
(b) falls continuously
(c) remain constant
(d) first rises and then falls

270. Average Fixed Cost curve _____
(a) slope upwards
(b) slope downwards
(c) is TJ’ shaped
(d) is ‘S’ shaped

271. Total Variable Curve is _____ shaped
(a) ‘U’ shaped
(b) Inverted’U’shaped
(c) Inverted ‘S’ shaped
(d) ‘C’ shaped

272. Average Fixed Cost curve is indicated by-
(a) a rectangular hyperbola
(b) a straight line parallel to X-axis
(c) a straight line parallel to Y-axis
(d) a ‘U’ shaped curve

273. Average Fixed Cost curve will never touch-
(a) X-axis
(b) Y-axis
(c) both ‘a’ and ‘b’
(d) none of the above

274. Average Variable Cost equals-
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 274

275. Which of the following falls continuously?
(a) Marginal Cost
(b) Average Fixed Cost
(c) Average Variable Cost
(d) Total Fixed Cost

276. Average Variable Cost falls as output is expanded-
(a) upto normal capacity output
(b) beyond normal capacity output
(c) all the levels of output
(d) Nothing can be said

277. Beyond normal capacity output, as output in-creases AVC will-
(a) remain constant
(b) decrease
(c) increase
(d) nothing can be said

278. Average variable cost is inversely related to _____
(a) MP of variable factor
(b) AP of variable factor
(c) TP
(d) nothing can be said

279. AVC falls as output increases upto normal ca-pacity due to-
(a) constant returns to scale
(b) diminishing returns to factor
(c) increasing returns to factor
(d) negative returns to factor

280. AVC curve is-
(a) ‘S’ shaped
(b) ‘U’ shaped
(c) Inverted ‘S’ shaped
(d) Inverted’U’shaped

281. _____ and _____ curves start from the same point on Y-axis which is above the origin.
(a) TFC and TVC
(b) TVC and TC
(c) TFC and TC
(d) None of the above

282. Two curves which are inverted ‘S’ shaped are –
(a) TFC and TVC
(b) TVC and TC
(c) TC and AVC
(d) AFC and AVC

283. Average Cost curve is-
(a) Horizontal Line parallel to x-axis
(b) Inverted ‘S’ shaped
(c) Inverted ‘U’ shaped
(d) ‘U’ shaped

284. When output is increased Average Cost at all the levels of output includes both AVC and AFC means that-
(a) AC curve will always lie above the AVC curve
(b) AC curve will always lie below the AVC curve
(c) AC and AVC are parallel to each other with same vertical distance throughout
(d) None of the above

285. The vertical gap between AC and AVC curves as the output increases.
(a) increases
(b) decreases
(c) remain constant
(d) None of the above

286. Since AFC can never be zero, _____ and _____ curves never intersect each other
(a) AC and MC
(b) AC and AFC
(c) AC and AVC
(d) None of the above

287. The two inverted ‘S’ shaped short run cost curves are parallel to each other and maintain a constant distance of ₹ 100. Which cost is indicated by ₹100?
(a) Total Variable Cost
(b) Total Cost
(c) total Fixed Cost
(d) Average Fixed Cost

288. Find the odd one out-
(a) Salary to manager of the company
(b) Payment of insurance premium for insurance of factory
(c) Interest on loan taken from Union Bank
(d) Payment of excise duty

289. Average Fixed Cost falls as the output rises because-
(a) AFC and output are inversely related
(b) AFC and output are positively related
(c) AFC and output are not related
(d) All the above

290. Production at the loss of _____ may continue in short run.
(a) Variable Cost
(b) Fixed Cost
(c) Marginal Cost
(d) Direct Cost

291. Production at the loss of _____ cannot be continued in short run.
(a) Direct Cost
(b) Fixed Cost
(c) Marginal Cost
(d) Variable Cost

292. Which of the following statements is correct of the relationship among the short run costs?
(a) ATC = AFC – AVC
(b) AVC = AFC + ATC
(c) AFC = ATC + AVC
(d) AFC = ATC -AVC

293. Average Total Cost equals-
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 293

294. Average Total Cost means-
(a) The general average cost
(b) The average cost of producing one unit
(c) The cost of producing the last unit
(d) None of the above

