Cost, Revenue and Profit constitute a fundamental area of Microeconomics that explains how firms measure expenses, generate income, and determine economic performance. These MCQs are designed to strengthen conceptual understanding of cost curves, revenue measures, profit concepts, and break-even analysis. The questions align strictly with competitive examination syllabi and aim to enhance analytical clarity, precision, and exam-oriented thinking for FPSC, CSS, PMS, GAT, and SPSC candidates.
Table of Contents
1. Total cost is defined as:
A. The sum of total fixed cost and total variable cost
B. Cost incurred only on labor
C. Cost that varies directly with output
D. Opportunity cost of production
Explanation:
Total cost represents the overall expenditure incurred by a firm and is obtained by adding fixed and variable costs at a given level of output.
Total cost represents the overall expenditure incurred by a firm and is obtained by adding fixed and variable costs at a given level of output.
2. Which cost remains constant regardless of output level in the short run?
A. Fixed cost
B. Variable cost
C. Marginal cost
D. Average cost
Explanation:
Fixed costs do not change with output in the short run and must be paid even when production is zero.
Fixed costs do not change with output in the short run and must be paid even when production is zero.
3. Marginal cost is the change in:
A. Total cost due to one additional unit of output
B. Average cost due to scale expansion
C. Fixed cost due to output change
D. Revenue from last unit sold
Explanation:
Marginal cost measures the incremental cost incurred from producing one additional unit of output.
Marginal cost measures the incremental cost incurred from producing one additional unit of output.
4. Average variable cost is calculated as:
A. Total variable cost divided by output
B. Total cost divided by output
C. Fixed cost divided by output
D. Marginal cost multiplied by output
Explanation:
Average variable cost reflects variable cost per unit and helps firms analyze short-run production decisions.
Average variable cost reflects variable cost per unit and helps firms analyze short-run production decisions.
5. Which cost curve is U-shaped due to the law of diminishing returns?
A. Average cost
B. Total fixed cost
C. Total variable cost
D. Total cost
Explanation:
The U-shape of the average cost curve reflects initially increasing and then diminishing returns to variable factors.
The U-shape of the average cost curve reflects initially increasing and then diminishing returns to variable factors.
6. Total revenue is obtained by:
A. Price multiplied by quantity sold
B. Quantity divided by price
C. Marginal revenue plus average revenue
D. Fixed cost plus profit
Explanation:
Total revenue represents total sales receipts and is calculated by multiplying market price by output sold.
Total revenue represents total sales receipts and is calculated by multiplying market price by output sold.
7. Average revenue is equal to:
A. Price per unit
B. Total revenue minus cost
C. Marginal revenue
D. Profit per unit
Explanation:
Average revenue is total revenue divided by output and equals price under standard market conditions.
Average revenue is total revenue divided by output and equals price under standard market conditions.
8. Marginal revenue measures:
A. Change in total revenue from one more unit sold
B. Revenue earned per unit
C. Difference between profit and cost
D. Total sales receipts
Explanation:
Marginal revenue indicates how total revenue responds to a marginal change in output sold.
Marginal revenue indicates how total revenue responds to a marginal change in output sold.
9. Profit is maximized when:
A. Marginal revenue equals marginal cost
B. Total revenue is maximum
C. Average cost is minimum
D. Fixed cost is zero
Explanation:
The profit-maximizing condition occurs where the additional revenue from output equals its additional cost.
The profit-maximizing condition occurs where the additional revenue from output equals its additional cost.
10. Economic profit differs from accounting profit because it includes:
A. Opportunity cost
B. Explicit cost only
C. Depreciation only
D. Sunk cost
Explanation:
Economic profit accounts for both explicit and implicit costs, including the opportunity cost of resources.
Economic profit accounts for both explicit and implicit costs, including the opportunity cost of resources.
11. Break-even point occurs when:
A. Total revenue equals total cost
B. Marginal cost equals average cost
C. Fixed cost becomes zero
D. Profit is maximized
Explanation:
At the break-even point, a firm earns neither profit nor loss because total revenue exactly equals total cost.
At the break-even point, a firm earns neither profit nor loss because total revenue exactly equals total cost.
