Consider the following statements:
(A) The area under the SMC curve up to an output level gives the total cost at that level.
(B) The cost function shows the least cost of producing each level of output, given factor prices and technology.
(C) The SMC curve cuts the SAC curve from above at the minimum point of SAC.
(D) For the first unit of output, SMC and AVC are the same.
(E) In the short run, marginal cost is the increase in TVC due to the production of one extra unit of output.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (B), (D) and (E) only
(A) The area under the SMC curve up to an output level gives the total cost at that level. — Incorrect. The area under the SMC curve gives the total variable cost, not the total cost. TFC is not in it.
(B) The cost function shows the least cost of producing each level of output, given factor prices and technology. — Correct. For each output the firm picks the cheapest input combination.
(C) The SMC curve cuts the SAC curve from above at the minimum point of SAC. — Incorrect. SMC cuts SAC from below. It is MP that cuts AP from above.
(D) For the first unit of output, SMC and AVC are the same. — Correct. For the first unit, the extra cost and the average variable cost are the same amount.
(E) In the short run, marginal cost is the increase in TVC due to the production of one extra unit of output. — Correct. Fixed cost cannot change in the short run, so every change in TC is a change in TVC.
NCERT (2026-27): “3.7 Costs In order to produce output, the firm needs to employ inputs. But a given level of output, typically, can be produced in many ways. There can be more than one input combinations with which a firm can produce a desired level of output. In Table 3.1, we can see that 50 units of output can be produced by three different input combinations (L = 6, K = 3), (L = 4, K = 4) and (L = 3, K = 6). The question is which input combination will the firm choose? With the input prices given, it will choose that combination of inputs which is least expensive. So, for every level of output, the firm chooses the least cost input combination. Thus the cost function describes the least cost of producing each level of output given prices of factors of production and technology.” “3.7.1 Short Run Costs … Just like the case of marginal product, marginal cost also is undefined at zero level of output. It is important to note here that in the short run, fixed cost cannot be changed. When we change the level of output, whatever change occurs to total cost is entirely due to the change in total variable cost. So in the short run, marginal cost is the increase in TVC due to increase in production of one extra unit of output.” “Shapes of the Short Run Cost Curves … At zero level of output, SMC is undefined. The TVC at a particular level of output is given by the area under the SMC curve up to that level. …” “Shapes of the Short Run Cost Curves … Now, what does the AVC curve look like? For the first unit of output, it is easy to check that SMC and AVC are the same. So both SMC and AVC curves start from the same point. …” “Shapes of the Short Run Cost Curves … Similar to the case of AVC and SMC, as long as SAC is falling, SMC is less than the SAC. When SAC is rising, SMC is greater than the SAC. SMC curve cuts the SAC curve from below at the minimum point of SAC.” |