Theory Of Production And Cost

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Theory Of Production And Cost - Quiz


Questions and Answers
  • 1. 

    Which of the following is considered production in Economics?

    • A.

      Tilling of soil.

    • B.

      Singing a song before friends.

    • C.

      Preventing a child from falling into a manhole on the road.

    • D.

      Painting a picture for pleasure.

    Correct Answer
    A. Tilling of soil.
    Explanation
    Tilling of soil is considered production in Economics because it involves the transformation of raw materials (the soil) into a final product (prepared soil for farming). This process adds value to the raw material and contributes to the production of goods or services. Singing a song before friends, preventing a child from falling into a manhole, and painting a picture for pleasure do not involve the creation of goods or services for the purpose of economic production.

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  • 2. 

    Identify the correct statement :

    • A.

      The average product is at its maximum when marginal product is equal to average product.

    • B.

      The law of increasing returns to scale relates to the effect of changes in factor proportions.

    • C.

      Economies of scale arise only because of indivisibilities of factor proportions.

    • D.

      Internal economies of scale can accrue only to the exporting sector.

    Correct Answer
    A. The average product is at its maximum when marginal product is equal to average product.
    Explanation
    The statement "The average product is at its maximum when marginal product is equal to average product" is correct. This is because the average product is calculated by dividing the total product by the quantity of input used, while the marginal product is the additional output produced by using one additional unit of input. When the marginal product is equal to the average product, it means that each additional unit of input is contributing the same amount of output as the average. This indicates that the resources are being used efficiently and the average product is maximized.

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  • 3. 

    Which of the following is not a characteristic of land? 

    • A.

      Its supply for the economy is limited.

    • B.

      It is immobile.

    • C.

      Its usefulness depends on human efforts.

    • D.

      It is produced by our forefathers.

    Correct Answer
    D. It is produced by our forefathers.
    Explanation
    Land is a natural resource and is not produced by human beings. It is a gift of nature and has been present since the beginning of time. Therefore, the statement "It is produced by our forefathers" is not a characteristic of land.

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  • 4. 

     Which of the following statements is true?

    • A.

      Accumulation of capital depends solely on income.

    • B.

      Savings can also be affected by the State.

    • C.

      External economies go with size and internal economies with location.

    • D.

      The supply curve of labour is an upward slopping curve.

    Correct Answer
    B. Savings can also be affected by the State.
    Explanation
    The statement "Savings can also be affected by the State" is true because the government can influence savings behavior through various policies and regulations. For example, the state can provide tax incentives for saving, implement policies that encourage saving for retirement, or offer government-backed savings programs. Additionally, the state can also affect savings indirectly through its economic policies, such as interest rates or inflation rates, which can impact individuals' willingness and ability to save. Therefore, the state plays a role in shaping the level of savings in an economy.

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  • 5. 

    In the production of wheat, all of the following are variable factors that are used by the  farmer except :                                                                                                                                        

    • A.

      The seed and fertilizer used when the crop is planted.

    • B.

      The field that has been cleared of trees and in which the crop is planted.

    • C.

      The tractor used by the farmer in planting and cultivating not only wheat but also

    • D.

      The number of hours that the farmer spends in cultivating the wheat fields.

    Correct Answer
    B. The field that has been cleared of trees and in which the crop is planted.
    Explanation
    The field that has been cleared of trees and in which the crop is planted is not a variable factor in the production of wheat. Once the field has been cleared and prepared for planting, it remains constant throughout the production process. The other factors mentioned - seed and fertilizer, tractor, and the number of hours spent by the farmer - are all variable factors that can be adjusted and have an impact on the production of wheat.

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  • 6. 

    The marginal product of a variable input is best described as:                                              

    • A.

      Total product divided by the number of units of variable input.

    • B.

      The additional output resulting from a one unit increase in the variable input.

    • C.

      The additional output resulting from a one unit increase in both the variable and fixed inputs

    • D.

      The ratio of the amount of the variable input that is being used to the amount of the fixed input that is being used.

    Correct Answer
    B. The additional output resulting from a one unit increase in the variable input.
    Explanation
    The marginal product of a variable input refers to the additional output that is obtained from increasing the quantity of the variable input by one unit. It measures the change in total product resulting from a small change in the variable input. This concept helps to understand the productivity of each additional unit of input and is an important factor in determining optimal production levels.