12. Average fixed cost curve continuously:
A. Declines as output increases
B. Increases with output
C. Remains constant
D. Becomes U-shaped
Explanation:
Fixed cost spread over larger output causes average fixed cost to fall continuously.
Fixed cost spread over larger output causes average fixed cost to fall continuously.
13. Which cost is considered irrelevant for decision-making?
A. Sunk cost
B. Marginal cost
C. Opportunity cost
D. Variable cost
Explanation:
Sunk costs are already incurred and cannot be recovered, making them irrelevant to current decisions.
Sunk costs are already incurred and cannot be recovered, making them irrelevant to current decisions.
14. When marginal cost is below average cost:
A. Average cost falls
B. Average cost rises
C. Total cost is constant
D. Fixed cost increases
Explanation:
Marginal cost pulls the average cost downward as long as it lies below it.
Marginal cost pulls the average cost downward as long as it lies below it.
15. Accounting profit is calculated by subtracting:
A. Explicit costs from total revenue
B. Implicit costs from revenue
C. Opportunity costs from revenue
D. Fixed costs only
Explanation:
Accounting profit considers only explicit monetary costs incurred by the firm.
Accounting profit considers only explicit monetary costs incurred by the firm.
Figure: Break-even point where total cost equals total revenue.
16. Normal profit occurs when:
A. Economic profit is zero
B. Accounting profit is zero
C. Marginal revenue is zero
D. Total cost exceeds revenue
Explanation:
Normal profit covers opportunity costs and implies zero economic profit.
Normal profit covers opportunity costs and implies zero economic profit.
17. Which revenue curve is horizontal under perfect competition?
A. Average revenue
B. Total revenue
C. Profit curve
D. Cost curve
Explanation:
Firms are price takers under perfect competition, resulting in a horizontal average revenue curve.
Firms are price takers under perfect competition, resulting in a horizontal average revenue curve.
18. Which cost increases directly with output?
A. Variable cost
B. Fixed cost
C. Sunk cost
D. Implicit cost
Explanation:
Variable costs change directly with changes in the level of output.
Variable costs change directly with changes in the level of output.
19. The difference between total revenue and total cost represents:
A. Profit
B. Average revenue
C. Marginal cost
D. Fixed cost
Explanation:
Profit is defined as the surplus of total revenue over total cost.
Profit is defined as the surplus of total revenue over total cost.
20. When total revenue is maximum, marginal revenue is:
A. Zero
B. Maximum
C. Equal to price
D. Negative
Explanation:
Total revenue reaches its peak where marginal revenue equals zero.
Total revenue reaches its peak where marginal revenue equals zero.
21. Implicit costs are:
A. Non-monetary opportunity costs
B. Explicit cash expenses
C. Accounting losses
D. Fixed payments
Explanation:
Implicit costs represent the opportunity cost of using self-owned resources.
Implicit costs represent the opportunity cost of using self-owned resources.
22. Which cost curve intersects average cost at its minimum point?
A. Marginal cost
B. Total cost
C. Fixed cost
D. Revenue curve
Explanation:
Marginal cost intersects average cost at its lowest point due to averaging behavior.
Marginal cost intersects average cost at its lowest point due to averaging behavior.
23. When a firm incurs losses, it should continue production if:
A. Price covers average variable cost
B. Price covers total cost
C. Fixed cost is zero
D. Marginal cost exceeds revenue
Explanation:
Covering average variable cost allows the firm to minimize losses in the short run.
Covering average variable cost allows the firm to minimize losses in the short run.
24. Supernormal profit exists when:
A. Economic profit is positive
B. Accounting profit is zero
C. Revenue equals cost
D. Marginal revenue is negative
Explanation:
Supernormal profit arises when total revenue exceeds total economic cost.
Supernormal profit arises when total revenue exceeds total economic cost.
25. Which measure indicates profit per unit of output?
A. Average profit
B. Marginal revenue
C. Total profit
D. Average cost
Explanation:
Average profit equals total profit divided by output, indicating profit per unit.
Average profit equals total profit divided by output, indicating profit per unit.
26. Which cost is incurred even when output is zero?
A. Fixed cost
B. Variable cost
C. Marginal cost
D. Average cost
Explanation:
Fixed costs do not depend on the level of output and must be paid even when production is zero.
