I85PREP
⌘ K
Kerala Plus Two Economics (DHSE) study materials
Kerala Plus Two Economics (DHSE) study resources

Kerala Plus Two Economics (DHSE) practice questions

One question at a time. Build your Kerala Plus Two Economics (DHSE) understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Introduction to Microeconomics and Basic Economic Problems

In microeconomics, the central problem of scarcity arises because:

  1. Governments always fix prices below the equilibrium level in every market
  2. Consumers are irrational and therefore keep changing their preferences
  3. Firms produce more goods than households are willing to buy
  4. Human wants are unlimited while productive resources are limited and have alternative uses Correct answer.

Explanation

Scarcity is the mismatch between unlimited wants and limited resources that can be put to alternative uses. Because resources are scarce, every economy must choose what to produce, how to produce and for whom to produce. Price fixing or irrational behaviour are not the source of the basic economic problem.

Question 2Introduction to Microeconomics and Basic Economic Problems

The opportunity cost of a good is best described as:

  1. The value of the next best alternative forgone to obtain it Correct answer.
  2. The price the government fixes for the good in a controlled market
  3. The money actually paid for the good in the market
  4. The total cost of all inputs used in producing the good

Explanation

Opportunity cost measures what must be given up, namely the value of the next best alternative sacrificed when a choice is made. It is not the same as the money price paid, which is only the market payment. Accounting the total input cost or an administered price does not capture the forgone alternative.

Question 3Introduction to Microeconomics and Basic Economic Problems

A production possibility frontier is drawn concave to the origin because:

  1. Marginal opportunity cost rises as more of one good is produced Correct answer.
  2. Consumer demand for the two goods is identical in every period
  3. Resources are equally efficient in the production of both goods
  4. The economy always operates at full employment of all resources

Explanation

A concave (bowed-out) PPF reflects increasing marginal opportunity cost: resources are not equally suited to both goods, so shifting more resources raises the sacrifice of the other good. Equal efficiency would give a straight-line frontier. Full employment and demand patterns do not determine the curvature.

Question 4Introduction to Microeconomics and Basic Economic Problems

A point lying inside the production possibility frontier indicates that:

  1. The economy is producing with the most modern technology available
  2. The economy is using its resources inefficiently or has unemployed resources Correct answer.
  3. The economy has achieved an unattainable combination of the two goods
  4. The opportunity cost of both goods has fallen to zero

Explanation

Points inside the frontier show that the economy could produce more of at least one good without sacrificing the other, so resources are idle or inefficiently used. Points on the frontier are efficient, and points beyond it are unattainable with current resources and technology. Opportunity cost does not become zero inside the curve.

Question 5Introduction to Microeconomics and Basic Economic Problems

Which of the following is a normative statement in economics?

  1. The government ought to raise the minimum wage to reduce poverty Correct answer.
  2. The unemployment rate in the state rose last year
  3. An increase in the price of rice reduces the quantity of rice demanded
  4. Total output grew by four per cent during the previous financial year

Explanation

A normative statement expresses a value judgement about what ought to be and cannot be tested purely by facts. Statements about price effects, measured unemployment and recorded growth are positive statements that can be verified with data. The word 'ought' signals the ethical judgement in the wage recommendation.

Question 6Introduction to Microeconomics and Basic Economic Problems

In a centrally planned economy, the three central problems of what, how and for whom to produce are solved mainly by:

  1. Planning authorities setting output targets and allocating resources Correct answer.
  2. The unrestricted operation of the price mechanism without any authority
  3. Signals of prices and profits in free markets
  4. Bargaining between individual households and firms

Explanation

In a planned economy a central authority owns or directs resources and decides output targets, techniques of production and distribution. Market prices and profits are the coordinating device of a market economy, not of central planning. Bargaining among private agents and a free price mechanism describe decentralised systems.

Question 7Introduction to Microeconomics and Basic Economic Problems

A mixed economy is one in which:

  1. All economic decisions are taken by a single central planning board
  2. Only the state owns and operates all means of production
  3. Only private firms own and operate all means of production
  4. Both the public sector and the private sector participate in production and allocation Correct answer.

