Business Quiz: Production And Costs

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Business Quiz: Production And Costs - Quiz

In any business, production and cost are two pivotal processes regarding a business's success and profit. You need to be making sure that the cost of your production does not outweigh the money being brought in. So, let's see how much knowledge do you have about the topic.


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 increases the price of its output, the total revenue will also increase. Conversely, if the firm decreases its output or decreases the price of its output, the total revenue will decrease. Therefore, the statement accurately describes the relationship between total revenue, quantity of output, and price.

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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 are already owned by the firm, such as the foregone income from using the owner's own capital or the foregone income from using the owner's own land. Wages and salaries paid to workers are explicit costs, as they involve actual monetary payments to individuals for their labor services. Therefore, the correct answer 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 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
    Implicit costs refer to the opportunity costs of using resources in a particular way, such as the foregone income from using one's own time or the foregone interest from using one's own capital. Accounting profits only consider explicit costs, such as wages and rent, while economic profits take into account both explicit and implicit costs. Therefore, if there are implicit costs of production, accounting profits will not fully capture the true cost of production, resulting in economic profits being lower than accounting profits. Hence, the statement is 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 decreases as more inputs are added. Therefore, the statement that the marginal product is increasing when a production function gets flatter is false.

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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 while keeping the factory size constant, it will eventually experience diminishing marginal product. This means that each additional worker contributes less and less to the overall output of the firm. This occurs because the fixed resources in the factory, such as machinery and equipment, are being shared among more workers, leading to less productivity per worker. As a result, the firm's production efficiency decreases, indicating diminishing marginal product.

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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 input at a faster rate to produce more output. This implies that the total cost of production will increase at an increasing rate as the quantity of output expands. Therefore, the corresponding total-cost curve will become steeper, not flatter. Hence, the correct answer is False.

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  • 8. 

    Fixed cost plus variable costs equal total costs.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because fixed costs are costs that do not change regardless of the level of production or sales, while variable costs are costs that vary with the level of production or sales. When you add the fixed costs to the variable costs, you get the total costs, which represent the overall expenses incurred by a business. Therefore, fixed cost plus variable costs do equal total costs.

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  • 9. 

    Average total costs are total costs divided by marginal costs.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    This statement is false because average total costs are actually total costs divided by the quantity of output produced, not by marginal costs. Marginal costs, on the other hand, represent the additional cost of producing one more unit of output. Therefore, the correct relationship is that average total costs are equal to total costs divided by the quantity of output, not by 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 additional cost of producing one more unit is less 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 in this scenario.

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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, a production function first 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 each additional unit of input leads to a smaller increase in output. This change in the production function is reflected in the marginal-cost curve, which also becomes U-shaped. Initially, the marginal cost decreases as the increasing marginal product leads to more efficient production. But 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 fact, the average-total-cost curve typically intersects the marginal-cost curve at its lowest point when the marginal-cost curve is below the average-total-cost curve. This is because when the marginal-cost curve is below the average-total-cost curve, producing additional units of output actually reduces the average cost, resulting in a downward slope for the average-total-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, a firm has more flexibility to adjust its inputs and make changes to its production process. This means that it can achieve economies of scale and reduce its average total cost. As a result, the average-total-cost curve in the long run is flatter compared to the short run, where the firm may face more fixed costs and less flexibility. Therefore, the statement is true.

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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 the firm's average total cost, not minimizes marginal cost. At the efficient scale, the firm achieves the lowest average total cost per unit of output, indicating optimal production efficiency. Minimizing marginal cost is not necessarily equivalent to achieving the most efficient scale, as marginal cost represents the additional cost of producing one more unit of output, which may not always align with achieving the lowest average total cost.

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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 given statement is false. In the long run, as a firm expands its production facilities, it generally experiences economies of scale first, followed by constant returns to scale, and finally diseconomies of scale. Economies of scale occur when a firm's average costs decrease as it increases its scale of production, while diseconomies of scale occur when a firm's average costs increase as it expands. Constant returns to scale, on the other hand, occur when a firm's average costs remain constant as it changes its scale of production.

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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 are the actual out-of-pocket expenses incurred in running a business, such as wages, rent, and utilities. Implicit costs, on the other hand, refer to the opportunity costs of using resources in a particular way, such as the foregone income from using personal savings instead of investing them. Since accounting profit only considers explicit costs, it does not take into account the opportunity costs or implicit costs. 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 total profit earned by a business after accounting for both explicit and implicit costs. Implicit costs refer to the opportunity costs of using resources for a particular business venture, such as the foregone income from alternative uses of those resources. Explicit costs, on the other hand, are the actual out-of-pocket expenses incurred by the business. Therefore, the correct answer is "the sum of the implicit and explicit costs" because economic profit takes into account both types of costs to determine the overall profitability 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
    When there are implicit costs of production, accounting profit will exceed economic profit. Accounting profit only takes into account explicit costs, such as wages and rent, while economic profit considers both explicit and implicit costs. Implicit costs refer to the opportunity costs of using resources in a particular way, such as the foregone income from using personal savings or the foregone income from pursuing an alternative business opportunity. Therefore, when implicit costs are taken into account, economic profit will be lower than accounting profit, resulting in accounting profit exceeding economic 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 more of a certain input is added, the additional output produced by each additional unit of that input decreases. This implies that the slope of the production function becomes flatter as the quantity of the input increases. As more units of the input are 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
    If a production function exhibits diminishing marginal product, it means that as the quantity of output increases, the additional output produced by each additional unit of input decreases. This implies that the cost of producing each additional unit of output increases. Therefore, the slope of the corresponding 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 level of production. If the production needs to be increased, more workers can be hired, leading to higher labor costs. Conversely, if the production needs to be decreased, some workers can be laid off, resulting in lower labor costs. Therefore, wages paid to factory labor can vary depending on the level of production and are thus considered a variable cost in the short run.

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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 cost of producing one additional unit is lower than the average cost of producing all units. This indicates that the average total costs are falling because the additional unit is being produced at a lower cost than the average. This can be due to economies of scale or efficient production processes. As a result, the overall average cost of production decreases, leading to 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 corresponds to a production function that initially exhibits increasing marginal product and later diminishing marginal product. This means that as the quantity produced increases, the additional output gained from each additional unit of input initially increases, reaches a maximum point, and then starts to decrease. This pattern is reflected in the U-shaped marginal-cost curve, where the cost of producing each additional unit initially decreases, reaches a minimum point, and then starts to increase. Therefore, the correct answer is that the marginal-cost curve will be U-shaped.

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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 in the long run, it is likely to experience economies of scale. This means that as the factory increases its production levels, it can benefit from cost savings and efficiency improvements. These cost savings can be achieved through factors such as bulk purchasing, specialization of labor, and improved technology. As a result, the average total costs of production are expected to decrease, leading to economies of scale.

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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 producing at this level allows the company to achieve the lowest average cost per unit of output. By minimizing average total cost, the company can maximize its profitability and efficiency in production. This is because average total cost takes into account both fixed and variable costs, making it a comprehensive measure of production costs. Therefore, the efficient scale of production is the level at which average total cost is minimized.

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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. This means that in the long run, a firm can adjust all of its costs, including both fixed and variable costs. Fixed costs are expenses that do not change with the level of production, such as rent or salaries, while variable costs are expenses that do change with the level of production, such as raw materials or labor. In the long run, a firm can make decisions to change its production capacity, technology, or inputs, which allows it to adjust both fixed and variable costs to optimize its operations.

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