CUET UG Economics Booster Test 3 - Short Run Cost Structure -

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CUET UG Economics Booster Test 3 - Short Run Cost Structure

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Short Run Cost Structure

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QUESTION 1 OF 20

Conceptually, which of the following is true about constant production costs when comparing the short run to the long run?

Answer Review

1 Conceptually, which of the following is true about constant production costs when comparing the short run to the long run?

A TFC remains constant regardless of the time horizon, ensuring output independence always.

B In the long run, all inputs are variable, meaning there are no fixed costs, causing TC to coincide with TVC.

C Constant production costs only apply when the production function displays Constant Returns to Scale (CRS).

D TFC exists in the long run but is proportional to the scale of output.

💡 Short Explanation

�� Fixed costs exist only in the short run. �� In the long run, all factors become variable. �� Therefore, Total Cost equals Total Variable Cost.

✅ Correct Answer Explanation

In the short run, some factors of production remain fixed, giving rise to Total Fixed Cost (TFC). Therefore, TC = TFC + TVC However, in the long run, firms have enough time to vary all factors of production. Since there are no fixed inputs, TFC becomes zero. Consequently, TC = TVC Thus, Option B correctly reflects the NCERT concept. • Option A is incorrect because TFC does not exist in the long run. • Option C incorrectly relates fixed costs to Constant Returns to Scale. • Option D is incorrect because fixed costs disappear in the long run rather than varying with output.

❓ Why Other Options Are Incorrect

�� Option A → Fixed costs remain constant only in the short run, not in the long run.
�� Option C → Constant Returns to Scale is a production concept and has no relation to the existence of fixed costs.
�� Option D → Fixed costs do not become proportional to output; they disappear in the long run.

🎯 Strategy

Used

Elimination

Application:

Eliminate options that incorrectly assume fixed costs continue in the long run.

Final Logic:

Only Option B correctly explains that all costs become variable in the long run.

🧠 Memory Trick

"Long Run = No Fixed Cost."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Short Run and Long Run Cost Concepts

2 Complete the analytical description of output independence:
On a cost graph where output is measured on the horizontal axis and costs on the vertical axis, the output independence of TFC implies that the tangent of the angle formed from the origin to any point on the TFC curve __________ as output increases.

A remains constant

B increases linearly

C decreases continuously

D forms a U-shape

💡 Short Explanation

�� TFC remains constant at every output level. �� The ray from the origin becomes flatter as output increases. �� Hence, its slope (tan θ) continuously decreases.

✅ Correct Answer Explanation

The TFC curve is a horizontal straight line because Total Fixed Cost remains unchanged irrespective of output. For any point on the TFC curve, tan θ = TFC / Output = AFC Since TFC is constant while output continuously increases, the value of TFC ÷ Output keeps falling. Thus, the tangent of the angle formed by the ray from the origin decreases continuously, representing the declining Average Fixed Cost (AFC). Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → The tangent cannot remain constant because output changes while TFC remains fixed.
�� Option B → The slope decreases rather than increasing.
�� Option D → The ray from the origin does not form a U-shaped curve.

🎯 Strategy

Used

Dimensional/Unit Analysis

Application:

Interpret the slope as TFC ÷ Output (AFC) and observe its behavior as output rises.

Final Logic:

Constant numerator with increasing denominator leads to a continuously decreasing ratio.

🧠 Memory Trick

"More Output → Lower AFC."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Average Fixed Cost and TFC Curve Geometry

3 Complete the conceptual statement:
The input-driven nature of TVC implies that initially, as variable input employment increases, factor proportions become more suitable, causing marginal product to increase and marginal cost to __________.

A increase proportionally

B fall

C remain constant

D become zero

💡 Short Explanation

�� Initially, Marginal Product increases. �� Higher productivity lowers production cost per unit. �� Therefore, Marginal Cost falls.