Explanation

A mixed economy combines private ownership and market coordination with a public sector that provides goods, regulates and redistributes. Pure private ownership describes a capitalist market economy, while complete state ownership describes a planned economy. A single planning board is the hallmark of central planning, not of a mixed system.

Question 8Introduction to Microeconomics and Basic Economic Problems

The 'for whom to produce' problem in an economy is essentially a question of:

  1. Which techniques of production should be adopted by firms
  2. Which goods and services should be produced in the economy
  3. How much capital should be accumulated for future production
  4. How the national output is distributed among the members of society Correct answer.

Explanation

The distribution question asks who receives the goods and services produced, which depends on factor incomes and ownership of resources. Choosing which goods to produce is the 'what' problem, and choosing techniques is the 'how' problem. Capital accumulation relates to growth rather than to distribution among people.

Question 9Introduction to Microeconomics and Basic Economic Problems

The branch of economics that studies individual decision-making units such as households and firms is called:

  1. Public finance
  2. Development economics
  3. Microeconomics Correct answer.
  4. Macroeconomics

Explanation

Microeconomics analyses the behaviour of individual units, including consumer choice, firm production and price formation in single markets. Macroeconomics deals with economy-wide aggregates such as national income and general price level. Public finance and development economics are applied fields rather than the individual-versus-aggregate division.

Question 10Introduction to Microeconomics and Basic Economic Problems

The study of how the general price level and total employment in an economy are determined belongs to:

  1. Industrial organisation
  2. Welfare economics
  3. Microeconomics
  4. Macroeconomics Correct answer.

Explanation

Macroeconomics examines economy-wide aggregates, including the general price level, aggregate output and total employment. Microeconomics concerns individual markets and decision units rather than economy-wide totals. Welfare economics and industrial organisation are specialised branches, not the study of aggregate price and employment levels.

Question 11Introduction to Microeconomics and Basic Economic Problems

An economy produces only two goods, cloth and rice. Moving along its production possibility frontier from cloth to rice, the amount of cloth given up for each extra unit of rice:

  1. Becomes zero once half of the resources are shifted to rice
  2. Remains constant whatever the level of rice output
  3. Falls continuously as more rice is produced
  4. Rises as more rice is produced, reflecting increasing marginal opportunity cost Correct answer.

Explanation

On a concave PPF, resources are imperfectly adaptable, so each additional unit of rice requires giving up more cloth than the previous unit. This is increasing marginal opportunity cost, and it explains why the frontier bows outward. Constant sacrifice would require a straight-line frontier, and the sacrifice never drops to zero while resources remain scarce.

Question 12Introduction to Microeconomics and Basic Economic Problems

A technological improvement that raises the productivity of all resources in an economy will:

  1. Shift the production possibility frontier outward to the right Correct answer.
  2. Move the economy to a point inside the existing frontier
  3. Leave the frontier unchanged but change the economy's choice of point on it
  4. Rotate the frontier inward along the horizontal axis only

Explanation

Improved productivity means more output can be obtained from the same resources, so the entire production possibility frontier shifts outward. An inward rotation or a movement inside the frontier would indicate lost capability or inefficiency. A change in the chosen point alone would not reflect the new productive capacity.

Question 13Introduction to Microeconomics and Basic Economic Problems

Which of the following best illustrates the 'what to produce' problem facing an economy?

  1. Deciding whether to use more labour or more machinery in rice cultivation
  2. Deciding whether scarce land should be used for a housing project or for paddy cultivation Correct answer.
  3. Deciding how the profits of a firm should be shared among its owners
  4. Deciding whether the central bank should raise the interest rate

Explanation

The 'what to produce' problem concerns which goods and services, and in what quantities, an economy should produce from scarce resources. The labour-versus-machinery choice is the 'how to produce' problem, while profit sharing concerns distribution. Interest-rate policy is a macroeconomic stabilisation decision, not the allocative question of what to produce.