Fixed costs do not depend on the level of output and must be paid even when production is zero.
27. Which revenue curve coincides with the demand curve for a firm?
A. Average revenue curve
B. Marginal revenue curve
C. Total revenue curve
D. Profit curve
Explanation:
Average revenue represents price per unit and therefore coincides with the demand curve faced by the firm.
Average revenue represents price per unit and therefore coincides with the demand curve faced by the firm.
28. When marginal revenue is greater than marginal cost, the firm should:
A. Increase output
B. Reduce output
C. Shut down production
D. Keep output constant
Explanation:
When marginal revenue exceeds marginal cost, producing additional units increases total profit.
When marginal revenue exceeds marginal cost, producing additional units increases total profit.
29. Which of the following is included in economic cost but excluded from accounting cost?
A. Implicit cost
B. Wages paid
C. Rent paid
D. Interest paid
Explanation:
Economic cost includes implicit costs, representing the opportunity cost of self-owned resources.
Economic cost includes implicit costs, representing the opportunity cost of self-owned resources.
30. A firm earns supernormal profit when:
A. Total revenue exceeds total economic cost
B. Total revenue equals total cost
C. Fixed cost is minimized
D. Marginal cost equals average cost
Explanation:
Supernormal profit exists when revenue exceeds all explicit and implicit costs of production.
Supernormal profit exists when revenue exceeds all explicit and implicit costs of production.
Figure: Interaction of cost and revenue determining profit.
31. Which cost curve never touches the quantity axis?
A. Average fixed cost
B. Marginal cost
C. Average variable cost
D. Average cost
Explanation:
Average fixed cost approaches zero asymptotically as output increases but never becomes zero.
Average fixed cost approaches zero asymptotically as output increases but never becomes zero.
32. Which cost reflects the value of the next best alternative forgone?
A. Opportunity cost
B. Accounting cost
C. Sunk cost
D. Fixed cost
Explanation:
Opportunity cost measures the value of the best alternative sacrificed when a decision is made.
Opportunity cost measures the value of the best alternative sacrificed when a decision is made.
33. When marginal cost is rising but below average cost, average cost will:
A. Continue to fall
B. Remain constant
C. Rise immediately
D. Become zero
Explanation:
As long as marginal cost lies below average cost, it pulls the average downward despite rising values.
As long as marginal cost lies below average cost, it pulls the average downward despite rising values.
34. Which revenue measure determines the profit-maximizing output?
A. Marginal revenue
B. Average revenue
C. Total revenue
D. Price elasticity of demand
Explanation:
Marginal revenue is compared with marginal cost to identify the output level that maximizes profit.
Marginal revenue is compared with marginal cost to identify the output level that maximizes profit.
35. Which situation indicates minimum average cost?
A. Marginal cost equals average cost
B. Marginal revenue equals marginal cost
C. Average revenue equals average cost
D. Total cost equals total revenue
Explanation:
Average cost reaches its minimum where it is intersected by the marginal cost curve.
Average cost reaches its minimum where it is intersected by the marginal cost curve.
36. Which cost increases at an increasing rate due to diminishing returns?
A. Marginal cost
B. Fixed cost
C. Sunk cost
D. Average fixed cost
Explanation:
Diminishing returns raise the additional cost of producing each extra unit, increasing marginal cost.
Diminishing returns raise the additional cost of producing each extra unit, increasing marginal cost.
37. A firm incurs losses but continues production in the short run because:
A. Revenue covers variable cost
B. Fixed cost is zero
C. Total revenue is maximum
D. Marginal cost is negative
Explanation:
Covering variable costs allows the firm to contribute toward fixed costs and minimize losses.
Covering variable costs allows the firm to contribute toward fixed costs and minimize losses.
38. Which profit concept includes both explicit and implicit costs?
A. Economic profit
B. Accounting profit
C. Gross profit
D. Normal profit
Explanation:
Economic profit deducts both explicit expenses and implicit opportunity costs from revenue.
Economic profit deducts both explicit expenses and implicit opportunity costs from revenue.
39. When average revenue exceeds average cost, the firm earns:
A. Supernormal profit
B. Normal profit
C. Loss
D. Zero profit
Explanation:
Supernormal profit occurs when revenue per unit exceeds cost per unit at a given output level.