295. Average Cost curve contains in it-
(a) Normal Profits
(b) No Normal Profits
(c) Both ‘a’ and ‘b’
(d) None of the above

296. Average Cost curve is a _____
(a) ‘S’ shaped curve
(b) T shaped curve
(c) ‘U’ shaped curve
(d) Straight Line

297. When expressed as an average, it shows a continuous fall with increase in output-
(a) the average cost of a firm
(b) the fixed cost of a firm
(c) marginal cost
(d) variable cost

298. An addition to the total cost caused by producing one more unit of output is called _____
(a) average cost
(b) marginal cost
(c) fixed cost
(d) variable cost

299. Marginal Cost varies inversely with _____ in short run
(a) average product of variable factor
(b) total product
(c) marginal product of variable factor
(d) both ‘a’ and ‘b’

300. Marginal Curve is _____
(a) ‘U’ shaped
(b) ‘L’ shaped
(c) ‘S’ shaped
(d) downward sloping continuously

301. At the minimum average cost, a firm can produce the _____
(a) maximum output
(b) optimum profit
(c) optimum output
(d) marginal output

302. Any change in Marginal Cost will lead to a change in firm’s _____
(a) total fixed cost
(b) total variable cost
(c) average fixed cost
(d) both ‘a’ and ‘c’

303. With increase in output, the average fixed cost will fall in _____
(a) very long period
(b) long period
(c) market period
(d) short period

304. Marginal Cost is the slope of _____ curve.
(a) total variable cost
(b) total fixed cost
(c) average cost
(d) all the above

305. When total variable cost rises at a diminishing rate, marginal cost _____
(a) rises
(b) remain constant
(c) falls
(d) none of the above

306. When TVC rises at an increasing rate, MC _____
(a) rises
(b) falls
(c) remain constant
(d) none of the above

307. Graphically, the area under the Marginal Cost curve is _____
(a) TFC
(b) TVC
(c) TC
(d) AC

308. Marginal Cost Curve cuts the Average Cost Curve at its _____
(a) falling part
(b) rising part
(c) minimum point
(d) both ‘a’ and ‘b’

309. Marginal Cost is independent of
(a) fixed cost
(b) variable cost
(c) opportunity cost
(d) output

310. All but one are ‘U’ shaped
(a) The AVC curve
(b) The AC curve
(c) The MC curve
(d) The AFC curve

311. Find the Odd One out of the following
(a) TCn – TCn-1
(b) TFCn – TFCn-1
(c) TVCn-TVC-1
(d) TCn-(TVCn-1+TFCn-1) .

312. The point at which marginal cost equate average cost shows-
(a) The maximum Profit
(b) The equilibrium point of the consumer
(c) The plant capacity
(d) The minimum price of the product

313. Which of the following is incorrectly matched?
(a) MC – ‘U’ shaped
(b) AFC – Rectangular Hyperbola
(c) TC – ‘J’ shaped
(d) AVC – ‘U’ shaped

314. If a table shows number of units produced and average cost of each unit, one can calculate-
(a) AVC
(b) MC
(c) TC
(d) All the above

315. Consider the following statements and point the correct one-
(a) If MC curve is below the AC curve, then the AC curve must be rising
(b) When MC curve is above the AC curve, then the AC curve must be falling
(c) MC cost curve cuts the AC curve at the minimum point of AC curve
(d) AC pulls up or down the MC Sp

316. When AC is at its minimum, then-
(a) AC >MC
(b) AC < MC
(c) AC = MC
(d) All the above

317. Per unit cost of a commodity is called-
(a) fixed cost
(b) variable cost
(c) average cost
(d) marginal cost

318. When MC curve cuts AC curve-
(a) AC = MC
(b) AC > MC
(c) AC < MC
(d) both AC and MC are falling

319. What happens to Average Cost when MC > AC?
(a) AC will fall
(b) AC will rise
(c) AC will remain constant
(d) None of the above

320. Marginal cost includes-
(a) fixed cost and variable cost
(b) only fixed cost
(c) only variable cost
(d) None of the above

321. If the marginal cost of production is less than the average cost then-
(a) MC curve lies under the AC curve
(b) AC would be falling
(c) MC cost pulls down AC
(d) All the above

322. MC is greater than AC when production is in a state of _____
(a) increasing returns
(b) diminishing returns
(c) constant returns
(d) None of the above