Question 14Introduction to Microeconomics and Basic Economic Problems

An economy is initially producing on its production possibility frontier. If it decides to produce more of good X, the movement along the frontier shows that:

  1. The production possibility frontier has shifted outward
  2. Some units of good Y must be sacrificed because resources are fully employed Correct answer.
  3. The economy has moved to a position of unemployed resources
  4. More of good X can be produced without any reduction in good Y

Explanation

On the frontier all resources are fully and efficiently employed, so producing more of one good requires withdrawing resources from the other. The sacrifice of good Y is the opportunity cost of extra X. No output is free at the frontier, and a movement along the curve is not a shift of the curve.

Question 15Introduction to Microeconomics and Basic Economic Problems

Which statement correctly distinguishes positive economics from normative economics?

  1. Positive economics uses only mathematical models while normative economics uses only historical data
  2. Positive economics deals with value judgements while normative economics deals with verifiable facts
  3. Positive economics studies only the public sector while normative economics studies only the private sector
  4. Positive economics describes and explains economic phenomena while normative economics prescribes what should be done Correct answer.

Explanation

Positive economics is concerned with description, explanation and prediction that can be tested against evidence. Normative economics involves value judgements and policy prescriptions about what ought to be. The other options confuse the distinction with sectoral coverage or with particular research methods.

Question 16Introduction to Microeconomics and Basic Economic Problems

In the circular flow of income in a simple two-sector economy, which statement is correct?

  1. Households pay taxes to firms and firms provide public goods in return
  2. Saving by households flows directly to firms as investment without any financial market
  3. Firms supply factor services to households and receive wages in return
  4. Households supply factor services to firms and receive factor incomes in return Correct answer.

Explanation

In the two-sector model, households own factors of production and sell their services to firms, receiving rent, wages, interest and profit. Firms use these factors to produce goods and services that households buy with their incomes. Taxes and public goods involve the government, and saving reaches investors through financial markets, so those options misstate the flow.

Question 17Theory of Consumer Behaviour (utility, indifference curves, demand)

In cardinal utility analysis, total utility is at its maximum when marginal utility is:

  1. zero Correct answer.
  2. negative
  3. positive and falling
  4. positive and rising

Explanation

Total utility increases as long as marginal utility is positive and reaches its peak at the point where marginal utility becomes zero. Beyond that point, negative marginal utility makes total utility fall. This zero-marginal-utility condition marks satiation for the consumer.

Question 18Theory of Consumer Behaviour (utility, indifference curves, demand)

A consumer's total utility from 4 units is 60 utils and from 5 units is 68 utils. The marginal utility of the fifth unit is:

  1. 8 utils Correct answer.
  2. 68 utils
  3. 13.6 utils
  4. 4 utils

Explanation

Marginal utility is the change in total utility divided by the change in quantity, here 68 minus 60 over one extra unit, giving 8 utils. It measures the addition to satisfaction from consuming one more unit, not the average satisfaction.

Question 19Theory of Consumer Behaviour (utility, indifference curves, demand)

The law of diminishing marginal utility states that as a consumer consumes more units of a commodity in a given period, the marginal utility of successive units:

  1. becomes negative immediately
  2. rises at an increasing rate
  3. remains constant
  4. falls Correct answer.

Explanation

The law says that with continuous consumption of the same commodity within a period, the satisfaction added by each extra unit declines. It does not claim utility turns negative at once, only that the additions become smaller. This tendency underpins the downward-sloping demand curve.

Question 20Theory of Consumer Behaviour (utility, indifference curves, demand)

An indifference curve is convex to the origin because of:

  1. constant opportunity cost between the goods
  2. the consumer's fixed money income
  3. a diminishing marginal rate of substitution Correct answer.
  4. increasing marginal utility of both goods

Explanation

Along an indifference curve the marginal rate of substitution falls as more of one good is substituted for another, and this diminishing MRS gives the curve its convex shape. Convexity reflects the consumer's preference for balanced bundles. Budget or income considerations do not determine the shape of an indifference curve.

Question 21Theory of Consumer Behaviour (utility, indifference curves, demand)

Two indifference curves belonging to the same consumer's preference map:

  1. can never intersect each other Correct answer.
  2. intersect when both goods are normal goods
  3. intersect where the consumer is in equilibrium
  4. are always parallel straight lines

Explanation

Indifference curves cannot intersect because intersection would imply two different utility levels for the same bundle, violating transitivity and consistency of preferences. Each curve represents a distinct level of satisfaction. Parallelism is not guaranteed, since curves need not be equally spaced.