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  • 7. 

    Diminishing marginal returns implies:                                                                                   

    • A.

      Decreasing average variable costs.

    • B.

      Decreasing marginal costs.

    • C.

      Increasing marginal costs.

    • D.

      Decreasing average fixed costs.

    Correct Answer
    C. Increasing marginal costs.
    Explanation
    Diminishing marginal returns implies that as more units of a variable input are added to a fixed input, the additional output produced by each additional unit of the variable input will start to decrease. This means that the marginal cost of producing each additional unit of output will increase. Therefore, the correct answer is "Increasing marginal costs."

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  • 8. 

    The short run, as economists use the phrase, is characterized by:    

    • A.

      At least one fixed factor of production and firms neither leaving nor entering the industry.

    • B.

      A period where the law of diminishing returns does not hold.

    • C.

      No variable inputs - that is all of the factors of production are fixed.

    • D.

      All inputs being variable.

    Correct Answer
    A. At least one fixed factor of production and firms neither leaving nor entering the industry.
    Explanation
    In the short run, there is at least one fixed factor of production, meaning that there is at least one input that cannot be easily changed or adjusted. This could be a fixed amount of capital or a fixed amount of land, for example. Additionally, in the short run, firms are not able to easily enter or exit the industry. This means that the number of firms in the industry remains constant, and new firms cannot enter to compete or existing firms cannot exit to reduce competition.

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  • 9. 

    The marginal, average, and total product curves encountered by the firm producing in the short run exhibit all of the following relationships except:

    • A.

      When total product is rising, average and marginal product may be either rising or falling.

    • B.

      When marginal product is negative, total product and average product are falling.

    • C.

      When average product is at a maximum, marginal product equals average product, and total product is rising.

    • D.

      When marginal product is at a maximum, average product equals marginal product, and total product is rising.

    Correct Answer
    D. When marginal product is at a maximum, average product equals marginal product, and total product is rising.
  • 10. 

    To economists, the main difference between the short run and the long run is that :

    • A.

      In the short run all inputs are fixed, while in the long run all inputs are variable.

    • B.

      In the short run the firm varies all of its inputs to find the least-cost combination of inputs.

    • C.

      In the short run, at least one of the firm's input levels is fixed.

    • D.

      In the long run, the firm is making a constrained decision about how to use existing plant and equipment efficiently.

    Correct Answer
    C. In the short run, at least one of the firm's input levels is fixed.
    Explanation
    In the short run, at least one of the firm's input levels is fixed. This means that the firm cannot adjust or change all of its inputs in the short run. It is limited by the fixed input level, which could be a fixed amount of labor, capital, or any other input. This constraint on input adjustment in the short run affects the firm's decision-making process and its ability to optimize its production and cost efficiency. In contrast, in the long run, all inputs are variable, allowing the firm to adjust and optimize its input levels to achieve the most efficient production process.

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  • 11. 

    Which of the following is the best definition of the aproduction functiona?     

    • A.

      The relationship between market price and quantity supplied.

    • B.

      The relationship between the firm's total revenue and the cost of production.

    • C.

      The relationship between the quantities of inputs needed to produce a given level of output.

    • D.

      The relationship between the quantity of inputs and the firm's marginal cost of production.

    Correct Answer
    C. The relationship between the quantities of inputs needed to produce a given level of output.
    Explanation
    The best definition of the production function is the relationship between the quantities of inputs needed to produce a given level of output. This means that the production function shows how much of each input, such as labor or capital, is required to produce a certain amount of output. It helps to determine the most efficient combination of inputs to achieve a desired level of production.

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  • 12. 

    The alaw of diminishing returnsa applies to :

    • A.

      The short run, but not the long run.

    • B.

      The long run, but not the short rim.

    • C.

      Both the short run and the long run.

    • D.

      Neither the short run nor the long run.

    Correct Answer
    A. The short run, but not the long run.
    Explanation
    The law of diminishing returns states that as one input is increased while keeping other inputs constant, the marginal output will eventually decrease. This law applies to the short run because in the short run, at least one input is fixed and cannot be changed. As a result, increasing the variable input will eventually lead to diminishing returns. However, in the long run, all inputs can be adjusted, allowing for more flexibility and the potential to avoid diminishing returns. Therefore, the law of diminishing returns applies to the short run, but not the long run.

