Theory of Production and CostPYQ - Dec 2023Question 54 of 20

Marginal cost is defined as:

Options

AChange in total cost due to one unit change in output

BTotal cost divided by output

CChange in variable cost divided by change in output

DBoth a and c

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Correct Answer

✅ Option d — Both a and c

All Options:

AChange in total cost due to one unit change in output
BTotal cost divided by output
CChange in variable cost divided by change in output
DBoth a and c

Detailed Solution & Explanation

To understand marginal cost, we need to break down the concept into its components. • Marginal cost is the additional cost incurred when one more unit of a product is produced. • It can be calculated as the change in total cost due to a one-unit change in output, which is a direct measure of the extra cost of producing one more unit. • Another way to express marginal cost is as the change in variable cost divided by the change in output, as variable costs are the costs that change with the level of production. The correct answer includes both these definitions because they essentially describe the same concept from different perspectives. • Option A is correct because it directly measures the change in total cost due to a one-unit change in output. • Option C is also correct because it focuses on the variable cost, which is the cost component that changes with output, and expresses it as a rate of change. On the other hand, options like B are incorrect because they describe average cost, not marginal cost, which is a different economic concept.

About This Chapter: Theory of Production and Cost

Paper

Paper 4: Business Economics

Weightage

10%

Key Topics

Function, Cost Concepts (Short/Long Run)

This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.

View Official ICAI Syllabus

Exam Strategy Tip

The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.

Related Comparison Tables

Fixed Cost vs Variable Cost: Cost Concepts

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