Question 22Theory of Consumer Behaviour (utility, indifference curves, demand)

A budget line is drawn for a consumer with money income of 200, price of good X equal to 20 and price of good Y equal to 10. The vertical intercept on the Y-axis is:

  1. 20 units of Y Correct answer.
  2. 200 units of Y
  3. 10 units of Y
  4. 2 units of Y

Explanation

The vertical intercept shows the maximum quantity of Y purchasable when the entire income is spent on Y, which equals income divided by the price of Y, that is 200 divided by 10, giving 20 units. The horizontal intercept would be 200 divided by 20, equal to 10 units of X.

Question 23Theory of Consumer Behaviour (utility, indifference curves, demand)

If the price of good X falls while money income and the price of good Y stay unchanged, the budget line:

  1. rotates inward along the Y-axis
  2. shifts parallel outward away from the origin
  3. pivots outward along the X-axis, becoming flatter Correct answer.
  4. pivots inward along the X-axis, becoming steeper

Explanation

A fall in the price of X raises the maximum affordable quantity of X, so the horizontal intercept moves right while the vertical intercept stays fixed. The line therefore rotates outward about the Y-intercept and its slope magnitude falls, making it flatter. A parallel shift would require a change in money income.

Question 24Theory of Consumer Behaviour (utility, indifference curves, demand)

The slope of the budget line, measured as the magnitude of its gradient, equals:

  1. the marginal rate of substitution at every point
  2. the ratio of the price of X to the price of Y Correct answer.
  3. the ratio of total utility to money income
  4. the ratio of income to the price of X

Explanation

The budget line's slope magnitude is the price of X divided by the price of Y, showing how much Y must be given up to buy one more unit of X. It represents the market rate of exchange between the two goods. The marginal rate of substitution belongs to the indifference curve, not the budget line.

Question 25Theory of Consumer Behaviour (utility, indifference curves, demand)

Consumer equilibrium under the indifference curve approach requires that the budget line be:

  1. tangent to the lowest indifference curve available
  2. intersecting two indifference curves at once
  3. parallel to the highest indifference curve
  4. tangent to the highest attainable indifference curve Correct answer.

Explanation

Equilibrium occurs at the point where the budget line touches the highest indifference curve it can reach, so the slopes of the two curves are equal. At that tangency the marginal rate of substitution equals the price ratio. Choosing a lower curve would leave affordable satisfaction unexploited.

Question 26Theory of Consumer Behaviour (utility, indifference curves, demand)

At the point of consumer equilibrium in indifference curve analysis, the marginal rate of substitution of X for Y equals:

  1. the marginal utility of money
  2. the total utility of good X
  3. the ratio of money income to the price of Y
  4. the ratio of the price of X to the price of Y Correct answer.

Explanation

Tangency of the budget line and the indifference curve makes the MRS equal the price ratio, Px divided by Py. This condition means the consumer's subjective trade-off matches the market trade-off. Any divergence would let the consumer raise satisfaction by reallocating spending.

Question 27Theory of Consumer Behaviour (utility, indifference curves, demand)

In cardinal utility analysis, a consumer spending a fixed income on two goods maximises utility when:

  1. marginal utility per rupee is equal for both goods Correct answer.
  2. total utility from both goods is equal
  3. marginal utility of each good is zero
  4. the price of both goods is equal

Explanation

The equi-marginal principle requires that the marginal utility obtained per unit of money spent be the same for every good, that is MUx divided by Px equals MUy divided by Py. If one good yielded more utility per rupee, reallocating spending would raise total satisfaction. Equal total utilities or equal prices are not required.

Question 28Theory of Consumer Behaviour (utility, indifference curves, demand)

A consumer derives marginal utility of 40 from the last rupee spent on good X and marginal utility of 25 from the last rupee spent on good Y. To increase total utility the consumer should:

  1. buy more of both goods
  2. buy more of X and less of Y Correct answer.
  3. buy more of Y and less of X
  4. keep the present allocation unchanged

Explanation

Utility per rupee is higher on good X, so shifting expenditure from Y to X raises total satisfaction. As more X is bought its marginal utility per rupee falls, while the marginal utility per rupee of Y rises, until the two are equal. Reallocation continues until the equi-marginal condition holds.

