CUET UG Economics Booster Test 2 - Long Run Costs and Profit -

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CUET UG Economics Booster Test 2 - Long Run Costs and Profit

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 2 - Long Run Costs and Profit

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QUESTION 1 OF 20

Choose the correct analytical implication(s) of long-run inputs:
1. A firm may vary both inputs simultaneously to produce different levels of output.
2. All inputs are variable.
3. The firm is constrained by a fixed factor.

Answer Review

1 Choose the correct analytical implication(s) of long-run inputs:
1. A firm may vary both inputs simultaneously to produce different levels of output.
2. All inputs are variable.
3. The firm is constrained by a fixed factor.

A 1 only

B 2 and 3

C 1 and 2

D 1, 2, and 3

💡 Short Explanation

�� In the long run, all inputs are variable. �� Firms can change all factors simultaneously. �� There is no fixed factor constraint.

✅ Correct Answer Explanation

In the long run, firms have sufficient time to adjust all factors of production. Therefore, they can vary labour, capital and other inputs together to achieve different levels of output. Statement 1 is correct because firms may vary multiple inputs simultaneously. Statement 2 is correct because all inputs become variable in the long run. Statement 3 is incorrect because there is no fixed factor in the long run. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → Statement 2 is also correct.
�� Option B → Statement 3 is incorrect.
�� Option D → Statement 3 is false because no fixed factor exists in the long run.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement independently using the definition of the long run.

Final Logic:

Only Statements 1 and 2 correctly describe long-run production.

🧠 Memory Trick

"Long Run = All Inputs Change Together."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Long Run Variables

2 Complete the statement logically based on the text:
"Because all factors can be varied in the long run, there is no..."

A way to increase output

B fixed factor

C total cost

D total product

💡 Short Explanation

�� Every factor becomes variable. �� Fixed factors exist only in the short run. �� Hence, no fixed factor exists in the long run.

✅ Correct Answer Explanation

The defining feature of the long run is that all factors of production are variable. Since every input can be adjusted, there is no fixed factor. Therefore, Option B is correct. Option A is incorrect because firms can increase output. Option C is incorrect because total cost still exists. Option D is incorrect because total product continues to exist.

❓ Why Other Options Are Incorrect

�� Option A → Output can be expanded in the long run.
�� Option C → Total cost exists in both the short run and long run.
�� Option D → Production continues, so total product exists.

🎯 Strategy

Used

Elimination

Application:

Remove options that continue to exist in long-run production.

Final Logic:

Only the fixed factor disappears.

🧠 Memory Trick

"Long Run = No Fixed Factor."

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

3 Identify the correct Concept Equation/Assertion derived from the long-run model:
Assertion: In the long run, Total Cost (TC) exactly equals Total Variable Cost (TVC).
Reason: In the long run, there are no fixed costs because all inputs are variable.

A Assertion is true, but Reason is false.

B Both Assertion and Reason are true, but Reason is not the correct explanation.

C Both Assertion and Reason are true, and Reason is the correct explanation.

D Assertion is false, but Reason is true.

💡 Short Explanation

�� There are no fixed costs in the long run. �� Therefore, TC equals TVC. �� The reason directly explains the assertion.

✅ Correct Answer Explanation

The Assertion is true because in the long run every input becomes variable, so Total Fixed Cost (TFC) is zero. Thus, TC = TVC The Reason is also true because the absence of fixed costs directly results from all inputs being variable. Therefore, the reason correctly explains the assertion, making Option C correct.

❓ Why Other Options Are Incorrect

�� Option A → The reason is true.
�� Option B → The reason is the correct explanation.
�� Option D → The assertion is also true.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Check whether both statements are true and whether the reason explains the assertion.

Final Logic:

Both are true, and the reason explains why TC equals TVC.

🧠 Memory Trick

"No Fixed Cost ⇒ TC = TVC."

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

4 Arrange the steps logically to find the Long Run Total Cost using marginal costs:
1. Determine the desired level of output.
2. Sum all the marginal costs up to that output level.
3. Identify the marginal cost of each unit produced.

