1Which of the following best defines Opportunity Cost?
A.The total explicit costs incurred by a firm
B.The value of the next best alternative forgone
C.The cost of raw materials and labor
D.The accounting cost minus the economic cost
Correct Answer: The value of the next best alternative forgone
Explanation:Opportunity cost is a fundamental economic concept representing the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.
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2Costs that involve a direct monetary outlay or payment to outsiders are known as:
A.Implicit Costs
B.Sunk Costs
C.Explicit Costs
D.Social Costs
Correct Answer: Explicit Costs
Explanation:Explicit costs are out-of-pocket costs for a firm, such as payments for wages, raw materials, and rent. They are recorded in the books of accounts.
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3A cost that has already been incurred and cannot be recovered is called a:
A.Marginal Cost
B.Sunk Cost
C.Opportunity Cost
D.Variable Cost
Correct Answer: Sunk Cost
Explanation:Sunk costs are retrospective costs that have already been incurred and cannot be recovered. They should be irrelevant to future decision-making.
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4Economic Profit is calculated as:
A.Total Revenue Explicit Costs
B.Total Revenue (Explicit Costs + Implicit Costs)
C.Total Revenue Fixed Costs
D.Total Revenue Variable Costs
Correct Answer: Total Revenue (Explicit Costs + Implicit Costs)
Explanation:Economic profit accounts for both explicit costs (accounting costs) and implicit costs (opportunity costs of self-owned resources).
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5In the context of the production function, the Short Run is defined as a period where:
A.All inputs are variable
B.No production takes place
C.At least one input is fixed while others are variable
D.The firm can exit the industry completely
Correct Answer: At least one input is fixed while others are variable
Explanation:The short run is a time frame in which the quantity of at least one input is fixed (usually capital or land), and the firm cannot adjust it.
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6The functional relationship between physical inputs and physical output is known as:
A.Cost Function
B.Production Function
C.Revenue Function
D.Demand Function
Correct Answer: Production Function
Explanation:A production function expresses the relationship between quantities of productive factors (inputs) used and the amount of product obtained (output). Mathematical form: .
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7Which law governs production in the short run with one variable input?
A.Law of Returns to Scale
B.Law of Demand
C.Law of Variable Proportions
D.Law of Increasing Returns
Correct Answer: Law of Variable Proportions
Explanation:The Law of Variable Proportions (or Law of Diminishing Returns) analyzes the production function with one variable factor, keeping other factors fixed.
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8In the Law of Variable Proportions, the Point of Inflection occurs where:
A.Total Product stops increasing
B.Total Product starts increasing at a diminishing rate
C.Average Product is maximum
D.Marginal Product is zero
Correct Answer: Total Product starts increasing at a diminishing rate
Explanation:The point of inflection is where the Total Product curve changes from convex to concave, meaning the slope (Marginal Product) stops increasing and begins to decrease.
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9When Total Product (TP) is at its maximum, Marginal Product (MP) is:
A.Maximum
B.Negative
C.Zero
D.Equal to Average Product
Correct Answer: Zero
Explanation:Marginal Product represents the slope of the Total Product curve. When the slope is zero (TP is flat at its peak), MP is zero.
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10Which of the following describes Stage II of the Law of Variable Proportions?
A.MP is increasing
B.MP is negative
C.MP is declining but positive
D.AP is increasing
Correct Answer: MP is declining but positive
Explanation:In Stage II (Stage of Diminishing Returns), both AP and MP decline, but MP remains positive. This is the rational stage of production.
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11A rational producer will always operate in which stage of the Law of Variable Proportions?
A.Stage I
B.Stage II
C.Stage III
D.Either Stage I or III
Correct Answer: Stage II
Explanation:In Stage I, efficiency is still increasing. In Stage III, marginal product is negative. Rational producers operate in Stage II where TP is rising (albeit slowly) and factors are utilized efficiently.
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12If the production function exhibits Constant Returns to Scale, doubling all inputs will result in:
A.Less than double the output
B.Exactly double the output
C.More than double the output
D.No change in output
Correct Answer: Exactly double the output
Explanation:Constant Returns to Scale (Long Run concept) implies that output increases in the same proportion as the increase in inputs.
