Average And Marginal Cost Functions Quiz

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Average And Marginal Cost Functions Quiz - Quiz

Average cost and marginal cost are two types of costs that we have covered in economics class. It is important for a manufacturer to know how to use these two costs to ensure maximization of profit with ultimate supply. Take up the quiz below and see how much you understand these costs as taught in class. All the best and keep revising!


Questions and Answers
  • 1. 

    The basic law of demand says that all other things being the same,

    • A.

      The lower the price of a product, the less of it consumers will purchase

    • B.

      The higher the price of a product, the less of it consumers will purchase

    • C.

      The lower the price of a product, the more of it consumers will purchase

    • D.

      The higher the price of a product, the more of it consumers will purchase

    • E.

      The greater the number of units of a product sold in the past, the more of it consumers will purchase that product in the future

    Correct Answer
    C. The lower the price of a product, the more of it consumers will purchase
    Explanation
    The answer is correct because it aligns with the basic law of demand, which states that as the price of a product decreases, consumers will demand more of it. This is because lower prices make the product more affordable and attractive to consumers, leading to an increase in demand. Conversely, as the price of a product increases, consumers will demand less of it due to the higher cost. Therefore, the statement "The lower the price of a product, the more of it consumers will purchase" accurately reflects the relationship between price and consumer demand.

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  • 2. 

    If a farm is producing as efficiently as it knows how, the how will the total cost function slope?

    • A.

      Upward

    • B.

      Downward

    • C.

      No Slope

    • D.

      Downward until an output threshold value, then upward

    • E.

      Upward until an output threshold value, then downward

    Correct Answer
    A. Upward
    Explanation
    If a farm is producing as efficiently as it knows how, the total cost function will have an upward slope. This means that as the farm increases its level of production, the total cost will also increase. This is because producing more requires additional resources and inputs, which come at a cost. Therefore, the total cost function will show a positive relationship between the level of production and the total cost incurred by the farm.

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  • 3. 

    Which of the following cost line items would be a fixed cost?

    • A.

      Commissions to Salespeople

    • B.

      Rent

    • C.

      Raw Materials

    • D.

      Packaging

    • E.

      Shipping/Delivery Charges

    Correct Answer
    B. Rent
    Explanation
    Rent is considered a fixed cost because it remains constant regardless of the level of production or sales. It is a recurring expense that the company must pay regularly, such as monthly or annually, regardless of the business activity. Unlike variable costs, which fluctuate with production or sales volume, rent remains the same and is not directly influenced by changes in the level of output. Therefore, it is classified as a fixed cost.

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  • 4. 

    If TC(Q) = 1000Q2 + 100Q + 10, what is the formula for AC(Q)?

    • A.

      2000Q + 100

    • B.

      2000Q2 + 100Q

    • C.

      1000Q2 + 100Q + 10

    • D.

      1000Q + 100 +10/Q

    • E.

      100Q + 10 + 1/Q

    Correct Answer
    D. 1000Q + 100 +10/Q
    Explanation
    The formula for AC(Q) can be found by taking the derivative of TC(Q) with respect to Q and dividing it by Q. This will give us the average cost per unit, which is the formula for AC(Q). The given answer, 1000Q + 100 + 10/Q, matches this criteria and is therefore the correct formula for AC(Q).

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  • 5. 

    Which of the following best describes marginal cost?

    • A.

      The per-unit-of-output cost for a product

    • B.

      The incremental cost of producing one more unit of output

    • C.

      A cost invariant to the farm's output

    • D.

      The sum of all costs associate with the production of a product

    • E.

      The cost of fixed items such as general and administrative expenses

    Correct Answer
    B. The incremental cost of producing one more unit of output
    Explanation
    Marginal cost refers to the additional cost incurred in producing one more unit of output. It is the cost that increases when production is increased by one unit. This concept is important for businesses to determine the optimal level of production and pricing strategies. By understanding the marginal cost, businesses can make informed decisions about how much to produce and at what price to sell their products.

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  • 6. 

    Which of the following statements is true regarding the relationship between average and marginal cost functions?

    • A.

      When average cost is a decreasing function of output, marginal cost is greater than average cost

    • B.

      When average cost neither increases or decreases (because it is constant or at a minimum point), marginal cost is equal to average cost

    • C.

      The average cost function is always smaller than the marginal cost function

    • D.

      The average cost function is always greater than the marginal cost function

    • E.