Question 29Theory of Consumer Behaviour (utility, indifference curves, demand)

The income effect of a price change refers to the change in quantity demanded caused by:

  1. a change in the consumer's tastes and preferences
  2. a change in the consumer's money income
  3. a change in the price of a substitute good
  4. a change in the consumer's real purchasing power Correct answer.

Explanation

A price change alters the real purchasing power of a given money income, and the resulting change in quantity demanded is the income effect. It is distinct from the substitution effect, which arises from the change in relative prices. Money income itself is held constant in this decomposition.

Question 30Theory of Consumer Behaviour (utility, indifference curves, demand)

For a normal good, the substitution effect of a price fall and the income effect:

  1. both decrease the quantity demanded
  2. both increase the quantity demanded Correct answer.
  3. cancel each other completely
  4. work in opposite directions

Explanation

When the price of a normal good falls, the substitution effect raises quantity demanded because the good is now relatively cheaper. Because purchasing power rises and the good is normal, the income effect also raises quantity demanded. The two effects reinforce each other, giving a downward-sloping demand curve.

Question 31Theory of Consumer Behaviour (utility, indifference curves, demand)

A Giffen good is one for which:

  1. quantity demanded is unrelated to price
  2. the substitution effect outweighs the income effect when its price falls
  3. the substitution effect is zero at every price
  4. the income effect outweighs the substitution effect when its price falls Correct answer.

Explanation

For a Giffen good, a price fall generates a negative income effect so large that it dominates the positive substitution effect, so quantity demanded falls. This produces an upward-sloping demand curve. The good must be strongly inferior and take a large share of the consumer's budget.

Question 32Theory of Consumer Behaviour (utility, indifference curves, demand)

A movement along a given demand curve for a commodity is caused by:

  1. a change in consumer preferences
  2. a change in the price of a related good
  3. a rise in consumer income
  4. a change in the price of the commodity itself Correct answer.

Explanation

A change in the commodity's own price changes quantity demanded and is shown as movement along the existing demand curve. Changes in income, related prices or preferences shift the whole curve to a new position. The distinction separates changes in quantity demanded from changes in demand.

Question 33Theory of Consumer Behaviour (utility, indifference curves, demand)

For two goods that are perfect substitutes, the indifference curves are:

  1. upward-sloping lines
  2. right-angled curves
  3. straight downward-sloping lines Correct answer.
  4. convex to the origin

Explanation

When goods are perfect substitutes the consumer is willing to exchange them at a constant rate, so the marginal rate of substitution is constant. Constant MRS gives straight-line indifference curves with a negative slope. Curvature appears only when substitutability diminishes.

Question 34Theory of Consumer Behaviour (utility, indifference curves, demand)

For two goods that are perfect complements, such as left and right shoes, the indifference curves are:

  1. convex curves touching both axes
  2. vertical straight lines throughout
  3. L-shaped, with the corner on the line of equal quantities Correct answer.
  4. straight lines with a constant slope

Explanation

Perfect complements are useful only in fixed proportions, so extra units of one good alone add no satisfaction. The indifference curves are therefore right-angled, with the kink lying on the ray showing the fixed consumption ratio. Utility rises only when both goods increase together.

Question 35Theory of Consumer Behaviour (utility, indifference curves, demand)

The assumption that a consumer prefers bundle A to bundle B, and bundle B to bundle C, implies that the consumer prefers bundle A to bundle C. This property of preferences is called:

  1. continuity
  2. monotonicity
  3. completeness
  4. transitivity Correct answer.

Explanation

Transitivity requires that pairwise rankings be consistent across bundles, so preference for A over B and B over C implies preference for A over C. It rules out cyclical preferences and makes indifference curves non-intersecting. Completeness and monotonicity are separate axioms.