✅ Correct Answer Explanation

During the initial stage of production, employing additional units of the variable factor improves the utilization of fixed inputs. Consequently, the Marginal Product (MP) increases. Since Marginal Cost (MC) is inversely related to Marginal Product (MP), an increase in MP causes MC to decline. Thus, Total Variable Cost initially rises at a decreasing rate. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → MC does not initially increase; it decreases.
�� Option C → MC changes with productivity and is therefore not constant.
�� Option D → Marginal Cost can never become zero because producing an extra unit always involves some cost.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the inverse relationship between Marginal Product and Marginal Cost.

Final Logic:

Higher MP always implies Lower MC.

🧠 Memory Trick

"MP ↑ ⇒ MC ↓."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Marginal Product and Marginal Cost Relationship

4 Consider the assertion (A) and reason (R) for the zero output state.
Assertion (A): At exactly zero output, Total Cost (TC) intercepts the vertical axis at a positive value equal to c₁.
Reason (R): At zero output, Total Variable Cost (TVC) is undefined, shifting the entire TC curve upwards.

A Both A and R are true, and R is the correct explanation of A.

B Both A and R are true, but R is not the correct explanation of A.

C A is true, but R is false.

D Both A and R are false.

💡 Short Explanation

�� At zero output, TC equals TFC. �� TVC is zero at zero output. �� Therefore, the reason is incorrect.

✅ Correct Answer Explanation

The Assertion is true because when output is zero, TC = TFC + TVC Since TVC = 0 at zero output, TC = TFC Hence, the Total Cost curve begins from the positive value of Total Fixed Cost on the vertical axis. The Reason is false because Total Variable Cost is not undefined at zero output. It is exactly zero. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → The reason is false.
�� Option B → TVC is zero, not undefined.
�� Option D → The assertion is correct.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Verify the truth of the assertion and reason independently.

Final Logic:

Assertion is true; Reason is false.

🧠 Memory Trick

"Zero Output ⇒ TVC = 0."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Total Cost at Zero Output

5 Which mathematical equation correctly demonstrates the relationship between the summation of costs (TC) and Average Cost components?

A TC = (AFC + AVC) / q

B TC = q(SAC) − TFC

C TC = q(AFC + AVC)

D TC = ΔSMC / Δq

💡 Short Explanation

�� SAC = AFC + AVC. �� TC = SAC × Output. �� Therefore, TC = q(AFC + AVC).

✅ Correct Answer Explanation

Average Cost is defined as SAC = AFC + AVC Also, SAC = TC / q Rearranging, TC = q × SAC Substituting SAC = AFC + AVC, TC = q(AFC + AVC) Hence, Option C correctly expresses the mathematical relationship among Total Cost, Average Fixed Cost, and Average Variable Cost.

❓ Why Other Options Are Incorrect

�� Option A → This gives Average Cost, not Total Cost.
�� Option B → Subtracting TFC gives TVC, not TC.
�� Option D → This is unrelated to the Total Cost equation.

🎯 Strategy

Used

Substitution

Application:

Substitute SAC = AFC + AVC into TC = SAC × q.

Final Logic:

Only Option C satisfies both cost identities.

🧠 Memory Trick

"TC = Output × Average Cost."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship among TC, AFC, AVC and SAC

6 Choose the correct statements regarding the properties of the TC base at fixed cost:
I. The difference between TC and TVC at any output level q is geometrically equivalent to the area under the AFC curve at that q.
II. The rate of change of TC with respect to output is determined solely by the rate of change of the fixed cost base.
III. If TFC increases due to an external factor, the entire TC curve shifts vertically upward by that exact amount, while TVC remains unaffected.

A I and II

B I and III

C II and III

D I, II, and III

💡 Short Explanation

�� TC = TFC + TVC. �� An increase in TFC shifts only the TC curve upward. �� TC changes with TVC, not with fixed cost.

✅ Correct Answer Explanation

Statement I is correct because: TC − TVC = TFC Since AFC × Output = TFC, the rectangular area under the AFC curve at output q represents Total Fixed Cost, which is also the vertical difference between TC and TVC. Statement II is incorrect because the rate of change of Total Cost is determined by Variable Cost, not Fixed Cost. Since TFC remains constant in the short run, its rate of change is zero. Statement III is correct because if Total Fixed Cost increases, Total Variable Cost remains unchanged. Therefore, the entire TC curve shifts upward by exactly the increase in TFC. Hence, Statements I and III are correct, making Option B the correct answer.