      When average cost is an increasing function of output, marginal cost is less than average cost

    Correct Answer
    B. When average cost neither increases or decreases (because it is constant or at a minimum point), marginal cost is equal to average cost
    Explanation
    When the average cost is constant or at a minimum point, it means that the additional cost of producing one more unit of output is equal to the average cost. This is because the average cost is not changing with each additional unit produced. Therefore, the marginal cost is equal to the average cost in this situation.

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  • 7. 

    What is a sunk cost?

    • A.

      A cost that can be avoided if certain choices are made

    • B.

      A cost that always varies with the output of a factory

    • C.

      The average cost of operating a plant

    • D.

      The "lower envelop" of short-run average cost functions

    • E.

      A cost incurred no matter what the decision is and cannot be avoided

    Correct Answer
    E. A cost incurred no matter what the decision is and cannot be avoided
    Explanation
    A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of the decision made. It is a cost that is independent of any future choices or actions. Sunk costs are irrelevant to decision-making because they cannot be changed or avoided. Therefore, regardless of the decision made, the sunk cost will remain the same and cannot be recovered.

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  • 8. 

    Suppose an entrepreneur starts a business earning $2M in revenue in 2009 while at the same time incurring $1.8M in costs. If the entrepreneur's best outside alternative employment opportunity is to earn $300K, what are the firms accounting and economic profits?

    • A.

      $200K, -$100K

    • B.

      $200K, $100K

    • C.

      $300K, $100K

    • D.

      $300K, -$100K

    • E.

      $200K, $200K

    Correct Answer
    A. $200K, -$100K
    Explanation
    The firm's accounting profit is $200K because it is calculated by subtracting the total costs ($1.8M) from the total revenue ($2M). However, the firm's economic profit is -$100K because it takes into account the opportunity cost of the entrepreneur's best alternative employment opportunity ($300K). Therefore, the economic profit is calculated by subtracting the total costs and the opportunity cost from the total revenue.

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  • 9. 

    Which of the following variables does not influnce the quantity of product that a firm is able to sell?

    • A.

      Price of the product

    • B.

      Price of related products

    • C.

      Plant production costs

    • D.

      Incomes and testes of consumers

    • E.

      Advertising

    Correct Answer
    C. Plant production costs
    Explanation
    Plant production costs do not directly influence the quantity of product that a firm is able to sell. While these costs can impact the firm's profitability and pricing decisions, they do not have a direct effect on the demand for the product or the firm's ability to sell it. Factors such as price of the product, price of related products, incomes and tastes of consumers, and advertising can all have a direct impact on the quantity of product that a firm is able to sell.

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  • 10. 

    In which of the following markets is a consumer less sensitive to price?

    • A.

      Airlines

    • B.

      Refrigerators

    • C.

      Health Care

    • D.

      Computer components

    • E.

      Washing Machines

    Correct Answer
    C. Health Care
    Explanation
    In the health care market, consumers are generally less sensitive to price because their primary concern is their health and well-being, rather than the cost of the services or products. Health care is often considered a necessity, and consumers are willing to pay higher prices for quality care and treatments. Additionally, health care decisions are often made based on the advice of medical professionals, rather than solely on price considerations. Therefore, consumers in the health care market tend to be less price-sensitive compared to other markets.

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  • 11. 

    Which of the following best describes marginal revenue?

    • A.

      How sales revenue varies as a function of how much product is sold

    • B.

      The incremental sales from producing one more unit of output

    • C.

      Rate of change in total revenue that results from the sale of ∆Q additional units of output

    • D.

      The total sales for a given product based on plant output

    • E.

      Percentage change in quantity divided by percentage change in price

    Correct Answer
    C. Rate of change in total revenue that results from the sale of ∆Q additional units of output
    Explanation
    Marginal revenue refers to the rate of change in total revenue that occurs when selling additional units of output. It represents the incremental sales generated from producing one more unit of a product. This concept helps businesses understand how their sales revenue varies as a function of the quantity of products sold. By analyzing marginal revenue, companies can make informed decisions about production levels and pricing strategies to maximize their profits.

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  • 12. 

    At what point can a firm achieve a profit maximizing quantity?

    • A.

      MR > MC

    • B.

      MC = D

    • C.

      MR < MC

    • D.

      MR = D

    • E.

      MR = MC

    Correct Answer
    C. MR < MC
    Explanation
    A firm can achieve a profit maximizing quantity when MR (Marginal Revenue) is greater than MC (Marginal Cost). This means that the additional revenue generated from producing and selling one more unit is higher than the additional cost incurred. At this point, the firm can increase its profits by producing and selling more units. In the given answer, MR is less than MC, indicating that the firm has not yet reached the profit maximizing quantity.

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  • 13. 

    Which characteristic does not describe a perfectly competitive market?

