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Test How Deep Your Knowledge Is On Microeconomics! - Quiz

The Costs of Production

Questions and Answers
  • 1. 

    Total revenue equals the quantity of output the firm produces times the price at which it sells its output

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because total revenue is calculated by multiplying the quantity of output produced by the firm with the price at which it sells its output. This means that as the firm increases its output or raises the price of its product, the total revenue will also increase. Conversely, if the firm decreases its output or lowers the price, the total revenue will decrease. Therefore, the relationship between quantity of output, price, and total revenue is directly proportional.

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  • 2. 

    Wages and salaries paid to workers are an example of implicit costs of production

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Wages and salaries paid to workers are not an example of implicit costs of production. Implicit costs refer to the opportunity costs of using resources that a firm already owns, such as the owner's time or the cost of using the firm's own capital. Wages and salaries paid to workers, on the other hand, are explicit costs as they involve actual monetary payments made by the firm to its workers. Therefore, the statement is false.

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  • 3. 

    If total revenue is $100, explicit costs are $50, and implicit costs are $30, then accounting profit equals $50

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The accounting profit is calculated by subtracting explicit costs from total revenue. In this case, the total revenue is $100 and the explicit costs are $50, so the accounting profit would be $100 - $50 = $50. Therefore, the statement that accounting profit equals $50 is true.

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  • 4. 

    If there are implicit costs of production, accounting profits will exceed economic profits

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    If there are implicit costs of production, it means that the resources used in production have alternative uses and therefore have an opportunity cost. Accounting profits only take into account explicit costs, such as wages and materials, and do not consider the opportunity cost of resources. On the other hand, economic profits take into account both explicit and implicit costs. Therefore, if there are implicit costs, accounting profits will be higher than economic profits, making the statement true.

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  • 5. 

    When a production function gets flatter, the marginal product is increasing

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    When a production function gets flatter, it means that the increase in inputs leads to a smaller increase in output. In other words, the marginal product of each additional unit of input decreases. Therefore, the marginal product is not increasing when a production function gets flatter.

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  • 6. 

    If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When a firm continues to hire more workers within the same size factory, it will eventually experience diminishing marginal product. This means that the additional output produced by each additional worker will decrease over time. This occurs because the factory's fixed resources, such as machinery and space, remain constant while the number of workers increases. As a result, each worker has less access to these resources, leading to a decrease in their productivity. This concept is a fundamental principle in economics and helps explain why firms must carefully consider the optimal number of workers to hire.

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  • 7. 

    If the production function for a firm exhibits diminishing marginal product, the corresponding total-cost curve for the firm will become flatter as the quantity of output expands

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    If the production function exhibits diminishing marginal product, it means that each additional unit of input will result in a smaller increase in output. As a result, the firm will have to increase its inputs at a faster rate to produce more output. This implies that the total cost of production will increase at a faster rate as the quantity of output expands, leading to a steeper total-cost curve rather than a flatter one. Therefore, the statement is false.

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  • 8. 

    Fixed cost plus variable costs equal total costs

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    This statement is true because fixed costs are costs that do not change regardless of the level of production or sales, such as rent or salaries. Variable costs, on the other hand, are costs that vary with the level of production or sales, such as raw materials or direct labor. When fixed costs and variable costs are added together, they equal the total costs incurred by a business. Therefore, the statement "Fixed cost plus variable costs equal total costs" is true.

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  • 9. 

    Average total costs are total costs divided by marginal costs

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because average total costs are total costs divided by quantity, not marginal costs. Marginal costs refer to the additional cost incurred from producing one additional unit, while average total costs take into account the total costs incurred for producing all units. Therefore, the correct calculation for average total costs is dividing total costs by quantity, not marginal costs.

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  • 10. 

    When marginal costs are below average total costs, average total costs must be falling

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When marginal costs are below average total costs, it means that the cost of producing an additional unit is lower than the average cost of producing all units. This suggests that the average cost per unit is decreasing as more units are produced. Therefore, it can be concluded that average total costs must be falling.

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  • 11. 

    If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will be U-shaped

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    As the quantity produced increases, the production function initially exhibits increasing marginal product, meaning that each additional unit of input leads to a greater increase in output. However, at a certain point, the production function starts to exhibit diminishing marginal product, where the additional output from each additional unit of input decreases. This change in the production function leads to a U-shaped marginal-cost curve. Initially, the marginal cost decreases as the increasing marginal product leads to lower production costs. However, as the diminishing marginal product sets in, the marginal cost starts to increase due to the diminishing returns. Therefore, the statement is true.