Supernormal profit occurs when revenue per unit exceeds cost per unit at a given output level.
40. Which condition represents the shutdown point of a firm?
A. Price equals average variable cost
B. Price equals average cost
C. Marginal revenue equals marginal cost
D. Total revenue equals total cost
Explanation:
The shutdown point occurs where price just covers average variable cost in the short run.
The shutdown point occurs where price just covers average variable cost in the short run.
41. Which cost does not influence short-run output decisions once incurred?
A. Sunk cost
B. Variable cost
C. Marginal cost
D. Opportunity cost
Explanation:
Sunk costs are already incurred and cannot be recovered, so they are irrelevant for current production decisions.
Sunk costs are already incurred and cannot be recovered, so they are irrelevant for current production decisions.
42. Which revenue curve is always downward sloping for a monopolist?
A. Marginal revenue curve
B. Average revenue curve
C. Total revenue curve
D. Profit curve
Explanation:
To sell additional units, a monopolist must reduce price, causing marginal revenue to decline faster than demand.
To sell additional units, a monopolist must reduce price, causing marginal revenue to decline faster than demand.
43. Which cost curve determines the firm’s shutdown point?
A. Average variable cost
B. Average cost
C. Marginal cost
D. Average fixed cost
Explanation:
A firm shuts down in the short run when price falls below average variable cost.
A firm shuts down in the short run when price falls below average variable cost.
44. When marginal cost exceeds marginal revenue, the firm should:
A. Reduce output
B. Increase output
C. Keep output constant
D. Ignore cost conditions
Explanation:
Producing units where marginal cost exceeds marginal revenue reduces total profit.
Producing units where marginal cost exceeds marginal revenue reduces total profit.
45. Which curve shows total earnings of the firm at different output levels?
A. Total revenue curve
B. Average revenue curve
C. Marginal revenue curve
D. Profit curve
Explanation:
Total revenue represents the firm’s total sales receipts at various output levels.
Total revenue represents the firm’s total sales receipts at various output levels.
%20%E2%80%93%20Microeconomics%20Diagram.jpg "Profit Maximization Condition (MR = MC) – Microeconomics Diagram")
Figure: Profit maximization where marginal revenue equals marginal cost.
46. Which profit is just sufficient to keep the firm in business?
A. Normal profit
B. Supernormal profit
C. Accounting profit
D. Economic loss
Explanation:
Normal profit covers all opportunity costs and results in zero economic profit.
Normal profit covers all opportunity costs and results in zero economic profit.
47. Which cost curve intersects the marginal cost curve at its minimum point?
A. Average variable cost
B. Average fixed cost
C. Total cost
D. Total variable cost
Explanation:
Marginal cost intersects the average variable cost curve at its lowest point.
Marginal cost intersects the average variable cost curve at its lowest point.
48. When total revenue is less than total cost, the firm incurs:
A. Loss
B. Normal profit
C. Supernormal profit
D. Zero profit
Explanation:
Loss occurs when the firm’s total cost exceeds total revenue at a given output level.
Loss occurs when the firm’s total cost exceeds total revenue at a given output level.
49. Which cost is excluded from marginal cost calculation?
A. Fixed cost
B. Variable cost
C. Labor cost
D. Raw material cost
Explanation:
Marginal cost depends only on changes in variable cost; fixed cost does not affect it.
Marginal cost depends only on changes in variable cost; fixed cost does not affect it.
50. Which relationship holds true at the profit-maximizing output?
A. Marginal revenue equals marginal cost
B. Average revenue equals average cost
C. Total revenue is minimum
D. Fixed cost is zero
Explanation:
Profit is maximized at the output level where the additional revenue from output equals the additional cost.
Profit is maximized at the output level where the additional revenue from output equals the additional cost.
Related MCQs:
Demand and Supply MCQs (Microeconomics)
Elasticity of Demand and Supply MCQs
Economics MCQs
External Reference:
Factors of Production – Wikipedia
Disclaimer: These MCQs are created for educational and practice purposes only.
About the Author: This content is prepared by an academic MCQs specialist for competitive exam preparation.
Last Updated: 11 February 2026
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