323. AC is greater than MC, so long as –
(a) AC is falling
(b) AC is rising
(c) AC is constant
(d) All the above

324. MC = AC when –
(a) AC is falling
(b) AC is rising
(c) AC tends to stabilize
(d) None of the above

325. The distance between AC and AVC curves tends to _____ at higher level of output
(a) increase
(b) remain constant
(c) reduce
(d) None of the above

326. ATC and AVC curves tend to intersect at some level of output
(a) Statement is Incorrect
(b) Statement of Correct
(c) Statement is Partially Correct
(d) None of the above

327. The difference between ATC and AVC:
(a) is constant
(b) is total fixed cost
(c) gets narrow as output falls
(d) is the average fixed cost

328. Can AC fall, when MC is rising?
(a) No
(b) Yes
(c) Can’t say
(d) None of the above

329. When MC < AVC, _____ with increase in the output
(a) AVC rises
(b) AV C falls
(c) AVC remain constant
(d) AVC curve cut MC curve

330. When MC becomes equal to AC and AVC, they _____
(a) begin to rise
(b) begin to fall
(c) become constant
(d) Any of the above

331. There will be productive efficiency when-
(a) MC = AC
(b) firm is producing at the minimum point of Average Cost Curve
(c) MC curve cuts the AC curve
(d) All the above

332. Marginal Cost is _____
(a) Always less than the Average Cost
(b) Always more than the Average Cost
(c) Equal to the Average Cost at its minimum point
(d) Never equal to Average Cost

333. The slope of the TVC or total cost curve indicates the-
(a) marginal revenue
(b) average cost
(c) variable cost
(d) marginal cost

334. Falling average cost means-
(a) increasing returns
(b) diminishing returns
(c) constant returns
(d) negative returns

335. _____ costs are important in short run to de¬termine optimum level of output
(a) Fixed
(b) Marginal
(c) Opportunity
(d) Sunk

336. Short run average costs eventually rise because of _____
(a) rising overhead costs
(b) rising factor prices
(c) falling marginal and average productivity
(d) None of these

337. Decreasing average costs for a firm, as it expands plant size and output-
(a) results from decreasing returns to scale
(b) results usually from the effects of increased mechanism and specialization
(c) results from increased complexity of rapid expansion
(d) None of the above

338. MC curve passes through the minimum point of _____
(a) AC curve
(b) TC curve
(c) AVC curve
(d) both ‘a’ and ‘c’

339. Which of the following statements about the relationship between marginal cost and average cost is correct? –
(a) When MC is falling AC is falling
(b) AC equals MC at MC’s lowest point
(c) When MC exceeds AC, AC must be rising
(d) When AC exceeds MC, MC must be rising

340. Salesmen’s commission is an example of –
(a) Fixed cost
(b) Variable cost
(c) Semi-Variable cost Le. fixed over some range and then increase
(d) Stair-Step cost

341. The Long Run Average Curve shows the average cost of production when _____ in supply
(a) all factors are fixed
(b) all factor are variable
(c) some factors are fixed while some are variable
(d) one factor is fixed while all others are variable

342. Which one of the following is called planning curve?
(a) Long Run Average Cost Curve
(b) Short Run Average Cost Curve
(c) Average Variable Cost Curve
(d) Average Total Cost Curve

343. Falling portion Le. negatively sloped portion of the long run average cost curve is because of-
(a) economies of scale
(b) diseconomies of scale
(c) diminishing returns
(d) law of variable proportions

344. Each point on LAC curve is a point of tangency with the corresponding-
(a) short run AC curves
(b) short run AVC curves
(c) short run MC curves
(d) none of the above

345. Which one of the following is also known as PLANT CURVE?
(a) LAC curve
(b) SAC curve
(c) AVC curve
(d) ATC curve

346. The LAC curve helps the firm to make choice about size of plant for producing a particular output at _____
(a) Optimum Cost
(b) Minimum Cost
(c) Maximum Cost
(d) Nothing can be said

347. Which of the following is correct regarding Long Run Average Cost curve?
(i) It shows least cost of producing each level of output
(ii) LAC curve is envelope of SAC curves
(iii) LAC is U-shaped
(iv) LAC curve is U-shaped due to economies and diseconomies
(a) (i) and (ii) only
(b) (ii) and (iii) only
(c) (i), (ii), (iii) and (iv)
(d) (iii) and (iv) only

