Question

Match the cost concepts in List I and their description in List II

List I (Cost concepts)		List II (Description)
a.	Sunk cost	i)	Change in total cost for a unit change in output
b.	Marginal cost	ii)	Value of inputs owned and used in production
c.	Investment cost	iii)	Costs that are unaffected by firm decision
d.	Implicit cost	iv)	Total increase in costs resulting from a decision

 

Choose the correct answer from the options given below:

1. a-ii, b-i, c-iv, d-iii
2. a-i, b-iii, c-iv, d-ii
3. a-iv, b-ii, c-iii, d-i
4. a-i, b-ii, c-iii, d-iv

Answer 1

Correct Answer - Option 1 : a-ii, b-i, c-iv, d-iii

A list and definition of different types of economic costs.

1. Sunk Cost

• Sunk costs are those which have already been incurred and which are unrecoverable.
• In business, sunk costs are typically not included in consideration when making future decisions, as they are seen as irrelevant to current and future budgetary concerns.
• Sunk costs are in contrast to relevant costs, which are future costs that have yet to be incurred.

2. Marginal Cost

• Marginal cost can help an organization optimize its production through economies of scale.
• Marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good.
• A company that is looking to maximize its profits will produce up to the point where marginal cost (MC) equals marginal revenue (MR).
• Fixed costs are constant regardless of production levels, so higher production leads to a lower fixed cost per unit as the total is allocated over more units.
• Variable costs change based on production levels, so producing more units will add more variable costs.

3. Investment Cost

• The cost of an investment includes acquisition charges such as brokerage, fees and duties.
• If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of an investment is determined by reference to the fair value of the asset given up.

4. Implicit cost

• An implicit cost is a cost that exists without the exchange of cash and is not recorded for accounting purposes.
• Implicit costs represent the loss of income but do not represent a loss of profit.
• These costs are in contrast to explicit costs, which represent money exchanged or the use of tangible resources by a company.

Therefore, the correct match is:

List I (Cost concepts)		List II (Description)
a.	Sunk cost	i)	Value of inputs owned and used in production
b.	Marginal cost	ii)	Change in total cost for a unit change in output
c.	Investment cost	iii)	The total increase in costs resulting from a decision
d.	Implicit cost	iv)	Costs that are unaffected by a firm decision

Hence option1 is correct