Page 143 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 9.7 Self Assessment

State whether the following statements are true or false:

1. Past costs are unadjusted historical cost data which have been recorded in the books.
2. Incremental costs include only variable cost.
3. Replacement cost means the price that would have to be paid currently for acquiring the
same plant.
4. Explicit costs cannot be regarded as paid out costs.
5. Actual costs are also called absolute costs or outlay costs.
6. Average cost is obtained by dividing the total cost by the total quantity produced.
7. Fixed costs can be altered in short run.

8. Social cost is the total cost to the society on account of production of a good.
Fill in the blanks:
9. Shut-down costs are required to be incurred when the production operations are
.......................... .
10. Economic costs can be calculated at two levels .......................... .
11. Marginal cost is the extra cost of producing .......................... .

12. AVC first .......................... , reaches a minimum and rises thereafter.
13. Implicit costs are the costs which go unrecognized by the ................. .

14. Capital equipment is a .............. factor.
15. The total cost concept is useful in ................ analysis.
16. Direct costs are ................ costs.

9.8 Review Questions

1. What type of cost is depreciation – Direct cost or Indirect cost? Support your argument
with reasons.
2. What types of costs would you incur if you have to organise a musical concert in your
city?

3. Output (units) 2,000 4,000 5,000
Cost per unit Rs 100 £100 £80
Explain which type of cost the above fi gures represent.
4. A liberal arts college created a new business school. The overhead items – library, registrar,
classrooms and offi ces – were already in place or substantially so. No additional central
administration personnel had to be added at first, only faculty and staff for the new school.

The cost of these positions, plus the modest marketing budget, were more than offset by the
new b-school’s tuition income in the second year of operation. There was every indication
that enrollment, and tuition, would grow.
Shortly after the school’s creation, the college’s provost decided it would be a good idea
to embark on a cost-allocation exercise. Provost and CFO decided on a “fair” formula
that allocated central administration overhead according to each school’s use of offi ce,
classroom, and laboratory square footage. Suddenly, the business school, still ramping up

138 LOVELY PROFESSIONAL UNIVERSITY