348. When the long run average cost curve is falling, it is tangent to _____
(a) the falling portion of SAC curve
(b) the rising portion of SAC curve
(c) the minimum point of SAC curve
(d) the minimum point of MC curve

349. When LAC curve is _____ it will be tangent to rising portions of the SAC curves
(a) sloping downward
(b) sloping upwards
(c) constant
(d) none of the above

350. When the LAC curve slopes upward, the firm is experiencing _____
(a) economies of scale
(b) external economies
(c) diseconomies
(d) none of these

351. Larger outputs can be economically produced ie. at the lowest cost with the _____
(a) smaller plant
(b) medium size plant
(c) bigger plant
(d) none of these

352. The LAC is –
(a) U-shaped
(b) Inverted U-shaped
(c) V-shaped
(d) S-shaped

353. In the long run, when a firm faces infinite SAC curves, the LAC curve will be-
(a) perpendicular to each SAC curve
(b) connect the lowest point of each SAC curve
(c) smooth curve, so as to be tangent to each of the SAC curves
(d) all the above

354. The LAC curve envelopes many SAC curves, it is therefore also called _____
(a) planning curve
(b) envelope curve
(c) family curve
(d) none of these

355. The LAC curve is flattened U-shaped because-
(a) some factors are fixed
(b) some factors are variable
(c) of change in technology
(d) technology remains constant

356. Modern firms face _____ shaped LAC curves
(a) L
(b) U
(c) S
(d) C

357. L-shaped LAC curve over a range shows that all sizes of plant have the _____
(a) different minimum cost of production
(b) falling cost of production
(c) same minimum cost of production
(d) rising cost of production

358. In the short period the firm can control only the _____ cost and not the _____ Cost and therefore must recover at least _____ Cost
(a) fixed ; variable ; fixed
(b) variable ; fixed ; variable
(c) average ; marginal; average
(d) accounting ; opportunity ; accounting

359. In short run the producer can control only _____ cost
(a) fixed
(b) semi-fixed
(c) variable
(d) stair step

360. In the long period _____ costs are under the control of the producer
(a) fixed
(b) variable
(c) all
(d) none

361. What does the shaded area show in the figure below?
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 361

(a) TFC
(b) TVC
(c) TC
(d) ATC

362. Consider the figure and answer which region represents diseconomies
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 362

(a) Region ‘c’ to ‘d’
(b) Region ‘a’ to ‘b’
(c) Region ‘d’ to ‘e’
(d) Region ‘b’ to ‘d’

Consider the following diagram to answer questions 363 to 369.
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 362.1

363. In the above diagram curve numbers 1, 2 and 3 are _____ respectively
(a) AVC ; AFC ; AC
(b) AFC ;AVC ; AC
(c) AC ; AFC ; AVC
(d) AC ; AVC ; AFC

364. In the above diagram at OK level of output, the average cost equals-
(a) KN
(b) KM
(c) KL
(d) MN

365. In the diagram above at OK level of output, KL denotes-
(a) AFC
(b) MC
(c) AVC
(d) AC

366. In the diagram above at OK level of output, KM denotes-
(a) AC
(b) AVC
(c) MC
(d) AFC

367. In the diagram above at OK level of output, the vertical distance shaded between LN denotes-
(a) AFC
(b) AVC
(c) AC
(d) None of these

368. In the above diagram, on the right side curve 3 becomes closer to curve 2 means-
(i) component of AFC shrinks
(ii) component of AFC increases
(iii) component of AVC increases
(iv) component of AVC shrinks
(a) i and iii
(b) ii and iv
(c) ii and iii
(d) none of the above

369. In the above diagram on the right side curve 1 gets away from curve 3 means-
(a) component of AFC increases but component of AVC shrinks
(b) component of both AFC and AVC increases
(c) component of AFC shrinks but component of AVC increases
(d) None of the above

370. Marginal Cost reflects change in either _____ or _____
(a) total cost; total variable cost
(b) total cost; average variable cost
(c) fixed cost; total variable cost
(d) none of the above

Use the following data to answer questions 371 to 376 :
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 370