❓ Why Other Options Are Incorrect

�� Option A → Statement II is incorrect because TFC does not determine the slope of TC.
�� Option C → Statement II is false.
�� Option D → Since Statement II is incorrect, all three statements cannot be correct.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement individually using the relationship TC = TFC + TVC.

Final Logic:

Only Statements I and III satisfy the NCERT concepts.

🧠 Memory Trick

"TC shifts, TVC doesn't."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Total Cost and Total Fixed Cost Relationship

7 Match the analytical angles with their derived cost functions on the TFC curve.

List I	List II
1. The slope of the angle AOq₀ where A is a point on the TFC curve	a. Gives the value of TFC which is constant
2. The horizontal line passing through point F on the y-axis	b. Gives the Average Fixed Cost (AFC) at q₀, calculated as tan θ
3. As output increases, the slope AOq becomes smaller	c. Average Fixed Cost (AFC) decreases
4. TFC curve remains parallel to the x-axis	d. Fixed Cost remains unchanged at every output level

A 1-b, 2-a, 3-c, 4-d

B 1-a, 2-b, 3-d, 4-c

C 1-a, 2-a, 3-c, 4-d

D 1-b, 2-b, 3-d, 4-c

💡 Short Explanation

�� The slope of OA represents Average Fixed Cost (AFC). �� The horizontal TFC curve represents constant Total Fixed Cost. �� AFC falls as output increases because TFC is spread over more units.

✅ Correct Answer Explanation

According to NCERT, the Total Fixed Cost (TFC) curve is a horizontal line because fixed cost remains unchanged in the short run. 1 → b The slope of OA is tan θ = TFC / Output = AFC. Therefore, 1 → b. 2 → a The horizontal line passing through point F on the y-axis represents the constant value of Total Fixed Cost at every level of output. Therefore, 2 → a. 3 → c As output increases while TFC remains constant, the slope of OA decreases. Hence, Average Fixed Cost also decreases. Therefore, 3 → c. 4 → d The TFC curve remains parallel to the x-axis because fixed costs do not vary with output in the short run. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrect because the slope represents AFC, not TFC, and the remaining concepts are interchanged.
�� Option C → Incorrect because the slope cannot directly represent TFC.
�� Option D → Incorrect because the horizontal TFC curve does not represent AFC, and the remaining matches are incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Match the geometric features of the TFC graph with the corresponding cost concepts explained in NCERT.

Final Logic:

Slope → AFC
Horizontal Line → TFC
Increasing Output → AFC Falls
Horizontal TFC → Fixed Cost Constant

🧠 Memory Trick

Line = TFC

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Total Fixed Cost (TFC) Curve and Average Fixed Cost (AFC) Geometry

8 Complete the following statement regarding rectangular hyperbola geometry:
For the AFC curve, if we take any point on the curve and construct a rectangle to the axes, the area of this rectangle represents the __________, which remains equal for all points on the hyperbola.

A Short Run Average Cost

B Total Variable Cost

C Total Fixed Cost

D Long Run Marginal Cost

💡 Short Explanation

�� AFC × Output = TFC. �� TFC remains constant. �� Every rectangle has the same area.

✅ Correct Answer Explanation

The AFC curve is a rectangular hyperbola because AFC = TFC / Output Therefore, AFC × Output = TFC Since Total Fixed Cost remains constant in the short run, every rectangle formed by the AFC curve and the coordinate axes has the same area, representing TFC. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → SAC varies with output and is not represented by the rectangle.
�� Option B → TVC changes with output and is not constant.
�� Option D → LRMC has no connection with AFC geometry.

🎯 Strategy

Used

Substitution

Application:

Use the identity AFC × Output = TFC.

Final Logic:

Constant rectangle area always equals Total Fixed Cost.

