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Unit 2: Cost and Production Analysis - Practice Quiz

ECO106 — Introduction To Economics 60 Questions
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1 What does a production function show?

Theory of production Easy
A. The relationship between tax and revenue
B. The relationship between income and saving
C. The relationship between inputs and output
D. The relationship between price and demand

2 Which of the following is an example of a factor of production?

Theory of production Easy
A. Demand
B. Land
C. Price
D. Utility

3 What is meant by output in production analysis?

Theory of production Easy
A. The quantity of goods produced
B. The amount of capital invested
C. The price charged for goods
D. The money paid for labor

4 In the short period, at least one factor of production is usually:

Short and long period production function Easy
A. Absent
B. Unlimited
C. Free
D. Fixed

5 In the long period, a firm can:

Short and long period production function Easy
A. Change all inputs
B. Change no inputs
C. Change only labor
D. Change only raw materials

6 Which input is commonly considered fixed in the short period?

Short and long period production function Easy
A. Hourly labor
B. Electricity usage
C. Factory size
D. Raw materials

7 The law of variable proportions applies when:

Law of variable proportions Easy
A. All inputs remain fixed over time
B. One input varies and others remain fixed
C. All inputs vary in the same proportion
D. Only the product price changes

8 What happens to total product when it initially increases at an increasing rate?

Law of variable proportions Easy
A. Total product becomes negative
B. Marginal product rises
C. Average product becomes zero
D. Marginal product falls

9 Marginal product is the change in total product caused by:

Law of variable proportions Easy
A. One fewer unit of output
B. A change in total revenue
C. A change in product price
D. One additional unit of input

10 When marginal product is zero, total product is generally:

Law of variable proportions Easy
A. At its maximum
B. Equal to average cost
C. At its minimum
D. Equal to fixed cost

11 What is fixed cost?

Theory of cost Easy
A. Cost that is paid only by consumers
B. Cost that does not change with output
C. Cost that equals total revenue
D. Cost that changes with every unit produced

12 Which of the following is usually a variable cost?

Theory of cost Easy
A. Insurance on machinery
B. Cost of raw materials
C. Annual building rent
D. Salaried manager's fixed pay

13 Total cost is equal to:

Theory of cost Easy
A. Average cost plus marginal cost
B. Fixed cost plus variable cost
C. Fixed cost minus variable cost
D. Revenue minus fixed cost

14 Average cost is calculated as:

Theory of cost Easy
A. Total cost multiplied by output
B. Fixed cost divided by price
C. Total cost divided by output
D. Variable cost minus total cost

15 The short-run average fixed cost curve generally:

Short and long run cost curves Easy
A. First falls and then rises sharply
B. Rises continuously with output
C. Falls as output increases
D. Remains constant at every output

16 The short-run average total cost curve is often described as:

Short and long run cost curves Easy
A. U-shaped
B. A vertical straight line
C. Perfectly horizontal
D. Always downward sloping

17 In the long run, all costs are generally:

Short and long run cost curves Easy
A. Variable
B. Zero
C. Sunk
D. Fixed

18 Marginal cost is the additional cost of producing:

Short and long run cost curves Easy
A. The average amount of output
B. All units of output
C. One less unit of input
D. One more unit of output

19 Economies of scale occur when long-run average cost:

Economies and diseconomies of scale Easy
A. Falls as output increases
B. Becomes equal to total revenue
C. Rises as output increases
D. Remains fixed at all output levels

20 Diseconomies of scale occur when:

Economies and diseconomies of scale Easy
A. Total cost remains unchanged with output
B. Output falls while all costs become zero
C. Long-run average cost rises with output
D. Long-run average cost falls with output

21 A firm increases all inputs by 20% and observes that output increases by 30%. Which production characteristic is indicated?

Theory of production Medium
A. Negative returns to scale
B. Increasing returns to scale
C. Decreasing returns to scale
D. Constant returns to scale

22 If a production function is written as , what does usually represent?

Theory of production Medium
A. Total revenue
B. Total output
C. Labour productivity
D. Capital input

23 A firm can vary labour but cannot change the size of its factory during a period. This production decision belongs to which period?

Short and long period production function Medium
A. The long period
B. The short period
C. The secular period
D. The market period

24 Which statement best distinguishes the long-period production function from the short-period production function?

Short and long period production function Medium
A. Output cannot change in the long period
B. All factors are variable in the long period
C. All factors are fixed in the long period
D. Only labour is variable in the long period

25 A firm has the production function , where is labour. At what labour input is total product maximized?

Short and long period production function Medium
A.
B.
C.
D.