371. The total variable cost of the 3rd unit is-
(a) 216
(b) 84
(c) 126
(d) 174

372. The marginal cost of the 2nd unit is-
(a) 0
(b) 45
(c) 39
(d) 42

373. The average cost of producing the 4th unit is-
(a) 66
(b) 48
(c) 67
(d) 49

374. The total fixed cost at the 3rd unit of output is-
(a) 180
(b) 42
(c) 66
(d) 90

375. The average fixed cost at the 4th unit of output , is-
(a) 42
(b) 32
(c) 22.5
(d) 20

376. The average variable cost at the 3rd unit of output is-
(a) 42
(b) 32
(c) 22
(d) none of these

Use the following data to answer questions 377 to 379:
Suppose that the Total Fixed Cost is ₹ 120
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 376

377. The total variable cost of the 3rd unit is-
(d) 120
(b) 200
(c) 300
(d) 520

378. The marginal cost of the 2nd unit of output is-
(a) 120
(b) 80
(c) 100
(d) 220

379. The total cost of 4th units of output is-
(a) 320
(b) 420
(c) 640
(d) 900

Use the following data to answer questions 380 to 382:
Fixed cost of a firm is ₹ 30.
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 379

380. Total Cost of 4th unit is-
(d) 68
(b) 116
(c) 50
(d) 90

381. The Average Cost of 2nd unit is-
(a) 50
(b) 34
(c) 29
(d) None of the above

382. The Marginal Cost of 3rd unit is-
(a) 18
(b) 22
(c) -26
(d) 50

Use the following data to answer questions 383 to 386:
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 382

383. The Total Fixed Cost of the 5th unit is-
(a) 80
(b) 40
(c) 120
(d) 240

384. The Average Fixed Cost of 2nd unit is-
(a) 40
(b) 20
(c) 10
(d) 05

385. The Average Variable Cost of 3rd unit is-
(a) 65
(b) 46.67
(c) 42.5
(d) 44

386. The Average Total Cost of 2nd unit is-
(a) 120
(b) 85
(c) 52.5
(d) 52

387. Table for the production of a firm.
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 387

One the basis of the above table match the following
(i) Prime Cost
(ii) Direct Cost
(iii) Fixed Cost
(iv) Variable Cost
(v) Total Cost
(a) (A, i) (B, ii) (C, iii)
(&) (A, ii) (B, iii) (C, iv)
(c) (A, iii) (B, iii) (C, iv)
(d) (A, v) (B, iii) (C, iv)

388. Considering the following information of firm’s production department for a week, the TVC, AVC and ATC would be-
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 388

(a) ₹ 11,9000 ; ₹ 119 and ₹ 123 respectively
(b) ₹ 11,600 ; ₹ 116 and ₹ 123 respectively
(c) ₹ 11,900 ; ₹ 119 and ₹ 119 respectively
(d) None of these

389. The average cost is ₹ 40 and it is minimum when 8 units are produced. The marginal cost of producing 4 unit is-
(a) 40
(b) 160
(c) 48
(d) 10

390. If the marginal cost of producing 1 unit of a commodity is ₹ 15 and that of producing 2 units is 10, which of the following is correct?
(a) Total cost = ₹ 25
(b) Variable cost = ₹ 25
(c) Average cost = ₹ 25
(d) None of the above

391. The total cost at 10 units of output is ₹ 55. The fixed cost is ₹ 5. The average variable cost at 10 units of output is-
(a) ₹ 25
(b) ₹ 6
(c) ₹ 5
(d) ₹ 1

392. The total cost of producing 5 units of a commodity is ? 20 and that of producing 4 units is? 15, what will be the marginal cost?
(a) ₹ 2.5
(b) ₹ 5
(c) ₹ 7.5
(d) ₹ 10

393. A firm produces 100 units of a commodity. Actual money expenditure incurred on producing this commodity is ₹ 1500. The owner supplies inputs worth ₹ 500 for which he does not get any payment. The economic cost turned out to be ₹ 2,100. The difference is-
(a) Normal Profit
(b) Loss
(c) Abnormal Profit
(d) None of these

394. What would be the economic cost considering the following-
Purchase of raw materials ₹ 200
Payment of wages and salaries ₹ 500
Payment of rent ₹ 50
Estimated value of owner’s services ₹ 300
Expected minimum profit ₹ 40
Estimated super normal profit ₹ 240
(a) 1000
(b) 1,180
(c) 1,090
(d) 2000