    • A.

      Firms produce identical or nearly identical products

    • B.

      Market price is beyond the control of any individual firm

    • C.

      A firm's demand curve is perfectly horizontal at the market price

    • D.

      Industry-level price elasticity is finite

    • E.

      Firm-level price elasticity of demand facing another perfect competitor is infinite

    Correct Answer
    D. Industry-level price elasticity is finite
    Explanation
    A perfectly competitive market is characterized by firms producing identical or nearly identical products, where the market price is beyond the control of any individual firm. Additionally, a firm's demand curve is perfectly horizontal at the market price, meaning that the firm can sell any quantity of its product at that price. However, in a perfectly competitive market, the industry-level price elasticity is infinite, not finite. This means that a small change in price would result in an infinitely large change in quantity demanded.

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  • 14. 

    What is a Nash equilibrium?

    • A.

      A state where each player is doing the best it can, given the strategies of all other players

    • B.

      A state where the sum of all payoffs is maximized

    • C.

      A state where the players always have achieved their best possible result

    • D.

      A state at which MR = MC for a firm

    • E.

      A state where each player always must play a dominant strategy

    Correct Answer
    A. A state where each player is doing the best it can, given the strategies of all other players
    Explanation
    A Nash equilibrium is a state in which each player is doing the best they can, given the strategies of all other players. In this state, no player has an incentive to unilaterally deviate from their chosen strategy, as it would not lead to a better outcome for them. It is a stable point where all players are optimizing their choices based on the actions of others, resulting in a balanced outcome.

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  • 15. 

    Suppose a factory is producing 100 units and the price of each unit is $10. If raising the price to $12 per unit results in a drop in sales of 12 units, what is the price elasticity of demand, ƞ?

    • A.

      6

    • B.

      0.6

    • C.

      1.67

    • D.

      0.8

    • E.

      0.17

    Correct Answer
    B. 0.6
    Explanation
    The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. In this case, the price is raised from $10 to $12, resulting in a drop in sales of 12 units. To calculate the price elasticity of demand, we use the formula: ƞ = (% change in quantity demanded) / (% change in price). The % change in quantity demanded is (-12 / 100) * 100 = -12%. The % change in price is (2 / 10) * 100 = 20%. Therefore, the price elasticity of demand is (-12 / 20) = -0.6, which is the absolute value of 0.6. So, the correct answer is 0.6.

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  • 16. 

    In what special situation might the law of demand not hold?

    • A.

      In a perfectly competitive market

    • B.

      When there is a high price elasticity of demand

    • C.

      When MR = MC

    • D.

      At the Nash Equilibrium

    • E.

      If high prices confer prestige

    Correct Answer
    E. If high prices confer prestige
    Explanation
    In certain situations, the law of demand may not hold true, such as when high prices confer prestige. In this scenario, the demand for a product might actually increase as the price increases because consumers associate high prices with exclusivity and status. This phenomenon is often observed in luxury goods or high-end brands, where consumers are willing to pay more to demonstrate their wealth and social status. Therefore, in this special situation, the law of demand, which states that as the price of a product increases, the quantity demanded decreases, does not hold.

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  • 17. 

    If ƞ = 0.8 and P = $25, what is MR?

    • A.

      $20

    • B.

      $6.25

    • C.

      -$5

    • D.

      -$6.25

    • E.

      $5

    Correct Answer
    D. -$6.25
    Explanation
    The given question is asking for the marginal revenue (MR) when ƞ (elasticity of demand) is 0.8 and P (price) is $25. The negative sign in front of the answer indicates that the MR is negative, meaning that a decrease in price will lead to an increase in total revenue. The value of -$6.25 suggests that for every $1 decrease in price, the total revenue will increase by $6.25.

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  • 18. 

    What is the revenue destructiob effect?

    • A.

      The loss in revenue a firm incurs on units it would have sold at a higher price when reducing price to sell extra units

    • B.

      The loss in revenue a firm incurs as a result of selling fewer units of output when raising price to increase profit

    • C.

      The loss in revenue a firm incurs due to brand level elasticities

    • D.

      The loss in revenue a firm incurs due to being in a perfectly competitive market

    • E.

      The loss in revenue a firm incurs due to predatory pricing

    Correct Answer
    A. The loss in revenue a firm incurs on units it would have sold at a higher price when reducing price to sell extra units
    Explanation
    The revenue destruction effect refers to the loss in revenue that a firm experiences when it reduces the price of its products in order to sell additional units. This loss occurs because the firm is selling these extra units at a lower price than it could have sold them for, resulting in a decrease in overall revenue.

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