🧠 Memory Trick

"Rectangle = TFC."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Rectangular Hyperbola of AFC

9 Arrange the logical sequence proving why the AVC curve must be U-shaped based on input productivity:
I. The Marginal Product (MP) of a variable factor begins to fall, causing the SMC to rise.
II. MP of a variable factor increases initially, causing SMC to fall.
III. AVC, being the average of all marginal costs up to that level, falls but less steeply than SMC.
IV. Once SMC rises sufficiently to exceed the prevailing AVC, the AVC also starts rising, completing the U-shape.

A II, III, I, IV

B I, II, III, IV

C II, I, IV, III

D III, II, I, IV

💡 Short Explanation

�� MP first increases. �� SMC falls, reducing AVC. �� Later MP falls, raising SMC and eventually AVC.

✅ Correct Answer Explanation

Initially, better utilization of fixed factors causes Marginal Product to increase, making SMC fall. Since AVC is the average of marginal costs, it also falls, although more gradually. Later, the Law of Diminishing Marginal Returns causes MP to decline, making SMC rise. Once SMC becomes greater than AVC, AVC also begins rising, creating the familiar U-shaped AVC curve. Therefore, the correct order is: II → III → I → IV Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Starts with diminishing returns instead of increasing productivity.
�� Option C → AVC cannot rise before MP starts falling.
�� Option D → AVC cannot fall before MP increases.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange events according to the production process explained by NCERT.

Final Logic:

Increasing MP precedes decreasing MP, leading to the U-shaped AVC.

🧠 Memory Trick

"MP Up → AVC Down → MP Down → AVC Up."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: U-Shaped AVC Curve

10 Match the cost curve intersection points in List-I with their geometric properties in List-II.

List I	List II
1. Point P where SMC cuts AVC	a. Occurs at output q₂ (where q₂ > q₁), representing the minimum point of SAC
2. Point S where SMC cuts SAC	b. Occurs at output q₁, representing the minimum point of AVC
3. SMC intersects an average cost curve at	c. Its minimum point
4. Minimum SAC occurs after minimum AVC because	d. AFC continues to fall

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-a, 3-c, 4-d

C 1-b, 2-b, 3-d, 4-c

D 1-a, 2-a, 3-d, 4-c

💡 Short Explanation

�� SMC cuts AVC at its minimum point. �� SMC cuts SAC at its minimum point. �� SAC reaches its minimum after AVC because AFC continues to fall.

✅ Correct Answer Explanation

According to NCERT, the Short Run Marginal Cost (SMC) curve intersects both AVC and SAC at their respective minimum points. 1 → b Point P is where SMC cuts AVC. This occurs at output q₁, where AVC is minimum. Therefore, 1 → b. 2 → a Point S is where SMC cuts SAC. This occurs at output q₂, where SAC is minimum. Since AFC continues to fall even after AVC reaches its minimum, q₂ > q₁. Therefore, 2 → a. 3 → c Marginal Cost always cuts an average cost curve at its minimum point. Therefore, 3 → c. 4 → d SAC reaches its minimum later because AFC continues to decline and offsets the initial rise in AVC. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrect because the minimum points of AVC and SAC are interchanged.
�� Option C → Incorrect because both curves do not attain their minimum at the same output, and the remaining matches are incorrect.
�� Option D → Incorrect because both intersection points are wrongly matched.

🎯 Strategy

Used

Option Grouping

Application:

Match each intersection point with the corresponding minimum average cost curve using the standard NCERT graph.

Final Logic:

SMC cuts AVC first and SAC later.

🧠 Memory Trick

SMC Meets AVC First, SAC Next

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship between SMC, AVC and SAC

11 Match the cost components in List-I to their impact on the SAC's geometric U-shape in List-II.

List I	List II
1. AFC component of SAC	a. Dictates the upward rising portion of the SAC curve once its rate of increase exceeds the counterpart's rate of decrease
2. AVC component of SAC	b. Causes SAC to continue falling even after SMC begins pulling AVC upward, until its rate of fall is overtaken
3. Short Run Average Cost (SAC)	c. Sum of AFC and AVC
4. Minimum point of SAC	d. Occurs when the rise in AVC exactly offsets the fall in AFC

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-b, 3-d, 4-c

C 1-b, 2-a, 3-c, 4-d

D 1-a, 2-a, 3-d, 4-c

💡 Short Explanation

�� SAC = AFC + AVC. �� Falling AFC initially dominates SAC. �� Rising AVC later dominates, causing SAC to rise.