395. The total cost curve makes an intercept of ₹ 50 on y-axis, Calculate total fixed cost and total variable cost of 3rd unit of output :
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 395

(a) 50 ; 15
(b) 40 ; 50
(c) 50 ; 70
(d) 110 ; 50

396. A firm is producing 20 units. At this level of output, ATC and AVC are equal to ₹40 and ₹37 respectively. What is the total fixed cost of the firm?
(a) ₹ 3
(b) ₹ 60
(c) ₹ 40
(d) ₹ 20

397. The total cost of producing 9 units of output is ₹85. If the ATC of producing 10 units is ₹10, then what will be the marginal cost of producing the 10th unit?
(a) ₹ 10
(b) ₹ 05
(c) ₹ 15
(d) ₹ 20

398. The AC of producing 5 units is ₹ 6 and AC of producing 6 units is ₹5. What is the MC of the 6th unit?
(a) ₹ 0
(b) ₹ 15
(c) ₹ 20
(d) ₹ 30

399. The TC of a firm increased by ₹450, when production increased from 12 units to 14 units. What is the MC of the firm?
(a) ₹ 150
(b) ₹ 175
(c) ₹ 200
(d) ₹ 225

400. Find the AC and AVC if entire output is sold at ₹ 60 per unit from the following :
Wage Bill ₹ 20,000
Raw-material Bill ₹ 60,000
Interest ₹ 6,000
Fuel consumption ₹ 10,000
Rent ₹ 4,000
(a) ₹ 50 ; ₹ 50
(b) ₹ 50 ; ₹ 45
(c) ₹ 45 ; ₹ 45
(d) ₹ 45 ; ₹ 50

401. A firm’s average fixed cost is ₹ 40 at 12 units of output. What will it be at 8 units of output.
(a) ₹ 120
(b) ₹ 60
(c) ₹ 80
(d) ₹ 40

402. A firm producing 5 units of output has AC of ₹ 150 and it pays ₹ 200 to its fixed factors of production. What is the AVC?
(a) ₹ 100
(b) ₹ 50
(c) ₹ 110
(d) ₹ 150

403. What is the Average Cost of producing 20 units if the Total Fixed Cost is ₹ 5,000 and AVC is ₹ 2?
(a) ₹ 250
(b) ₹ 260
(c) ₹ 258
(d) ₹ 252

404. The ATC of producing 50 units is ₹ 250 and TFC is ₹ 1,000. What is the AFC of producing 100 units?
(a) ₹10
(b) ₹ 30
(c) ₹ 20
(d) ₹ 5

405. When a bus with a seating capacity of 50 passengers is carrying on 40 passengers. The cost of passenger ticket is ₹ 100. What would be the Marginal Cost of carrying one additional passenger?
(a) ₹ 100
(b) zero
(c) ₹ 4,100
(d) ₹ 4,000

406. Electricity charges are increased for the commercial use from ₹ 3 per unit to ₹ 5 per unit. This would affect-
(a) Fixed Cost
(b) Variable Cost
(c) Both Fixed and Variable Cost
(d) Neither Fixed Cost nor Variable Cost

407. The development of Special Economic Zone will-
(a) generate internal economies and lower per unit cost
(b) generate external economies and lower per unit cost
(c) generate internal diseconomies and increase per unit cost
(d) generate external diseconomies and in-crease per unit cost

408. The following is the marginal cost schedule. Find the avarage cost of production of 4 unit of output
CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs 408

(a) ₹ 4
(b) ₹ 6
(c) ₹ 5
(d) ₹ 7

409. If the total cost of production of Good ‘X’ is ₹ 1,25,000; out of it implicit cost is ₹ 35,000 and normal profit is ₹ 25,000. What will be the explicit cost of Good ‘X?
(a) ₹ 60,000
(b) ₹ 90,000
(c) ₹ 1,00,000
(d) ₹ 65,000

410. When output increased from 40 units to 55 units, TC increased from ₹ 2,500 to ₹ 3,250. The MC is-
(a) ₹ 150
(b) ₹ 50
(c) ₹ 100
(d) ₹ 200

Answers

CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs answers

CA Foundation Business Economics Study Material Chapter 3 Theory Of Production and Cost - MCQs answers1