Question 36Theory of Consumer Behaviour (utility, indifference curves, demand)

A consumer's demand curve for a normal good can be derived from indifference curve analysis by:

  1. tracing the equilibrium quantities as the price of the good changes Correct answer.
  2. comparing total utilities of successive units consumed
  3. shifting the budget line parallel with a constant price ratio
  4. measuring the slope of a single indifference curve

Explanation

Varying the price of the good rotates the budget line and yields a new tangency point each time. Plotting the equilibrium quantity against each price traces out the price-consumption curve in the diagram and the demand curve in the price-quantity plane. Income and preferences are held constant.

Question 37Theory of Consumer Behaviour (utility, indifference curves, demand)

If a consumer's income rises and both goods are normal, the budget line shifts outward in parallel and the new equilibrium lies on:

  1. the same indifference curve, with less of both goods consumed
  2. a lower indifference curve, with more of one good only
  3. a higher indifference curve, with more of both goods consumed Correct answer.
  4. the same indifference curve at the original tangency point

Explanation

Higher income with unchanged prices shifts the budget line outward in parallel, allowing tangency with a higher indifference curve. When both goods are normal, the new equilibrium involves larger quantities of both. The income-consumption curve joins these successive equilibrium points.

Question 38Theory of Consumer Behaviour (utility, indifference curves, demand)

Which statement about the marginal rate of substitution of good X for good Y is correct?

  1. It always equals the ratio of the prices of X and Y at every bundle
  2. It is the ratio of total utility to total expenditure on X
  3. It is the amount of Y the consumer will give up for one more unit of X while staying on the same indifference curve Correct answer.
  4. It is the amount of money the consumer must pay for one more unit of X

Explanation

The marginal rate of substitution measures the quantity of Y a consumer is willing to sacrifice for an additional unit of X while keeping satisfaction constant. It is the absolute slope of the indifference curve and diminishes along a convex curve. It equals the price ratio only at the equilibrium tangency.

Question 39Theory of Consumer Behaviour (utility, indifference curves, demand)

A downward-sloping straight-line demand curve has a price elasticity that:

  1. is zero at the midpoint
  2. falls as price falls along the curve Correct answer.
  3. rises as price falls along the curve
  4. stays constant at every point

Explanation

On a linear demand curve the elasticity varies with position, being high at high prices and low at low prices. As price falls toward the lower end, elasticity declines continuously. Constant elasticity requires a curve of a different, non-linear form.

Question 40Theory of Consumer Behaviour (utility, indifference curves, demand)

A consumer regards two goods as perfect substitutes and faces a budget line flatter than the indifference curves. The equilibrium will be:

  1. a point where the marginal rate of substitution exceeds the price ratio
  2. a corner solution where only the cheaper good is bought Correct answer.
  3. any point on the budget line, since all give equal satisfaction
  4. an interior tangency with positive quantities of both goods

Explanation

With straight-line indifference curves, a tangency with positive amounts of both goods occurs only if the two slopes coincide. When the budget line is flatter, the consumer reaches the highest curve at a corner, spending all income on the good with the better price-to-satisfaction ratio. Interior solutions require curved indifference curves.

Question 41Production and Costs

In the short run, which of the following is the best example of a fixed factor of production for a small bakery?

  1. The flour used each day to bake bread
  2. The electricity consumed by the ovens during baking
  3. The monthly rent paid on its leased oven and building Correct answer.
  4. The wages paid to weekend counter staff

Explanation

A fixed factor is one whose quantity cannot be varied within the short period, and contractual rent on a leased oven and building stays the same whatever output the bakery produces. Flour, casual wages and electricity all change with the level of baking, so they are variable factors. The distinction depends on the time horizon, not on the size of the payment.

Question 42Production and Costs

A firm's total fixed cost is ₹600. When it produces 20 units, total cost is ₹1,600. What is the average variable cost at 20 units?

  1. ₹80
  2. ₹30
  3. ₹1,000
  4. ₹50 Correct answer.

Explanation

Total variable cost equals total cost minus total fixed cost, that is ₹1,600 − ₹600 = ₹1,000. Average variable cost is total variable cost divided by output, so ₹1,000 ÷ 20 = ₹50 per unit. Average total cost would be ₹80, which is a different measure.