✅ Correct Answer Explanation

According to NCERT, Short Run Average Cost (SAC) is the sum of Average Fixed Cost (AFC) and Average Variable Cost (AVC). 1 → b AFC continuously falls as output increases. Initially, this fall is greater than the rise in AVC, causing SAC to continue falling. Therefore, 1 → b. 2 → a Eventually, AVC rises rapidly because of diminishing marginal returns. When the increase in AVC exceeds the fall in AFC, SAC begins to rise. Therefore, 2 → a. 3 → c By definition, SAC = AFC + AVC. Therefore, 3 → c. 4 → d The minimum point of SAC occurs when the increase in AVC exactly offsets the decrease in AFC. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrect because the roles of AFC and AVC are interchanged.
�� Option B → Incorrect because AVC does not continue the downward movement of SAC, and SAC is correctly defined as AFC + AVC.
�� Option D → Incorrect because AFC does not determine the upward movement of SAC.

🎯 Strategy

Used

Option Grouping

Application:

Separate the effects of AFC and AVC on the movement of the SAC curve.

Final Logic:

Falling AFC lowers SAC initially; rising AVC eventually pushes SAC upward.

🧠 Memory Trick

AFC Pulls Down, AVC Pushes Up

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Short Run Average Cost (SAC) Curve

12 Select the correct logical condition that explains why the SAC curve minimum (q₂) must lie to the right of the AVC curve minimum (q₁):

A At q₁, AVC is flat (slope zero) but AFC is strictly positive and falling, meaning SAC (which is AVC + AFC) must still be falling at q₁.

B At q₁, SMC is at its maximum, forcing SAC to immediately rise.

C At q₁, AFC becomes zero, meaning SAC equals AVC.

D The minimum point of SAC is completely independent of the minimum point of AVC.

💡 Short Explanation

�� SAC = AFC + AVC. �� AFC continues falling after AVC reaches its minimum. �� Hence, SAC reaches its minimum later than AVC.

✅ Correct Answer Explanation

At output q₁, the AVC curve reaches its minimum, so its slope becomes zero. However, AFC continues to decline because Total Fixed Cost is spread over more units of output. Since: SAC = AFC + AVC the continuous fall in AFC outweighs the flat AVC at q₁. Therefore, SAC is still decreasing and reaches its minimum only at a higher output level (q₂). Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → SMC is not necessarily at its maximum when AVC is minimum.
�� Option C → AFC never becomes zero in the short run.
�� Option D → SAC minimum directly depends on AVC and AFC.

🎯 Strategy

Used

Elimination

Application:

Reject options contradicting the behaviour of AFC in the short run.

Final Logic:

Since AFC keeps falling, SAC continues to fall after AVC reaches its minimum.

🧠 Memory Trick

"AVC First, SAC Later."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship between SAC and AVC

13 Complete the analytical definition:
For discrete units of output, if a firm increases production from q₁ − 1 to q₁ units, the Short Run Marginal Cost of producing the q₁th unit is measured as the difference in __________.

A Average Variable Cost at q₁ and q₁ − 1

B Total Cost at q₁ and Total Cost at q₁ − 1

C Total Fixed Cost at q₁ and q₁ − 1

D Marginal Product at q₁ and q₁ − 1

💡 Short Explanation

�� Marginal Cost measures additional cost. �� It is calculated using Total Cost. �� Fixed Cost remains unchanged in the short run.

✅ Correct Answer Explanation

Short Run Marginal Cost (SMC) measures the additional cost of producing one more unit of output. For discrete output, SMC = TC(q₁) − TC(q₁ − 1) Since Total Fixed Cost remains constant, the increase in Total Cost is entirely due to the increase in Total Variable Cost. Therefore, Option B correctly defines Short Run Marginal Cost.

❓ Why Other Options Are Incorrect

�� Option A → AVC is an average cost, not a marginal cost.
�� Option C → Total Fixed Cost does not change with output.
�� Option D → Marginal Product measures physical output, not cost.