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13Total Fixed Cost (TFC) curve is:
A.U-shaped
B.A vertical straight line
C.A horizontal straight line parallel to the X-axis
D.Upward sloping
Correct Answer: A horizontal straight line parallel to the X-axis
Explanation:Fixed costs do not change with the level of output. Therefore, the TFC curve is a horizontal line.
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14Which cost curve is known as a Rectangular Hyperbola?
A.Average Variable Cost (AVC)
B.Average Fixed Cost (AFC)
C.Marginal Cost (MC)
D.Average Total Cost (ATC)
Correct Answer: Average Fixed Cost (AFC)
Explanation:AFC is calculated as . As increases, AFC decreases continuously but never touches the axes, forming a rectangular hyperbola.
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15Total Cost (TC) in the short run is the sum of:
A.Total Fixed Cost and Marginal Cost
B.Total Fixed Cost and Total Variable Cost
C.Average Fixed Cost and Average Variable Cost
D.Implicit Cost and Explicit Cost
Correct Answer: Total Fixed Cost and Total Variable Cost
Explanation:In the short run, total costs comprise costs that do not change with output (TFC) and costs that do change with output (TVC). .
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16Marginal Cost (MC) is defined as:
A.The total cost divided by output
B.The change in total cost resulting from a one-unit change in output
C.The cost of the fixed inputs
D.The difference between Average Cost and Average Variable Cost
Correct Answer: The change in total cost resulting from a one-unit change in output
Explanation:Mathematically, or .
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17The vertical distance between the Total Cost (TC) curve and the Total Variable Cost (TVC) curve is equal to:
A.Marginal Cost
B.Average Fixed Cost
C.Total Fixed Cost
D.Zero
Correct Answer: Total Fixed Cost
Explanation:Since , the difference () is always equal to TFC, which is constant.
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18When Average Cost (AC) is falling, what is the relationship between AC and Marginal Cost (MC)?
A.
B.
C.
D.
Correct Answer:
Explanation:When the average is being pulled down, the marginal value must be lower than the average.
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19The Marginal Cost (MC) curve cuts the Average Cost (AC) curve at:
A.The maximum point of AC
B.The minimum point of AC
C.The beginning of the AC curve
D.Any point depending on the product
Correct Answer: The minimum point of AC
Explanation:Mathematical relationship: MC equals AC when AC is at its minimum point.
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20Which of the following curves is NOT U-shaped?
A.Average Variable Cost (AVC)
B.Marginal Cost (MC)
C.Average Fixed Cost (AFC)
D.Short-run Average Cost (SAC)
Correct Answer: Average Fixed Cost (AFC)
Explanation:AVC, MC, and SAC are U-shaped due to the Law of Variable Proportions. AFC is a rectangular hyperbola (continuously falling).
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21The Long Run Average Cost (LAC) curve is also called the:
A.Planning Curve
B.Envelope Curve
C.Both Planning and Envelope Curve
D.Operating Curve
Correct Answer: Both Planning and Envelope Curve
Explanation:It is an 'Envelope Curve' because it envelopes all short-run curves, and a 'Planning Curve' because it helps firms plan the scale of plant for the long run.
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22Internal Economies of Scale occur due to:
A.Development of infrastructure in the region
B.Growth of the industry as a whole
C.Expansion of the firm's own size
D.Government subsidies
Correct Answer: Expansion of the firm's own size
Explanation:Internal economies arise from firm-specific factors like managerial efficiency, technical specialization, and financial capabilities as the firm expands.
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23If a firm doubles its inputs and output increases by less than double, it is experiencing:
A.Increasing Returns to Scale
B.Decreasing Returns to Scale
C.Constant Returns to Scale
D.Economies of Scope
Correct Answer: Decreasing Returns to Scale
Explanation:Decreasing Returns to Scale (or Diseconomies of Scale) happen when output growth lags behind input growth, leading to rising long-run average costs.
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24The formula for Break-Even Point (BEP) in units is:
A.
B.
C.
D.
Correct Answer:
Explanation:BEP (Units) is calculated by dividing Fixed Costs by the Contribution Margin per unit ().