A 3, 1, 2

B 1, 3, 2

C 3, 2, 1

D 1, 2, 3

💡 Short Explanation

�� Decide the required output. �� Identify marginal costs. �� Add them to obtain Total Cost.

✅ Correct Answer Explanation

To calculate Long Run Total Cost, the firm first decides the desired output level. It then determines the marginal cost associated with each unit produced and finally adds all those marginal costs to obtain the total cost. Therefore, the logical order is: 1 → 3 → 2 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Marginal costs cannot be identified before deciding output.
�� Option C → Summation cannot occur before identifying marginal costs.
�� Option D → Marginal costs must be identified before summation.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the production-cost calculation process logically.

Final Logic:

Output → Marginal Costs → Sum.

🧠 Memory Trick

"Choose → Identify → Add."

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

5 Complete the concept regarding LRAC calculation:
"If a firm produces q units of output with a long-run total cost of TC, the LRAC is calculated as..."

A TC − q

B TC × q

C TC / q

D q / TC

💡 Short Explanation

�� LRAC measures average cost. �� It equals Total Cost divided by Output. �� It gives the cost per unit of output.

✅ Correct Answer Explanation

Long Run Average Cost (LRAC) is defined as the cost per unit of output. Its formula is: LRAC = TC / q where: TC = Total Cost q = Quantity of Output Therefore, Option C correctly represents LRAC.

❓ Why Other Options Are Incorrect

�� Option A → Subtraction does not calculate average cost.
�� Option B → Multiplication has no economic meaning here.
�� Option D → This is the inverse of the correct formula.

🎯 Strategy

Used

Substitution

Application:

Recall the standard LRAC formula.

Final Logic:

Average Cost = Total Cost ÷ Output.

🧠 Memory Trick

"LRAC = TC ÷ q."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Long Run Average Cost (LRAC)

6 Match the scale property to its direct effect on the average cost:

List I	List II
1. To increase output by a certain proportion, inputs are increased by less than that proportion	a. Average cost remains constant (CRS)
2. Proportional increase in inputs and output	b. Average cost falls (IRS)
3. Inputs need to be increased by more than output proportion	c. Average cost must be rising (DRS)

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

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

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

D 1-b, 2-c, 3-a

💡 Short Explanation

�� IRS causes average cost to fall. �� CRS keeps average cost constant. �� DRS causes average cost to rise.

✅ Correct Answer Explanation

Returns to Scale explain how output changes when all inputs are increased proportionately. Increasing Returns to Scale (IRS): Output increases more than proportionately when inputs are increased. Hence, average cost falls. Constant Returns to Scale (CRS): Output increases in the same proportion as inputs, so average cost remains constant. Decreasing Returns to Scale (DRS): Output increases by a smaller proportion than inputs, causing average cost to rise. Thus the correct matching is: 1 → b 2 → a 3 → c Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrectly matches IRS with rising average cost.
�� Option C → Incorrectly matches CRS and DRS.
�� Option D → Incorrectly matches CRS with rising average cost.

🎯 Strategy

Used

Option Grouping

Application:

Match each type of returns to scale with its effect on LRAC.

Final Logic:

IRS → Falling AC; CRS → Constant AC; DRS → Rising AC.

🧠 Memory Trick

"IRS Falls, CRS Flat, DRS Rises."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Returns to Scale and LRAC

7 Arrange the logic sequence illustrating discrete unit cost change for LRMC:
1. The firm calculates the total cost at q₁ − 1 units.
2. The firm increases production to q₁ units and finds the new total cost.
3. The difference determines the marginal cost of producing the q₁th unit.

A 2, 1, 3

B 2, 3, 1

C 3, 1, 2

D 1, 2, 3

💡 Short Explanation

�� Find previous total cost. �� Find new total cost. �� Their difference gives LRMC.

✅ Correct Answer Explanation

Long Run Marginal Cost measures the additional cost of producing one more unit. The steps are: 1. Calculate the total cost at q₁ − 1 units. 2. Calculate the total cost at q₁ units. 3. Subtract the two total costs to obtain LRMC. Hence, the correct sequence is 1 → 2 → 3, making Option D correct.