🎯 Strategy

Used

Substitution

Application:

Recall the mathematical definition of Marginal Cost.

Final Logic:

Marginal Cost equals the change in Total Cost resulting from one additional unit of output.

🧠 Memory Trick

"MC = Change in TC."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Short Run Marginal Cost (SMC)

14 Choose the correct statements detailing the profound link between SMC and TVC geometry:
I. The total variable cost at a particular level of output is given by the exact area under the SMC curve up to that level.
II. Because SMC initially falls and then rises, TVC initially falls and then rises.
III. The area under the SMC curve up to output q divided by q yields the corresponding AVC.

A I and II

B I and III

C II and III

D I, II, and III

💡 Short Explanation

�� Area under the SMC curve equals TVC. �� AVC = TVC ÷ Output. �� TVC always increases with output.

✅ Correct Answer Explanation

Statement I is correct because Total Variable Cost is obtained by summing all marginal costs up to a given output level. Graphically, this equals the area under the SMC curve. Statement II is incorrect because TVC never falls as output increases. Although SMC may decrease initially, TVC continues to rise, only at a decreasing rate. Statement III is correct because: AVC = TVC ÷ Output Since TVC is represented by the area under the SMC curve, dividing that area by output gives AVC. Hence, Statements I and III are correct, making Option B the correct answer.

❓ Why Other Options Are Incorrect

�� Option A → Statement II is incorrect.
�� Option C → Statement II is false.
�� Option D → All three statements are not correct because Statement II is incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement separately using NCERT definitions of TVC, AVC and SMC.

Final Logic:

Only Statements I and III correctly describe the relationship.

🧠 Memory Trick

"Area under MC = TVC."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship between SMC, TVC and AVC

15 Arrange the theoretical sequence connecting physical production laws to the U-shaped geometry of SAC and AVC:
I. After a certain level, the production process becomes too crowded, factor proportions worsen, and MP falls.
II. An initial increase in variable input makes factor proportions more suitable, increasing MP.
III. Falling MP means more inputs are required per unit of output, increasing SMC and eventually turning the average curves upward.
IV. Increasing MP translates to less input required per unit of output, decreasing SMC and dragging the average cost curves downward.

A II, IV, I, III

B I, III, II, IV

C II, I, IV, III

D IV, II, III, I

💡 Short Explanation

�� MP first increases. �� SMC and average costs fall. �� Later MP falls, causing average costs to rise.

✅ Correct Answer Explanation

Initially, employing more variable inputs improves factor proportions, causing Marginal Product (MP) to rise (II). Higher MP means fewer inputs are required per unit of output, so SMC falls, pulling down SAC and AVC (IV). After a certain point, the Law of Diminishing Marginal Returns operates. MP starts falling (I). As additional output requires more inputs, SMC rises, causing both SAC and AVC to turn upward (III). Thus, the correct sequence is: II → IV → I → III Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Begins with diminishing returns instead of increasing returns.
�� Option C → Places rising costs before falling costs.
�� Option D → Does not follow the logical production sequence.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the events according to the stages of production and their effect on cost curves.

Final Logic:

Increasing MP lowers costs first; diminishing MP raises costs later.

🧠 Memory Trick

"MP Up → Cost Down → MP Down → Cost Up."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: U-Shaped SAC and AVC Curves

16 Match the geometric characteristics of horizontal TFC lines in List-I with their corresponding algebraic behavior in List-II.

List I	List II
1. Slope of the TFC curve	a. Equals the AFC, which continuously decreases as output expands
2. Slope of the ray from the origin to a point on the TFC curve	b. Equals zero at all levels of output
3. TFC curve is parallel to the x-axis	c. Fixed Cost remains constant at every level of output
4. As output increases, the slope of the ray from the origin	d. Becomes smaller because AFC decreases

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-a, 3-c, 4-d

C 1-b, 2-b, 3-d, 4-c

D 1-a, 2-a, 3-d, 4-c

💡 Short Explanation

�� The TFC curve is horizontal. �� Its slope is always zero. �� The slope of the ray from the origin equals AFC and decreases as output increases.