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25Contribution Margin is defined as:
A.Sales Fixed Costs
B.Sales Variable Costs
C.Fixed Costs + Profit
D.Total Assets Total Liabilities
Correct Answer: Sales Variable Costs
Explanation:Contribution is the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
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26At the Break-Even Point, Total Revenue (TR) is equal to:
A.Total Fixed Cost
B.Total Variable Cost
C.Total Cost
D.Zero
Correct Answer: Total Cost
Explanation:The Break-Even Point is the level of activity where total revenue equals total expenses (Fixed + Variable), resulting in zero profit.
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27The Margin of Safety is calculated as:
A.Actual Sales Break-Even Sales
B.Break-Even Sales Actual Sales
C.Fixed Cost / P/V Ratio
D.Variable Cost / Sales
Correct Answer: Actual Sales Break-Even Sales
Explanation:Margin of Safety represents the cushion a company has before it starts making a loss. It is the excess of actual sales over break-even sales.
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28The Profit-Volume (P/V) Ratio is calculated as:
A.
B.
C.
D.
Correct Answer:
Explanation:The P/V ratio expresses the relationship between Contribution and Sales, indicating the rate at which profit is earned.
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29An increase in Fixed Costs, assuming other factors remain constant, will:
A.Decrease the Break-Even Point
B.Increase the Break-Even Point
C.Have no effect on the Break-Even Point
D.Increase the P/V Ratio
Correct Answer: Increase the Break-Even Point
Explanation:If Fixed Costs rise, the firm needs to sell more units to cover these costs, thus raising the Break-Even Point.
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30Which of the following represents an Implicit Cost?
A.Rent paid for a factory
B.Wages paid to laborers
C.Interest on borrowed capital
D.Salary foregone by the owner for working in their own firm
Correct Answer: Salary foregone by the owner for working in their own firm
Explanation:Implicit costs are the opportunity costs of using resources owned by the firm/owner, such as the owner's time or own land, for which no direct cash payment is made.
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31Variable inputs are those that:
A.Cannot be changed in the short run
B.Can be changed in the short run
C.Are free of cost
D.Are used only in the long run
Correct Answer: Can be changed in the short run
Explanation:Variable inputs (like labor, raw materials) can be adjusted easily according to the level of output in the short run.
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32When Average Product (AP) is decreasing, Marginal Product (MP) is:
A.Greater than AP
B.Less than AP
C.Equal to AP
D.Constant
Correct Answer: Less than AP
Explanation:For an average curve to fall, the marginal value added must be lower than the current average.
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33The shape of the Total Product (TP) curve in the first stage of production is:
A.Concave to the origin
B.Convex to the origin
C.A straight line
D.Initially convex, then concave
Correct Answer: Initially convex, then concave
Explanation:TP increases at an increasing rate (convex) initially, then at a diminishing rate (concave) after the point of inflection.
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34Incremental costs are most similar to which other cost concept?
A.Sunk Costs
B.Fixed Costs
C.Marginal Costs
D.Average Costs
Correct Answer: Marginal Costs
Explanation:Incremental cost refers to the total change in cost resulting from a decision (often a batch or policy change), similar to Marginal Cost which is the change per single unit.
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35In a Break-Even Chart, the Angle of Incidence indicates:
A.The fixed cost amount
B.The variable cost ratio
C.The rate at which profit is earned
D.The total loss
Correct Answer: The rate at which profit is earned
Explanation:The Angle of Incidence is the angle formed where the Sales line cuts the Total Cost line. A wider angle indicates a higher rate of profit generation.
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36If Selling Price is $20$, Variable Cost is $12$, and Fixed Cost is $10,000$, the Break-Even Point in units is:
A.833 units
B.1,000 units
C.1,250 units
D.500 units
Correct Answer: 1,250 units
Explanation: units.
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37The Shut-down point in the short run for a firm occurs when Price is equal to:
A.Average Total Cost (ATC)
B.Average Fixed Cost (AFC)
C.Average Variable Cost (AVC)
D.Marginal Cost (MC)
Correct Answer: Average Variable Cost (AVC)
Explanation:If a firm cannot cover even its variable costs, it loses more by operating than by shutting down. The shut-down point is where .