❓ Why Other Options Are Incorrect

�� Option A → The new total cost should be calculated after the previous total cost.
�� Option B → Difference cannot be found before calculating both costs.
�� Option C → LRMC cannot be determined before obtaining the required costs.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the LRMC calculation procedure logically.

Final Logic:

Previous TC → New TC → Difference.

🧠 Memory Trick

"Old TC → New TC → Difference."

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

8 Complete the statement analytically:
"If the total cost of producing 5 units is Rs 130 and for 4 units is Rs 95, then the LRMC of the 5th unit is..."

A Rs 35

B Rs 225

C Rs 19

D Rs 95

💡 Short Explanation

�� LRMC = Change in Total Cost. �� LRMC = 130 − 95. �� Therefore, LRMC = Rs 35.

✅ Correct Answer Explanation

The formula for Long Run Marginal Cost is: LRMC = TC(q₁) − TC(q₁ − 1) Given: TC (5 units) = Rs 130 TC (4 units) = Rs 95 Therefore, LRMC = 130 − 95 = Rs 35 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Rs 225 is obtained by adding the two costs.
�� Option C → Rs 19 is obtained by incorrect division.
�� Option D → Rs 95 is the previous total cost, not LRMC.

🎯 Strategy

Used

Substitution

Application:

Substitute the given values into the LRMC formula.

Final Logic:

130 − 95 = Rs 35.

🧠 Memory Trick

"MC = New Cost − Old Cost."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Long Run Marginal Cost Formula

9 Choose the correct statement(s) describing the intersection of LRMC and LRAC:
1. LRMC cuts LRAC from above.
2. LRMC cuts LRAC from below.
3. The intersection occurs at the minimum point of LRAC.

A 1 and 3

B 2 and 3

C 3 only

D 1, 2, and 3

💡 Short Explanation

�� LRMC intersects LRAC from below. �� The intersection occurs at LRAC's minimum. �� This follows the marginal-average relationship.

✅ Correct Answer Explanation

The relationship between LRMC and LRAC follows the general rule for marginal and average curves. Statement 1 is incorrect because LRMC cuts LRAC from below, not from above. Statement 2 is correct. Statement 3 is correct because LRMC intersects LRAC at its minimum point. Therefore, Statements 2 and 3 are correct, making Option B the correct answer.

❓ Why Other Options Are Incorrect

�� Option A → Statement 1 is incorrect.
�� Option C → Statement 2 is also correct.
�� Option D → Statement 1 is false.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement separately using the LRMC-LRAC relationship.

Final Logic:

Only Statements 2 and 3 are correct.

🧠 Memory Trick

"MC Cuts AC From Below."

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

10 Arrange the logical positioning sequence of LRMC relative to LRAC as output expands:
1. LRAC is rising, making marginal cost greater than average cost.
2. LRAC falls initially, meaning marginal cost is less than the average cost.
3. LRMC intersects LRAC at its minimum point.

A 1, 2, 3

B 2, 3, 1

C 3, 2, 1

D 2, 1, 3

💡 Short Explanation

�� LRMC is below LRAC initially. �� LRMC equals LRAC at the minimum point. �� LRMC becomes greater than LRAC afterwards.

✅ Correct Answer Explanation

Initially, LRMC is less than LRAC, causing LRAC to fall. As output increases, LRMC intersects LRAC at its minimum point. Beyond this point, LRMC becomes greater than LRAC, causing LRAC to rise. Therefore, the correct sequence is: 2 → 3 → 1 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Begins with the rising stage instead of the falling stage.
�� Option C → Places the intersection before the falling stage.
�� Option D → Omits the intersection before LRAC starts rising.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the movement of LRMC and LRAC according to the standard marginal-average relationship.

Final Logic:

MC < AC → MC = AC → MC > AC.

🧠 Memory Trick

"Below → Equal → Above."

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

11 Complete the statement regarding the firm's ultimate analysis:
"We look at the cost structure of the firm... to be able to identify the output at which firms profits are..."

A exactly zero

B equal to fixed costs

C maximum

D proportional to marginal product

💡 Short Explanation

�� Firms study costs to maximize profits. �� Profit depends on revenue and cost. �� The optimal output is where profit is highest.

