CBSE Class 12 Economics – Sample Paper
Chapter: Production and Costs
Maximum Marks: 50 Time: 90 minutes
Section A – Very Short Answer Questions (1 mark each)
1. Define Production Function. (1)
Answer: It shows the technical relationship between inputs and output, indicating the maximum output from given inputs and technology.
2. What is meant by Short Run in production? (1)
Answer: A period when at least one factor (usually capital) remains fixed while others can vary.
3. Write the formula of Average Product (AP). (1)
Answer:
AP = TP / L, where TP = Total Product and L = Labour units.4. Define Marginal Product (MP). (1)
Answer: The change in total product when one more unit of variable input is used, keeping other inputs constant.
5. What is Law of Variable Proportions? (1)
Answer: As more units of a variable input are added to fixed inputs, output first increases at an increasing rate, then decreasing, and may finally fall.
6. Define Total Fixed Cost (TFC). (1)
Answer: Cost that remains constant regardless of output, such as rent or interest on capital.
7. Write the relationship between MC and AC. (1)
Answer: MC < AC → AC falls; MC > AC → AC rises; MC = AC → AC at minimum point.
8. What is Opportunity Cost? (1)
Answer: The value of the next best alternative forgone while choosing one option.
9. Why is the MC curve U-shaped? (1)
Answer: Because of initially increasing and later diminishing marginal returns to the variable factor.
10. State one reason for Increasing Returns to Scale. (1)
Answer: Better specialisation and division of labour improve efficiency, giving increasing returns.
Section B – Short Answer Questions (3 marks each)
11. Distinguish between Short Run and Long Run. (3)
Answer:
• Short Run – At least one factor fixed.
• Long Run – All factors variable.
• Short Run includes TFC; Long Run excludes TFC as all costs are variable.
• Short Run – At least one factor fixed.
• Long Run – All factors variable.
• Short Run includes TFC; Long Run excludes TFC as all costs are variable.
12. Explain the Law of Diminishing Marginal Product. (3)
Answer: When successive units of a variable factor are added to fixed factors, the marginal product declines after a certain point due to limited capacity of fixed inputs.
13. Define and explain TFC, TVC, and TC. (3)
Answer: TFC = fixed cost; TVC = variable cost that changes with output; TC = TFC + TVC. TC curve starts from TFC level and rises with output.
14. Why are AVC and ATC curves U-shaped? (3)
Answer: Initially increasing returns reduce average costs; later diminishing returns raise them, creating a U shape.
15. How does technological progress affect cost curves? (3)
Answer: Better technology increases efficiency and output per unit of input, shifting cost curves downward.
16. Differentiate between Explicit and Implicit Costs. (3)
Answer: Explicit Costs: Actual payments to outsiders (wages, rent).
Implicit Costs: Imputed value of self-owned resources (e.g., owner’s capital or labour).
Implicit Costs: Imputed value of self-owned resources (e.g., owner’s capital or labour).
17. Explain the concept of Economies of Scale. (3)
Answer: Cost advantages arising from expanding production, such as bulk buying, better technology, specialisation, and managerial efficiency, leading to fall in average cost.
18. Show the relationship between TP, AP and MP. (3)
Answer: When MP > AP, AP rises; when MP < AP, AP falls; MP cuts AP at its maximum point. TP rises while MP and AP are positive, and TP falls when MP is negative.
Section C – Long Answer Questions (6 marks each)
19. Explain the Law of Variable Proportions in detail with its three stages. (6)
Answer:
• Stage I – Increasing Returns: MP rises, TP increases rapidly.
• Stage II – Diminishing Returns: MP positive but falling; TP rises at decreasing rate – rational stage.
• Stage III – Negative Returns: MP becomes negative; TP declines.
Occurs due to over-utilisation of fixed inputs and limited capacity.
• Stage I – Increasing Returns: MP rises, TP increases rapidly.
• Stage II – Diminishing Returns: MP positive but falling; TP rises at decreasing rate – rational stage.
• Stage III – Negative Returns: MP becomes negative; TP declines.
Occurs due to over-utilisation of fixed inputs and limited capacity.
20. Explain Returns to Scale and their causes. (6)
Answer:
• Increasing Returns to Scale – Output increases more than proportionately due to specialisation, indivisibilities, and efficient management.
• Constant Returns – Output changes in same proportion as inputs.
• Decreasing Returns – Output rises less than inputs because of coordination problems and managerial inefficiency.
• Increasing Returns to Scale – Output increases more than proportionately due to specialisation, indivisibilities, and efficient management.
• Constant Returns – Output changes in same proportion as inputs.
• Decreasing Returns – Output rises less than inputs because of coordination problems and managerial inefficiency.
21. Derive the relationship between MP and MC with formula and reasoning. (6)
Answer: When wage rate (w) is constant,
MC = w / MPL. Thus, MC and MP move inversely – as MP rises, MC falls and vice-versa. Graphically, MC is a mirror image of MP below the x-axis.22. What are the major Determinants of Cost Curves? Explain how they shift. (6)
Answer: Cost curves are affected by:
• Input prices – Higher input prices shift curves upwards.
• Technology – Improved technology reduces costs, shifting curves downwards.
• Scale of production – Larger scale may lower average cost.
• Managerial efficiency and organisation – Efficient management lowers costs.
• Government taxes and policies – Higher taxes raise costs; subsidies reduce them.
• Input prices – Higher input prices shift curves upwards.
• Technology – Improved technology reduces costs, shifting curves downwards.
• Scale of production – Larger scale may lower average cost.
• Managerial efficiency and organisation – Efficient management lowers costs.
• Government taxes and policies – Higher taxes raise costs; subsidies reduce them.
End of Sample Paper – Use for study or practice.