✅ Correct Answer Explanation

According to NCERT, the Total Fixed Cost (TFC) curve is a horizontal straight line because Total Fixed Cost remains constant irrespective of output. 1 → b The slope of the TFC curve is zero at every level of output. Therefore, 1 → b. 2 → a The slope of the ray drawn from the origin to any point on the TFC curve is Slope = TFC / Output = AFC. Since TFC remains constant while output increases, AFC continuously decreases. Therefore, 2 → a. 3 → c The TFC curve remains parallel to the x-axis because Fixed Cost does not change with output in the short run. Therefore, 3 → c. 4 → d As output increases, the denominator in AFC = TFC / Output increases while TFC remains constant. Hence, the slope of the ray from the origin becomes smaller. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrect because the slope of the TFC curve is zero, whereas the slope of the ray represents AFC.
�� Option C → Incorrect because the ray from the origin does not have zero slope, and the remaining matches are incorrect.
�� Option D → Incorrect because the TFC curve itself does not represent AFC.

🎯 Strategy

Used

Option Grouping

Application:

Match each geometric feature of the TFC graph with its corresponding algebraic interpretation given in NCERT.

Final Logic:

Horizontal Line → Zero Slope
Ray from Origin → AFC
Parallel to x-axis → Constant TFC
Increasing Output → Falling AFC

🧠 Memory Trick

Ray = AFC

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Total Fixed Cost (TFC) Curve and Average Fixed Cost (AFC) Geometry

17 Arrange the states of mathematical relationship between Marginal and Average magnitudes as a firm increases production across the long run (LRMC and LRAC):
I. LRMC cuts LRAC from below at the absolute minimum point of LRAC, where Constant Returns to Scale is observed.
II. Output increases under Decreasing Returns to Scale, making LRAC rise, meaning LRMC must be greater than LRAC.
III. For the first unit of output, LRMC and LRAC are strictly the same.
IV. Output increases under Increasing Returns to Scale, making LRAC fall, meaning LRMC must be less than LRAC.

A III, IV, I, II

B IV, III, I, II

C I, II, III, IV

D III, II, I, IV

💡 Short Explanation

�� Initially LRMC = LRAC. �� Increasing Returns to Scale make LRAC fall. �� LRMC cuts LRAC at its minimum before LRAC rises.

✅ Correct Answer Explanation

Initially, for the first unit of output, LRMC equals LRAC (III). As output expands under Increasing Returns to Scale, LRMC remains below LRAC, causing LRAC to fall (IV). At the minimum point of LRAC, LRMC intersects LRAC from below, corresponding to Constant Returns to Scale (I). Beyond this point, Decreasing Returns to Scale prevail. LRMC exceeds LRAC, causing LRAC to rise (II). Therefore, the correct sequence is: III → IV → I → II Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Places Increasing Returns before the first-unit condition.
�� Option C → Begins with the minimum point instead of the initial stage.
�� Option D → Places Decreasing Returns before Increasing Returns.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the stages according to the progression of long-run production.

Final Logic:

Equal → Increasing Returns → Minimum → Decreasing Returns.

🧠 Memory Trick

"Equal → Fall → Minimum → Rise."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC and LRAC Relationship

18 Choose the correct statements regarding the mathematical influence of SMC on averages when comparing the U-shapes of AVC and SAC:
I. SMC must intersect both AVC and SAC at their respective absolute minimums because an average only changes direction when the marginal crosses it.
II. Because AFC is always falling, the point where SMC equals SAC occurs at a higher output level than where SMC equals AVC.
III. When SMC lies strictly between the AVC curve and the SAC curve, AVC is rising while SAC is still falling.

A I and II

B I and III

C II and III

D I, II, and III

💡 Short Explanation

�� SMC cuts averages at their minimum points. �� SAC reaches its minimum after AVC. �� SMC may lie between AVC and SAC while SAC is still falling.

✅ Correct Answer Explanation

Statement I is correct because the marginal curve always intersects an average curve at its minimum point. Statement II is correct because AFC continues falling even after AVC reaches its minimum. Therefore, SAC reaches its minimum at a higher output level than AVC. Statement III is also correct. Between the minimum points of AVC and SAC, SMC is greater than AVC but still less than SAC. Consequently, AVC begins rising while SAC continues falling. Thus, all three statements are correct, making Option D the correct answer.