Question 43Production and Costs

The law of variable proportions is studied in the short run because it assumes that:

  1. All factors of production can be varied freely
  2. At least one factor of production is held fixed Correct answer.
  3. The firm is operating at its minimum efficient scale
  4. The price of the product remains constant

Explanation

The law of variable proportions examines how output changes when one factor is increased while other factors stay unchanged, which is only possible when some factor is fixed. That fixed factor is what defines the short run. If every factor could be varied, the analysis would belong to returns to scale in the long run.

Question 44Production and Costs

Which statement correctly describes the relationship between marginal cost and average total cost when average total cost is falling?

  1. Marginal cost must be less than average total cost Correct answer.
  2. Marginal cost must equal average total cost
  3. Marginal cost must be greater than average total cost
  4. Marginal cost must be falling as well

Explanation

Average total cost falls whenever the cost of the extra unit is below the existing average, because adding a below-average value pulls the average down. Hence MC < ATC while ATC is falling, and MC > ATC while ATC is rising. Marginal cost itself may be rising or falling during this phase.

Question 45Production and Costs

The vertical distance between the total cost curve and the total variable cost curve at any level of output equals:

  1. Total revenue
  2. Average fixed cost
  3. Total fixed cost Correct answer.
  4. Marginal cost

Explanation

By definition total cost is the sum of total fixed cost and total variable cost, so TC − TVC = TFC at every output level. Because fixed cost does not change with output, this vertical gap stays constant. Marginal and average fixed cost are per-unit or incremental measures, not the gap between the two total curves.

Question 46Production and Costs

A firm's production function shows that with a fixed amount of capital, total product rises from 100 to 118 units when the fourth worker is hired. What is the marginal product of the fourth worker?

  1. 29.5 units
  2. 18 units Correct answer.
  3. 4 units
  4. 118 units

Explanation

Marginal product is the change in total product resulting from employing one additional unit of the variable factor. Here total product rises by 118 − 100 = 18 units, so the marginal product of the fourth worker is 18 units. Dividing total product by the number of workers would give average product instead.

Question 47Production and Costs

When marginal product is rising but remains above average product, average product will:

  1. Fall to zero as diminishing returns set in
  2. Stay constant at the level of marginal product
  3. Rise, because the marginal addition exceeds the existing average Correct answer.
  4. Fall, because marginal product is above average product

Explanation

Average product is pulled in the direction of the marginal value: if the marginal addition is above the average, the average must rise. This holds regardless of whether marginal product itself is rising or falling, as long as it lies above average product. Average product reaches its maximum only where it equals marginal product.

Question 48Production and Costs

The short-run average total cost curve is U-shaped mainly because:

  1. Marginal cost is constant at every level of output
  2. Average fixed cost falls continuously while diminishing returns eventually raise average variable cost Correct answer.
  3. Total fixed cost increases in steps with output
  4. Average fixed cost rises steadily as output expands

Explanation

Average total cost combines average fixed cost, which always declines as output spreads the fixed cost, and average variable cost, which first falls and then rises once diminishing returns set in. The U-shape results from the eventual dominance of rising average variable cost over falling average fixed cost. Neither component alone explains the shape.

Question 49Production and Costs

A firm's total cost schedule is: at 1 unit, ₹100; at 2 units, ₹130; at 3 units, ₹165. What is the marginal cost of the third unit?

  1. ₹30
  2. ₹165
  3. ₹35 Correct answer.
  4. ₹55

Explanation

Marginal cost is the addition to total cost from producing one more unit. Total cost rises from ₹130 to ₹165 when output goes from 2 to 3 units, so marginal cost is ₹35. The figure ₹30 is the marginal cost of the second unit, and ₹55 is average total cost at 3 units.

Question 50Production and Costs

Along the total product curve, total product is maximum when:

  1. Marginal product is zero Correct answer.
  2. Average product is zero
  3. Marginal product is at its maximum
  4. Average product equals marginal product

Explanation

Total product stops increasing when an extra unit of the variable factor adds nothing to output, that is when marginal product becomes zero. Beyond that point marginal product is negative and total product falls. Marginal product at its maximum marks the point of inflexion, where total product is rising fastest, not where it peaks.