26 When marginal product is greater than average product, what happens to average product?

Law of variable proportions Medium
A. Average product increases
B. Average product remains unchanged
C. Average product becomes zero
D. Average product decreases

27 A firm's total product rises from 80 to 104 units when labour increases from 4 to 5 workers. What is the marginal product of the fifth worker?

Law of variable proportions Medium
A. 26 units
B. 184 units
C. 20 units
D. 24 units

28 In which stage of the law of variable proportions does marginal product remain positive but decline?

Law of variable proportions Medium
A. Stage III
B. Stage I
C. The fixed-input stage
D. Stage II

29 If total product is increasing at a decreasing rate, which condition must hold?

Law of variable proportions Medium
A. Marginal product is negative and rising
B. Marginal product is constant and negative
C. Average product is zero and falling
D. Marginal product is positive and falling

30 A firm pays $12,000 annually for insurance whether it produces or not. How should this payment be classified?

Theory of cost Medium
A. An opportunity cost
B. A fixed cost
C. A variable cost
D. A marginal cost

31 A firm's total cost is $5,000 at 100 units and $5,600 at 120 units. What is its marginal cost over this output range?

Theory of cost Medium
A. $600 per unit
B. $30 per unit
C. $50 per unit
D. $20 per unit

32 If total fixed cost is $2,000 and total variable cost is $7,500, what is total cost?

Theory of cost Medium
A. $5,500
B. $9,500
C. $7,500
D. $15,000

33 Why does average fixed cost decline as output increases?

Theory of cost Medium
A. Variable cost becomes negative
B. Fixed cost is spread over more units
C. Total fixed cost rises with output
D. Marginal cost becomes constant

34 A firm's short-run average total cost is $18 at 100 units and $15 at 200 units. What does this indicate over the range?

Short and long run cost curves Medium
A. Average total cost is decreasing
B. Marginal cost is necessarily zero
C. Average total cost is increasing
D. Total fixed cost is increasing

35 Why is the long-run average cost curve often described as an envelope curve?

Short and long run cost curves Medium
A. It surrounds all marginal cost curves
B. It is formed by the lowest points of demand curves
C. It traces the least-cost choices among short-run curves
D. It measures only fixed costs

36 If marginal cost is below average total cost, what happens to average total cost as output expands?

Short and long run cost curves Medium
A. Average total cost becomes negative
B. Average total cost falls
C. Average total cost becomes fixed
D. Average total cost rises

37 A firm can choose among three plant sizes in the long run. For a particular output, plant A costs $100, plant B costs $80, and plant C costs $90. Which plant should it select?

Short and long run cost curves Medium
A. Plant B
B. Plant A
C. Plant C
D. Any plant has the same cost

38 A firm's output doubles while its total inputs rise by only 60%. What does this suggest?

Economies and diseconomies of scale Medium
A. Constant returns to scale
B. Economies of scale
C. A fall in productivity
D. Diseconomies of scale

39 Which situation is most likely to create economies of scale?

Economies and diseconomies of scale Medium
A. More duplicated supervision
B. Longer communication delays
C. Specialization of managerial tasks
D. Greater congestion in production

40 A firm's long-run average cost rises from $40 to $46 when output expands substantially. Which condition is most likely present?

Economies and diseconomies of scale Medium
A. Perfectly elastic demand
B. Constant returns to scale
C. Diseconomies of scale
D. External economies

41 A firm's production function is . If both inputs increase by , what is the most accurate conclusion about output, assuming is unchanged?

Theory of production Hard
A. Output increases by exactly
B. Output increases by less than
C. Output remains unchanged
D. Output increases by more than

42 For a differentiable production function, an interior cost-minimizing input combination occurs where an isoquant is tangent to an isocost line. Which condition must hold when both inputs are used positively?

Theory of production Hard
A.
B.
C.
D.

43 A production technology is represented by . If the wage is , the rental rate is , and the firm must produce , which input bundle minimizes cost?

Theory of production Hard
A.
B.
C.
D.

44 A firm has the production function . In the short run, . What is the maximum output attainable when , and what does the fixed capital imply?

Short and long period production function Hard
A. ; capital is fixed
B. ; both inputs are variable
C. ; labor is fixed
D. ; technology is decreasing

45 A firm has the production function . In the short run, . What is the maximum output attainable when , and what does the fixed capital imply?