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  • 13. 

    Diminishing returns occur :                                                               

    • A.

      When units of a variable input are added to a fixed input and total product falls.

    • B.

      When units of a variable input are added to a fixed input and marginal product falls.

    • C.

      When the size of the plant is increased in the long run.

    • D.

      When the quantity of the fixed input is increased and returns to the variable input falls.

    Correct Answer
    B. When units of a variable input are added to a fixed input and marginal product falls.
    Explanation
    Diminishing returns occur when units of a variable input are added to a fixed input and marginal product falls. This means that as more units of the variable input are added, the additional output produced by each additional unit decreases. This is because the fixed input, such as machinery or land, has a limited capacity to efficiently utilize the variable input. As a result, the overall productivity of the variable input decreases, leading to diminishing returns.

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  • 14. 

    What is the total output when 2 hours of labour are employed?  

    • A.

      80

    • B.

      100

    • C.

      180

    • D.

      200

    Correct Answer
    C. 180
    Explanation
    The total output when 2 hours of labour are employed is 180. This can be determined by looking at the table provided. When 1 hour of labour is employed, the total output is 100. When 2 hours of labour are employed, the marginal product decreases to 80. Therefore, the total output when 2 hours of labour are employed is the sum of the total output from 1 hour of labour (100) and the marginal product from the second hour of labour (80), which equals 180.

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  • 15. 

    What is the marginal product of the third hour of labour?  

    • A.

      60

    • B.

      80

    • C.

      100

    • D.

      240

    Correct Answer
    A. 60
  • 16. 

    What is the average product of the first three hours of labour?    

    • A.

      60

    • B.

      80

    • C.

      100

    • D.

      240

    Correct Answer
    B. 80
    Explanation
    The average product of the first three hours of labor can be calculated by taking the total output (240) and dividing it by the number of hours (3). This gives us an average product of 80.

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  • 17. 

    Which cost increases continuously with the increase in production?      

    • A.

      Average cost.

    • B.

      Marginal cost.

    • C.

      Fixed cost.

    • D.

      Variable cost.

    Correct Answer
    D. Variable cost.
    Explanation
    Variable cost is the cost that increases continuously with the increase in production. This cost is directly proportional to the level of production, meaning that as production increases, the variable cost also increases. Variable costs include expenses such as raw materials, direct labor, and utilities, which vary depending on the volume of production. In contrast, fixed costs remain constant regardless of the level of production. Therefore, the correct answer is variable cost.

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  • 18. 

    Which of the following cost curves is never 'U' shaped?

    • A.

      Average cost curve.

    • B.

      Marginal cost curve.

    • C.

      Average variable cost curve.

    • D.

      Average fixed cost curve.

    Correct Answer
    D. Average fixed cost curve.
    Explanation
    The average fixed cost curve is never 'U' shaped because it represents the average fixed cost per unit of output. Fixed costs do not change with the level of output, so the average fixed cost curve will continuously decrease as output increases. This is because the fixed costs are spread over a larger number of units, resulting in a lower average fixed cost per unit. Therefore, the average fixed cost curve is always downward sloping and never 'U' shaped.

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  • 19. 

    Total cost in the short run is classified into fixed costs and variable costs. Which one of the following is a variable cost?  

    • A.

      Cost of raw materials.

    • B.

      Cost of equipment.

    • C.

      Interest payment on past borrowings.

    • D.

      Payment of rent on building.

    Correct Answer
    A. Cost of raw materials.
    Explanation
    The cost of raw materials is considered a variable cost because it varies with the level of production. As production increases, the cost of raw materials also increases, and vice versa. In contrast, the cost of equipment, interest payment on past borrowings, and payment of rent on a building are considered fixed costs because they do not change with the level of production in the short run.

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  • 20. 

    In the short run, when the output of a firm increases, its average fixed cost :

    • A.

      Increases.

    • B.

      Decreases.

    • C.

      Remains constant.

    • D.

      First declines and then rises.

    Correct Answer
    B. Decreases.
    Explanation
    In the short run, when the output of a firm increases, its average fixed cost decreases. This is because fixed costs are spread over a larger quantity of output, resulting in a lower average fixed cost. As the firm produces more units, the fixed costs are divided among a greater number of units, reducing the average fixed cost per unit. Therefore, the correct answer is "Decreases".