✅ Correct Answer Explanation

The primary objective of a firm in microeconomic theory is profit maximization. Studying the firm's cost structure helps determine the output level at which the difference between total revenue and total cost is the greatest. Therefore, the firm identifies the level of output where profits are maximum, making Option C correct. Option A is incorrect because firms do not aim for zero profit. Option B is incorrect because profit is not measured relative to fixed costs. Option D is incorrect because profit is unrelated to proportionality with marginal product.

❓ Why Other Options Are Incorrect

�� Option A → Zero profit is not the firm's objective.
�� Option B → Profit depends on total revenue and total cost, not fixed cost alone.
�� Option D → Marginal product relates to production, not profit determination.

🎯 Strategy

Used

Elimination

Application:

Remove options that do not represent the firm's objective in economic theory.

Final Logic:

A rational firm chooses the output that maximizes profit.

🧠 Memory Trick

"Firm's Goal = Maximum Profit."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Profit Maximization

12 Match the firm's requirement to its economic choice:

List I	List II
1. Multiple input combinations yield the desired output	a. It describes the least cost of producing each level of output
2. The role of the cost function	b. The firm chooses the combination which is least expensive
3. Cost-minimising input combination	c. Selected from the available technically feasible input combinations
4. Cost function	d. Depends on technology and input prices

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

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

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

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

💡 Short Explanation

�� Several input combinations can produce the same output. �� Firms choose the least-cost combination. �� The cost function gives the minimum cost of production. �� It depends on technology and input prices.

✅ Correct Answer Explanation

According to NCERT, a firm may have several technically feasible input combinations capable of producing the same level of output. To minimize cost, it chooses the least expensive combination. The cost function describes the minimum cost of producing each level of output for a given technology and given input prices. Therefore: • 1 → b (The firm chooses the combination which is least expensive.) • 2 → a (The cost function describes the least cost of producing each level of output.) • 3 → c (The cost-minimising combination is selected from the technically feasible input combinations.) • 4 → d (The cost function depends on technology and input prices.) Hence, the correct matching is: • 1 → b • 2 → a • 3 → c • 4 → d Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrectly interchanges the meanings of the firm's choice and the cost function.
�� Option C → Incorrectly matches the cost-minimising combination and the cost function.
�� Option D → Incorrectly associates multiple input combinations with the cost function.

🎯 Strategy

Used

Option Grouping

Application:

Match each production concept with its corresponding NCERT definition.

Final Logic:

Many Input Combinations → Least-Cost Choice
Cost Function → Minimum Cost Description

🧠 Memory Trick

Function → Minimum Cost

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Function

13 Conceptually, what strictly occurs after the output has been produced?

A The firm pays for the cost of production

B The firm varies its fixed factors

C The firm sells it in the market and earns revenue

D The firm establishes its production function

💡 Short Explanation

�� Goods are produced first. �� They are then sold in the market. �� Selling generates revenue.

✅ Correct Answer Explanation

After production is completed, the firm's next step is to sell the output in the market. The sale of goods generates revenue, which is later compared with production cost to determine profit. Therefore, Option C is correct. Option A is incorrect because production costs are incurred during production, not after output is produced. Option B is incorrect because fixed factors are not varied after production. Option D is incorrect because the production function is determined before production.

❓ Why Other Options Are Incorrect

�� Option A → Production costs are incurred while producing, not afterwards.
�� Option B → Fixed factors are not changed after production.
�� Option D → The production function is established before production begins.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Identify the logical sequence from production to sale.

Final Logic:

Production is followed by selling and earning revenue.

🧠 Memory Trick

"Produce → Sell → Revenue."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Revenue and Production

14 Identify the Concept Equation defining profit based on the text:

A Profit = Maximum Revenue + Minimum Cost

B Profit = Revenue - Cost

C Profit = Average Cost - Marginal Cost

D Profit = Total Cost - Total Variable Cost

💡 Short Explanation

�� Profit equals revenue minus cost. �� Profit is positive when revenue exceeds cost. �� This is the basic economic definition.