❓ Why Other Options Are Incorrect

�� Option A → Statement III is also correct.
�� Option B → Statement II is also correct.
�� Option C → Statement I is also correct.

🎯 Strategy

Used

Option Grouping

Application:

Verify each statement independently using the marginal-average relationship.

Final Logic:

All three statements satisfy the NCERT explanation.

🧠 Memory Trick

"Marginal Cuts Minimum."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship among SMC, AVC and SAC

📄 Passage

In the short run, average variable cost at some level of output is the average of all marginal costs up to that level. In Table 3.3, we see that when the output is zero, SMC is undefined. For the first unit of output, SMC is Rs 10; for the second unit, the SMC is Rs 8 and so on. As output increases, SMC falls. AVC being the average of marginal costs, also falls, but falls less than SMC. Then, after a point, SMC starts rising. AVC, however, continues to fall as long as the value of SMC remains less than the prevailing value of AVC.

According to the sequential cost computation logic in the passage, if the SMCs for the first three units of output are Rs 10, Rs 8, and Rs 6 respectively, what is the Numerical Cost Schedule value for the Average Variable Cost (AVC) at 3 units of output?

A Rs 6

B Rs 8

C Rs 14

D Rs 24

💡 Short Explanation

�� AVC is the average of marginal costs. �� Total Variable Cost = 10 + 8 + 6 = Rs 24. �� AVC = 24 ÷ 3 = Rs 8.

✅ Correct Answer Explanation

The passage states that AVC is the average of all marginal costs up to a given level of output. For three units, SMC values = Rs 10, Rs 8 and Rs 6. Total Variable Cost = 10 + 8 + 6 = Rs 24 AVC = TVC ÷ Output = 24 ÷ 3 = Rs 8 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Rs 6 is only the third unit's SMC, not AVC.
�� Option C → Rs 14 is not obtained from averaging the given costs.
�� Option D → Rs 24 represents TVC, not AVC.

🎯 Strategy

Used

Substitution

Application:

Calculate TVC using SMC values and divide by total output.

Final Logic:

AVC = (10 + 8 + 6) ÷ 3 = Rs 8.

🧠 Memory Trick

"Average = Total ÷ Units."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Average Variable Cost and Marginal Cost

📄 Passage

Based on the passage's description of numerical cost schedules, when SMC begins to rise (e.g., from Rs 4 at q = 5 to Rs 6 at q = 6), what dictates whether the AVC will immediately start rising as well?

A AVC will only start rising if the newly increased SMC value is strictly greater than the prevailing AVC value at that output level.

B AVC will immediately rise because any increase in marginal cost directly causes an average cost curve to slope upward.

C AVC will only rise if the Average Fixed Cost also begins to rise simultaneously.

D AVC will rise only if the Total Cost exceeds Total Variable Cost.

💡 Short Explanation

�� AVC changes according to SMC. �� AVC falls while SMC is below AVC. �� AVC rises only when SMC exceeds AVC.

✅ Correct Answer Explanation

The relationship between Marginal Cost (SMC) and Average Variable Cost (AVC) follows a fundamental economic principle: If SMC < AVC, AVC falls. If SMC = AVC, AVC is at its minimum. If SMC > AVC, AVC rises. Therefore, merely increasing SMC does not guarantee that AVC will rise. AVC begins to increase only when SMC becomes greater than the prevailing AVC. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → An increase in SMC alone is insufficient; it must exceed AVC.
�� Option C → AFC always falls in the short run and does not determine the movement of AVC.
�� Option D → Total Cost always exceeds Total Variable Cost because TC = TVC + TFC; this does not determine AVC's movement.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Apply the standard marginal-average relationship described in the passage.

Final Logic:

Only when SMC > AVC does AVC begin to rise.

🧠 Memory Trick

"MC Above Average = Average Rises."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship Between SMC and AVC

CUET UG Economics Booster Test 3 - Short Run Cost Structure

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