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38Accounting Profit is generally ____ than Economic Profit.
A.Lower
B.Higher
C.Equal
D.Unrelated
Correct Answer: Higher
Explanation:Accounting profit only subtracts explicit costs. Economic profit subtracts explicit AND implicit costs. Since implicit costs are positive, economic profit is lower.
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39In the long run, there are no:
A.Variable Costs
B.Implicit Costs
C.Fixed Costs
D.Opportunity Costs
Correct Answer: Fixed Costs
Explanation:In the long run, all factors of production can be adjusted, meaning all costs become variable. There are no fixed costs.
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40Which curve indicates the minimum unit cost of producing any given volume of output in the long run?
A.LAC Curve
B.LMC Curve
C.SAC Curve
D.AVC Curve
Correct Answer: LAC Curve
Explanation:The Long Run Average Cost (LAC) curve represents the lowest possible average cost for producing various levels of output when the firm can adjust its plant size.
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41Managerial diseconomies of scale arise primarily due to:
A.Shortage of raw materials
B.Communication and coordination difficulties
C.Technological obsolescence
D.Government taxes
Correct Answer: Communication and coordination difficulties
Explanation:As a firm grows too large, management becomes complex, causing delays in decision-making and communication gaps (Diseconomies of Scale).
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42The derivative of the Total Cost function with respect to Quantity () gives:
A.Average Cost
B.Total Variable Cost
C.Marginal Cost
D.Fixed Cost
Correct Answer: Marginal Cost
Explanation:Mathematically, Marginal Cost is the first derivative of the Total Cost function: .
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43If the P/V ratio is 40% and Fixed Cost is $40,000$, what is the Break-Even Sales volume?
A.$16,000$
B.$100,000$
C.$160,000$
D.$10,000$
Correct Answer: $100,000$
Explanation:.
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44The law of variable proportions is also known as:
A.Law of Constant Returns
B.Law of Diminishing Marginal Utility
C.Law of Diminishing Returns
D.Law of Supply
Correct Answer: Law of Diminishing Returns
Explanation:It is often called the Law of Diminishing Returns because the most significant phase is where marginal product diminishes.
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45Isoquants are to production what ____ are to consumption.
A.Demand curves
B.Supply curves
C.Indifference curves
D.Budget lines
Correct Answer: Indifference curves
Explanation:An Isoquant represents combinations of inputs yielding the same output, similar to how an Indifference curve represents combinations of goods yielding the same utility.
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46Social Cost is defined as:
A.Private Cost + External Cost
B.Private Cost External Cost
C.Explicit Cost + Implicit Cost
D.Fixed Cost + Variable Cost
Correct Answer: Private Cost + External Cost
Explanation:Social cost is the total cost to society, which includes the private costs borne by the producer and the external costs (negative externalities like pollution) borne by society.
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47When Total Product is falling, Marginal Product is:
A.Rising
B.Zero
C.Negative
D.Constant
Correct Answer: Negative
Explanation:If the total amount produced actually decreases when adding another worker, that worker's marginal contribution is negative.
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48The difference between Total Revenue and Total Variable Cost is known as:
A.Net Profit
B.Gross Margin
C.Contribution
D.Operating Profit
Correct Answer: Contribution
Explanation:Contribution = . It contributes towards covering fixed costs and generating profit.
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49Which of the following cost curves is never U-shaped?
A.Long Run Average Cost
B.Short Run Marginal Cost
C.Total Fixed Cost
D.Average Variable Cost
Correct Answer: Total Fixed Cost
Explanation:Total Fixed Cost is a horizontal line. Note: AFC is a hyperbola. Neither are U-shaped. Given the options, TFC is the correct choice describing a linear shape.
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50If a firm wants to lower its Break-Even Point, it should:
A.Increase Variable Cost per unit
B.Decrease Selling Price
C.Increase Fixed Costs
D.Reduce Fixed Costs
Correct Answer: Reduce Fixed Costs
Explanation:Reducing the numerator (Fixed Costs) in the BEP formula lowers the break-even point, making it easier to reach profitability.
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