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Theory of Cost MCQ Test

CA Foundation Paper 4 - Business Economics, Chapter 3 Unit 2. Practice ICAI-style MCQs on cost concepts, short run cost curves, long run cost behaviour, and standard exam-based applications.

CA Foundation · Paper 4 · Business Economics

Chapter 3 · Unit 2 · Theory of Cost

MCQ Test Page · CA Foundation level · ICAI pattern · instant scoring and answer review

30 MCQs Foundation Level Past Paper Pattern

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Question 01

Total cost is equal to:

average fixed cost + marginal cost total fixed cost + total variable cost total variable cost + average cost marginal cost + average variable cost

Total cost is the sum of total fixed cost and total variable cost.

Question 02

In the short run, fixed costs are those costs which:

do not vary with output vary directly with output fall to zero at low output are always avoidable

Fixed costs remain unchanged in the short run regardless of output level.

Question 03

Which of the following is a variable cost?

rent of building insurance premium raw material cost interest on long-term loan

Raw material cost changes with output and is therefore a variable cost.

Question 04

When output is zero, total cost will be equal to:

total variable cost marginal cost average fixed cost total fixed cost

At zero output, variable cost is zero, so total cost equals total fixed cost.

Question 05

Average fixed cost is calculated as:

TFC ÷ Q TVC ÷ Q TC ÷ Q ΔTC ÷ ΔQ

Average fixed cost means fixed cost per unit of output.

Question 06

Average variable cost is equal to:

TFC ÷ Q TVC ÷ Q TC ÷ Q² TC − TVC

Average variable cost is variable cost per unit of output.

Question 07

Average cost is also known as:

marginal cost prime cost average total cost supplementary cost

Average cost and average total cost mean the same thing: TC ÷ Q.

Question 08

Marginal cost is the addition made to:

total fixed cost average cost average variable cost total cost by producing one more unit

Marginal cost measures the increase in total cost resulting from one extra unit of output.

Question 09

Which cost remains constant in total in the short run?

total variable cost total fixed cost total cost marginal cost

Total fixed cost does not change with output in short run.

Question 10

The shape of the average fixed cost curve is:

rectangular hyperbola upward sloping straight line horizontal line inverted U-shape

AFC continuously falls as output increases, taking the shape of a rectangular hyperbola.

Question 11

The average variable cost curve is generally:

downward sloping throughout horizontal U-shaped vertical

AVC first falls and then rises because of increasing and then diminishing returns.

Question 12

The average cost curve is U-shaped because:

fixed cost rises continuously marginal cost is constant output remains fixed it is influenced by falling AFC and U-shaped AVC

AC falls initially because AFC falls and AVC falls, then rises when AVC rises strongly.

Question 13

When marginal cost is below average cost, average cost will:

rise fall remain constant always become zero

Marginal cost pulls average cost downward when it is below average cost.

Question 14

When marginal cost is greater than average cost, average cost will:

rise fall remain unchanged in all cases become minimum immediately

Marginal cost above average cost pulls average cost upward.

Question 15

Marginal cost curve cuts average cost curve at its:

highest point left side minimum point starting point

MC intersects both AVC and AC at their minimum points.

Question 16

In the short run, the law mainly governing cost behaviour is:

law of demand law of supply law of returns to scale law of variable proportions

Short-run cost behaviour is tied to the law of variable proportions.

Question 17

Long-run average cost curve is also called:

profit curve planning curve revenue curve sales curve

LAC is called the planning curve because a firm plans plant size in the long run.

Question 18

In the long run:

all factors are variable all factors are fixed only labour is variable costs do not exist

In the long run, the firm can vary all factors including plant size.

Question 19

Long-run average cost falls due to:

diseconomies of scale fixed factors economies of scale falling demand

Economies of scale reduce per-unit cost in the long run.

Question 20

When long-run average cost rises with increase in output, it is due to:

internal economies constant returns specialisation only diseconomies of scale

When scale becomes too large, management and coordination problems can raise average cost.

Question 21

If output increases from 10 units to 11 units and total cost rises from ₹500 to ₹540, marginal cost is:

₹20 ₹40 ₹45 ₹50

MC = change in TC / change in output = (540 − 500) / 1 = ₹40.

Question 22

If total fixed cost is ₹300 and output is 10 units, average fixed cost is:

₹30 ₹20 ₹10 ₹300

AFC = TFC / Q = 300 / 10 = ₹30.

Question 23

If total variable cost is ₹600 at 20 units of output, average variable cost is:

₹20 ₹25 ₹40 ₹30

AVC = TVC / Q = 600 / 20 = ₹30.

Question 24

If total cost is ₹900 and output is 30 units, average cost is:

₹20 ₹25 ₹30 ₹35

AC = TC / Q = 900 / 30 = ₹30.

Question 25

Which of the following statements is correct?

AFC rises as output rises AFC continuously falls as output rises AFC is always equal to AVC AFC can become negative

Fixed cost is spread over more units as output rises, so AFC falls continuously.

Question 26

The reason marginal cost first falls and then rises is:

law of variable proportions law of demand law of diminishing utility law of increasing returns to scale only

In short run, MC reflects increasing and then diminishing returns to the variable factor.

Question 27

Which curve lies below the average cost curve because average cost includes it plus AFC?

marginal cost curve total cost curve total variable cost curve average variable cost curve

AC = AVC + AFC, so AVC lies below AC.

Question 28

The long-run average cost curve is generally:

a vertical line always downward sloping U-shaped rectangular hyperbola

LAC is usually U-shaped because of economies and diseconomies of scale.

Question 29

If marginal cost is less than AVC, then AVC will:

rise fall remain fixed become zero

Marginal pulls average. If MC is below AVC, AVC falls.

Question 30

A firm is in the long run when:

it can change plant size and all factors of production it cannot vary output fixed costs remain constant forever only one factor is variable

Long run means enough time to vary all inputs and choose plant size.

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MCQ Test · Chapter 3 · Unit 2 · Theory of Cost

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