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  • 12. 

    The average-total-cost curve crosses the marginal-cost curve at the minimum of the marginal-cost curve

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The average-total-cost curve does not necessarily cross the marginal-cost curve at the minimum of the marginal-cost curve. In some cases, the average-total-cost curve may intersect the marginal-cost curve at a point above or below the minimum of the marginal-cost curve. Therefore, the statement is false.

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  • 13. 

    The average-total-cost curve in the long run is flatter than the average-total-cost curve in the short run

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In the long run, firms have more flexibility to adjust their inputs and production processes, which allows them to achieve economies of scale and reduce their average total costs. This means that as the level of output increases, the increase in average total cost is relatively smaller in the long run compared to the short run. Therefore, the average-total-cost curve in the long run is flatter than the average-total-cost curve in the short run.

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  • 14. 

    The efficient scale for a firm is the quantity of output the minimizes marginal cost

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The efficient scale for a firm is the quantity of output that maximizes its profits, not minimizes marginal cost. The efficient scale occurs when the firm produces at the point where marginal cost equals marginal revenue, resulting in the highest level of profit. Therefore, the given statement is false.

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  • 15. 

    In the long run, as a firm expands its production facilities, it generally first experiences diseconomies of scale then constant returns to scale, and finally economies of scale

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because, in the long run, as a firm expands its production facilities, it generally first experiences economies of scale, then constant returns to scale, and finally diseconomies of scale. Economies of scale occur when the firm's average cost decreases as it increases its production scale. Constant returns to scale happen when the firm's average cost remains constant as it expands. Diseconomies of scale occur when the firm's average cost increases as it continues to expand. Therefore, the correct order is economies of scale, constant returns to scale, and then diseconomies of scale.

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  • 16. 

    Accounting profit is equal to total revenue minus

    • A.

      Implicit costs

    • B.

      Explicit costs

    • C.

      The sum of implicit and explicit costs

    • D.

      Marginal costs

    • E.

      Variable costs

    Correct Answer
    B. Explicit costs
    Explanation
    Accounting profit is calculated by subtracting explicit costs from total revenue. Explicit costs refer to the actual, tangible expenses incurred by a business, such as wages, rent, utilities, and raw materials. These costs are easily quantifiable and are directly deducted from revenue to determine the accounting profit. Implicit costs, on the other hand, represent the opportunity cost of using resources in a certain way, such as the foregone income from using personal savings instead of investing them elsewhere. However, implicit costs are not included in the calculation of accounting profit. Therefore, the correct answer is explicit costs.

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  • 17. 

    Economic profit is equal to total revenue minus

    • A.

      Implicit costs

    • B.

      Explicit costs

    • C.

      The sum of the implicit and explicit costs

    • D.

      Marginal costs

    • E.

      Variable costs

    Correct Answer
    C. The sum of the implicit and explicit costs
    Explanation
    Economic profit is a measure of the overall profitability of a business and is calculated by subtracting all costs, both implicit and explicit, from total revenue. Implicit costs refer to the opportunity costs of using resources in one way instead of another, while explicit costs are the actual out-of-pocket expenses incurred by a business. By considering both implicit and explicit costs, the calculation of economic profit provides a more comprehensive picture of the true financial performance of a business.

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  • 18. 

    If there are implicit costs of production

    • A.

      Economic profit will exceed accounting profit

    • B.

      Accounting profit will exceed economic profit

    • C.

      Economic profit and accounting profit will be equal

    • D.

      Economic profit will always be zero

    • E.

      Accounting profit will always be zero

    Correct Answer
    B. Accounting profit will exceed economic profit
    Explanation
    The correct answer is that accounting profit will exceed economic profit. This means that when there are implicit costs of production, the accounting profit, which only takes into account explicit costs, will be higher than the economic profit, which considers both explicit and implicit costs. Implicit costs refer to the opportunity costs of using resources in a certain way, while explicit costs are the actual out-of-pocket expenses. Therefore, when implicit costs are taken into account, the economic profit will be lower than the accounting profit.

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  • 19. 

    If a production function exhibits diminishing marginal product, its slope

    • A.

      Becomes flatter as the quantity of the input increases

    • B.

      Becomes steeper as the quantity of the input increases

    • C.

      Is linear (a straight line)

    • D.

      Could be any of the above

    Correct Answer
    A. Becomes flatter as the quantity of the input increases
    Explanation
    If a production function exhibits diminishing marginal product, it means that as the quantity of the input increases, the additional output produced by each additional unit of input decreases. This implies that the slope of the production function becomes flatter as the quantity of the input increases. As more input is added, the increase in output becomes smaller, resulting in a less steep slope. Therefore, the correct answer is that the slope becomes flatter as the quantity of the input increases.