✅ Correct Answer Explanation

Profit is defined as: Profit = Total Revenue − Total Cost This measures the firm's net earnings after deducting all production costs from the revenue earned through sales. Hence, Option B is correct. Option A is not the mathematical definition of profit. Option C compares cost measures, not profit. Option D represents Total Fixed Cost in the short run, not profit.

❓ Why Other Options Are Incorrect

�� Option A → Profit is calculated by subtraction, not by combining maximum revenue and minimum cost.
�� Option C → Average Cost and Marginal Cost do not determine profit.
�� Option D → TC − TVC equals Total Fixed Cost, not profit.

🎯 Strategy

Used

Substitution

Application:

Recall the standard profit equation from microeconomics.

Final Logic:

Profit = Revenue − Cost.

🧠 Memory Trick

"Profit = R − C."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Profit

15 Match the cost function parameters:

List I	List II
1. Cost function definition	a. Least cost of producing each level of output
2. Required constraint variables	b. Prices of factors of production and technology
3. Technology	c. Determines the production method available to the firm
4. Prices of factors of production	d. Influence the minimum cost of production

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

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

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

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

💡 Short Explanation

�� The cost function shows the minimum production cost. �� It depends on technology and input prices. �� Technology determines production possibilities. �� Factor prices influence production cost.

✅ Correct Answer Explanation

According to NCERT, a cost function describes the least cost of producing each level of output. It is determined under the constraints of given technology and given prices of factors of production. Therefore: • 1 → a (Cost function describes the least cost of producing each level of output.) • 2 → b (The required constraints are prices of factors of production and technology.) • 3 → c (Technology determines the production method available to the firm.) • 4 → d (Prices of factors influence the minimum cost of production.) Hence, the correct matching is: • 1 → a • 2 → b • 3 → c • 4 → d Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrectly interchanges the definition and the constraints.
�� Option C → Incorrectly matches technology and factor prices.
�� Option D → Incorrectly associates the cost function with technology.

🎯 Strategy

Used

Option Grouping

Application:

Match the definition of the cost function with its determining factors given in NCERT.

Final Logic:

Cost Function → Least Cost
Technology → Production Method
Factor Prices → Production Cost

🧠 Memory Trick

Technology + Prices = Cost

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Function

16 Complete the statement logically:
"For every level of output, the firm chooses the least cost input combination given..."

A only the fixed costs

B prices of factors of production and technology

C instantaneous market demand

D only the total revenue

💡 Short Explanation

�� Firms minimize production cost. �� Input prices and technology are assumed to be given. �� These determine the least-cost input combination.

✅ Correct Answer Explanation

A firm's objective is to produce a given level of output at the minimum possible cost. To achieve this, it chooses the least-cost combination of inputs based on: Prices of factors of production (such as wages, rent, and interest) Available technology These two factors determine the firm's cost function and production decisions. Therefore, Option B is correct. Option A is incorrect because fixed costs alone do not determine the input combination. Option C is incorrect because market demand determines sales, not the least-cost input combination. Option D is incorrect because revenue does not determine production cost.

❓ Why Other Options Are Incorrect

�� Option A → Least-cost production depends on all input prices, not only fixed costs.
�� Option C → Market demand affects output decisions, not input cost minimization.
�� Option D → Revenue is unrelated to selecting the least-cost input combination.

🎯 Strategy

Used

Elimination

Application:

Remove options unrelated to the determinants of the cost function.

Final Logic:

Only factor prices and technology determine the least-cost combination.

🧠 Memory Trick

"Least Cost = Prices + Technology."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Function

17 Choose the correct implication(s) of the instantaneous production assumption:
1. A significant time gap exists between inputs and outputs.
2. No time elapses between the combination of inputs and production of output.
3. The firm does not have to pay for inputs.

A 2 only

B 1 only

C 2 and 3

D 1, 2, and 3

💡 Short Explanation

�� Production is assumed to be instantaneous. �� There is no time lag between inputs and output. �� Firms still incur production costs.

✅ Correct Answer Explanation

In the simplified NCERT production model, production is assumed to be instantaneous, meaning there is no time gap between combining inputs and obtaining output. Statement 1 is incorrect because no significant time gap exists. Statement 2 is correct. Statement 3 is incorrect because firms must still pay for the factors of production. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Statement 1 is false.
�� Option C → Statement 3 is incorrect because inputs are not free.
�� Option D → Statements 1 and 3 are incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement using the assumptions of the simple production model.