Short and long period production function Hard
A. ; capital is fixed
B. ; capital is fixed
C. ; both inputs are variable
D. ; technology is decreasing

46 A long-run production function has increasing returns to scale for output levels below and decreasing returns to scale above . Which statement best describes the corresponding long-run average cost pattern, assuming input prices remain constant?

Short and long period production function Hard
A. LRAC rises below and falls above
B. LRAC remains constant at every output level
C. LRAC is unrelated to returns to scale
D. LRAC falls below and rises above

47 A firm can choose among plant sizes in the long run. At output , plant A has average cost , plant B has average cost , and plant C has average cost $13. Which interpretation is correct?

Short and long period production function Hard
A. The short-run average cost must equal for every plant
B. Plant C must be selected because it has the largest capacity
C. Plant B lies on the long-run expansion path at
D. Plant A must be selected because it has the smallest fixed cost

48 A firm's total product rises from to $132 when labor increases from $4 to $5 units, while capital remains fixed. What is the marginal product of the fifth unit of labor, and which stage is indicated if average product at five workers is $26?

Law of variable proportions Hard
A. ; the boundary between stages II and III
B. ; stage I
C. ; the boundary between stages I and II
D. ; the boundary between stages II and III

49 Under the law of variable proportions, total product is maximized when:

Law of variable proportions Hard
A. Marginal product becomes zero
B. Average product becomes zero
C. Marginal product equals average product
D. Average product reaches its maximum

50 Suppose marginal product of labor is positive but falling, while average product of labor is still rising. Which conclusion follows?

Law of variable proportions Hard
A. Labor is operating in stage III
B. Labor is operating in stage II
C. Total product is necessarily falling
D. Labor is operating in stage I

51 If marginal product becomes negative after the eighth unit of labor, a rational firm seeking to maximize output with fixed capital will never employ:

Law of variable proportions Hard
A. Fewer than eight labor units
B. More than eight labor units
C. Exactly eight labor units
D. Any labor when capital is fixed

52 A firm's total cost is . At , which pair correctly identifies average total cost and marginal cost?

Theory of cost Hard
A. and
B. and
C. and
D. and

53 A firm has fixed cost and variable cost . Which statement is always true for positive output, regardless of the shape of the variable-cost function?

Theory of cost Hard
A.
B.
C.
D.

54 A firm's marginal cost is below its average total cost at the current output. If no other change occurs, what happens when output increases slightly?

Theory of cost Hard
A. Average total cost increases
B. Average total cost remains unchanged
C. Average total cost decreases
D. Fixed cost per unit increases

55 The short-run average cost curves for three plant sizes form an envelope around the long-run average cost curve. At the tangency between a short-run average cost curve and LRAC, which statement is generally correct?

Short and long run cost curves Hard
A. The plant has the highest possible fixed cost
B. The plant's marginal cost must equal zero
C. The plant is cost-minimizing for that output
D. The firm must be experiencing diseconomies

56 A firm's short-run total cost is , while its long-run technology allows the fixed input to be adjusted freely. Which component disappears when moving from short-run to long-run analysis?

Short and long run cost curves Hard
A. The constraint imposed by fixed plant size
B. The cost of producing additional output
C. The opportunity cost of variable inputs
D. The marginal cost of all inputs

57 If intersects a firm's curve at its minimum but remains below at that same output, what does this imply about the relationship between the shutdown point and the break-even point?

Short and long run cost curves Hard
A. Shutdown output is below break-even output
B. No comparison is possible
C. Shutdown output equals break-even output
D. Shutdown output is above break-even output

58 A firm's output rises by when all inputs rise by . What type of returns to scale does the technology exhibit over this range?

Economies and diseconomies of scale Hard
A. Decreasing returns to scale
B. Negative returns to scale
C. Constant returns to scale
D. Increasing returns to scale

59 A firm's long-run average cost falls as output increases because specialized machinery becomes viable, but eventually rises because managerial coordination deteriorates. This pattern represents:

Economies and diseconomies of scale Hard
A. Economies followed by diseconomies of scale
B. Constant returns followed by fixed returns
C. Diminishing marginal product followed by increasing returns
D. Diseconomies followed by economies of scale

60 A firm doubles all inputs and output also doubles, but its long-run average cost falls as output expands. Which conclusion is most defensible?

Economies and diseconomies of scale Hard
A. The technology has increasing returns and costs must be falling
B. Returns to scale cannot be inferred from the information
C. The technology has constant returns and costs are falling for another reason
D. The technology has decreasing returns and costs must be rising
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