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  • 20. 

    If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve

    • A.

      Becomes flatter as the quantity of output increases

    • B.

      Become steeper as the quantity of output increases

    • C.

      Is linear (a straight line)

    • D.

      Could be any of the above

    Correct Answer
    B. Become steeper as the quantity of output increases
    Explanation
    Diminishing marginal product means that as the quantity of output increases, the additional output produced from each additional unit of input decreases. This implies that the cost of producing each additional unit of output increases. Therefore, the slope of the total-cost curve becomes steeper as the quantity of output increases.

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  • 21. 

    Which of the following is a variable cost in the short run?

    • A.

      Wages paid to factory labor

    • B.

      Payment on the lease for factory equipment

    • C.

      Rent on the factory

    • D.

      Interest payments on borrowed financial capital

    • E.

      Salaries paid to upper management

    Correct Answer
    A. Wages paid to factory labor
    Explanation
    In the short run, wages paid to factory labor are considered a variable cost. This is because the number of workers can be adjusted based on the production needs. If the company needs to increase production, they can hire more workers, and if they need to decrease production, they can lay off workers. The cost of wages will vary depending on the number of workers employed, making it a variable cost.

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  • 22. 

    When marginal costs are below average total costs

    • A.

      Average fixed costs are rising

    • B.

      Average total costs are falling

    • C.

      Average total costs are are rising

    • D.

      average total costs are minimized

    Correct Answer
    B. Average total costs are falling
    Explanation
    When marginal costs are below average total costs, it means that the additional cost of producing one more unit is less than the average cost of producing all units. This suggests that the average total costs are falling because the additional cost of production is lower than the average cost. In other words, as more units are produced, the average cost per unit decreases, resulting in falling average total costs.

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  • 23. 

    If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will

    • A.

      Slope upward

    • B.

      Be U-shaped

    • C.

      Slope downward

    • D.

      Be flat (horizontal)

    Correct Answer
    B. Be U-shaped
    Explanation
    The U-shaped marginal-cost curve is the most likely outcome when a production function initially shows increasing marginal product and later exhibits diminishing marginal product. Initially, as more units are produced, the marginal product increases, leading to lower marginal costs. However, as production continues to increase, the marginal product starts to decrease, resulting in higher marginal costs. This pattern creates a U-shaped curve, indicating that the marginal cost initially decreases and then increases.

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  • 24. 

    In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience

    • A.

      Economies of scale

    • B.

      Constant returns to scale

    • C.

      Diseconomies of scale

    • D.

      An increase in average total costs

    Correct Answer
    A. Economies of scale
    Explanation
    When a small factory expands its scale of operations, it is likely to experience economies of scale. This means that as the factory grows, it can benefit from cost savings and increased efficiency. By producing a larger quantity of goods, the factory can spread its fixed costs over a greater number of units, resulting in lower average costs. Additionally, the factory may be able to negotiate better deals with suppliers and take advantage of bulk purchasing discounts. Overall, expanding the scale of operations can lead to economies of scale, allowing the factory to operate more efficiently and reduce costs.

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  • 25. 

    The efficient scale of production is the quantity of output that minimizes

    • A.

      Average total cost

    • B.

      Marginal cost

    • C.

      Average fixed cost

    • D.

      Average variable cost

    Correct Answer
    A. Average total cost
    Explanation
    The efficient scale of production is the quantity of output that minimizes average total cost. This means that it is the level of production at which the average cost per unit is the lowest. At this point, the firm is able to achieve maximum efficiency in its production process, resulting in lower costs. By minimizing average total cost, the firm can maximize its profits and remain competitive in the market.

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  • 26. 

    Which of the following statements is true? 

    • A.

      All costs are fixed in the long run

    • B.

      All costs are variable in the long run

    • C.

      All costs are fixed in the short run

    • D.

      All costs are variable in the short run

    Correct Answer
    B. All costs are variable in the long run
    Explanation
    In the long run, all costs are variable because a firm has more flexibility to adjust its inputs, such as labor and capital, in response to changes in production levels. Fixed costs, which are costs that do not change with the level of output, can be adjusted in the long run by changing the scale of production or shutting down operations. Variable costs, on the other hand, are costs that change with the level of output and can be easily adjusted in the long run by changing the quantity of inputs used. Therefore, the statement "All costs are variable in the long run" is true.

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Jan 18, 2016
    Quiz Created by
    Abdulwaris786

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