Final Logic:

Only Statement 2 correctly reflects the instantaneous production assumption.

🧠 Memory Trick

"Instant Production = No Time Gap."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Assumptions of the Production Model

18 Match the synonymous terms as defined in the simple production model:

List I	List II
1. Production	a. Supply
2. Revenue	b. Earnings from selling output
3. Production is instantaneous	c. No time gap between production and supply
4. Supply	d. Output made available for sale in the market

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

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

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

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

💡 Short Explanation

�� Production and supply are used synonymously in the simple production model. �� Revenue refers to earnings from selling output. �� Instantaneous production means no time gap between production and supply. �� Supply is the output available for sale.

✅ Correct Answer Explanation

According to NCERT, the simple production model assumes that production is instantaneous. Therefore, goods produced are immediately available for sale, and the terms production and supply are often used interchangeably. Revenue refers to the income earned by a firm from selling its output in the market. Thus: • 1 → a (Production → Supply) • 2 → b (Revenue → Earnings from selling output) • 3 → c (Production is instantaneous → No time gap between production and supply) • 4 → d (Supply → Output made available for sale in the market) Hence, the correct matching is: • 1 → a • 2 → b • 3 → c • 4 → d Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrectly interchanges production and revenue.
�� Option C → Incorrectly matches instantaneous production and supply.
�� Option D → Incorrectly associates production with the no-time-gap condition instead of its synonymous term.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the NCERT definitions of production, supply, revenue, and the assumptions of the simple production model.

Final Logic:

Production → Supply
Revenue → Earnings
Instantaneous → No Time Gap
Supply → Output for Sale

🧠 Memory Trick

Sell → Revenue

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Production and Supply; Revenue

📄 Passage

"IRS implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion... With the input prices given, cost also increases by a lesser proportion. For example, suppose we want to double the output. To do that, inputs need to be increased, but less than double."

Based on the passage, if a firm operates under IRS and wants to double its output, what must happen to its inputs?

A They must more than double

B They must exactly double

C They need to be increased by less than double

D They remain constant

💡 Short Explanation

�� IRS means output rises more than proportionately. �� Inputs increase by a smaller proportion. �� Average cost falls under IRS.

✅ Correct Answer Explanation

The passage explains that under Increasing Returns to Scale (IRS), output increases by a greater proportion than the increase in inputs. Therefore, to double output, the firm needs to increase its inputs by less than double. Thus, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → This describes Decreasing Returns to Scale.
�� Option B → This represents Constant Returns to Scale.
�� Option D → Output cannot double without increasing inputs.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the exact explanation given in the passage.

Final Logic:

IRS ⇒ Inputs rise by less than output.

🧠 Memory Trick

"IRS = Less Input, More Output."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale (IRS)

📄 Passage

According to the passage, how does the operation of IRS analytically affect the cost of production when doubling output?

A The cost remains constant

B The cost increases by exactly double

C The cost increases by a lesser proportion (less than double)

D The cost increases by more than double

💡 Short Explanation

�� Under IRS, costs rise less than output. �� Inputs increase by less than double. �� Average cost declines.

✅ Correct Answer Explanation

Under Increasing Returns to Scale (IRS), output expands more rapidly than inputs. Since input prices are assumed to remain constant, the total cost increases by a smaller proportion than output. Thus, if output doubles, the production cost rises by less than double. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → Cost does increase under IRS, though by less than output.
�� Option B → Equal proportional increase corresponds to Constant Returns to Scale.
�� Option D → Greater-than-proportional cost increase occurs under Decreasing Returns to Scale.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Interpret the relationship between IRS, inputs, and production cost using the passage.

Final Logic:

IRS ⇒ Cost rises less than proportionately because inputs rise by less than output.

🧠 Memory Trick

"IRS = Less Cost per Output."

📚 Class XII – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale (IRS) and Long Run Average Cost

CUET UG Economics Booster Test 2 - Long Run Costs and Profit

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