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  • 21. 

     Which one of the following is also known as planning curve?

    • A.

      Long run average cost curve.

    • B.

      Short run average cost curve.

    • C.

      Average variable cost curve.

    • D.

      Average total cost curve.

    Correct Answer
    A. Long run average cost curve.
    Explanation
    The long run average cost curve is also known as the planning curve because it represents the average cost of production when all inputs can be adjusted in the long run. This curve shows the lowest average cost at which a firm can produce a given level of output when it has the flexibility to change its scale of production. Therefore, it is often used by firms to plan their production levels and make decisions regarding the optimal scale of operation.

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  • 22. 

    The cost of one thing in terms of the alternative given up is known as:

    • A.

      Production cost.

    • B.

      Physical cost.

    • C.

      Real cost.

    • D.

      Opportunity cost.

    Correct Answer
    D. Opportunity cost.
    Explanation
    Opportunity cost refers to the value of the next best alternative that is forgone when making a decision. It represents the cost of choosing one option over another. In this context, the cost of one thing in terms of the alternative given up is referred to as opportunity cost.

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  • 23. 

    With which of the following is the concept of marginal cost closely related?

    • A.

      Variable cost.

    • B.

      Fixed cost.

    • C.

      Opportunity cost.

    • D.

      Economic cost.

    Correct Answer
    A. Variable cost.
    Explanation
    The concept of marginal cost is closely related to variable cost because marginal cost refers to the additional cost incurred when producing one more unit of a product or service. Variable costs are expenses that change in direct proportion to the level of production, such as raw materials or labor costs. Therefore, as production increases, variable costs also increase, resulting in a higher marginal cost. This relationship between marginal cost and variable cost is essential for businesses to determine the most efficient level of production and make informed decisions regarding pricing and resource allocation.

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  • 24. 

    Which of the following statements is correct?

    • A.

      When the average cost is rising, the marginal cost must also be rising.

    • B.

      When the average cost is rising, the marginal cost must be falling.

    • C.

      When the average cost is rising, the marginal cost is above the average cost.

    • D.

      When the average cost is falling, the marginal cost must be rising.

    Correct Answer
    C. When the average cost is rising, the marginal cost is above the average cost.
    Explanation
    When the average cost is rising, it means that the cost per unit of production is increasing. This implies that the marginal cost, which is the cost of producing one additional unit, must be higher than the average cost. This is because the marginal cost represents the additional cost incurred for each additional unit produced, which is likely to be higher than the average cost. Therefore, when the average cost is rising, the marginal cost is above the average cost.

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  • 25. 

    Which of the following is an example of an aexplicit costa?

    • A.

      The wages a proprietor could have made by working as an employee of a large firm.

    • B.

      The income that could have been earned in alternative uses by the resources owned by the firm.

    • C.

      The payment of wages by the firm.

    • D.

      The normal profit earned by a firm.

    Correct Answer
    C. The payment of wages by the firm.
    Explanation
    The payment of wages by the firm is an example of an explicit cost. Explicit costs are the actual out-of-pocket expenses incurred by a firm in producing goods or services. In this case, the firm is directly paying wages to its employees, which is a clear and tangible cost that can be easily identified and measured.

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  • 26. 

     Which of the following is an example of an aimplicit costa?     

    • A.

      Interest that could have been earned on retained earnings used by the firm to finance expansion.

    • B.

      The payment of rent by the firm for the building in which it is housed.

    • C.

      The interest payment made by the firm for funds borrowed from a bank.

    • D.

      The payment of wages by the firm.

    Correct Answer
    A. Interest that could have been earned on retained earnings used by the firm to finance expansion.
    Explanation
    The correct answer is "Interest that could have been earned on retained earnings used by the firm to finance expansion." This is an example of an implicit cost because it represents the opportunity cost of using retained earnings for expansion instead of investing them to earn interest. Implicit costs are not explicit out-of-pocket expenses, but rather the value of resources that could have been used in an alternative way. In this case, the firm is forgoing potential interest income by using the retained earnings for expansion.

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  • 27. 

    The average fixed cost of 2 units of output is :

    • A.

      Rs.80

    • B.

      Rs.85

    • C.

      Rs.120

    • D.

      Rs.205

    Correct Answer
    C. Rs.120
    Explanation
    The average fixed cost of 2 units of output is Rs.120. This can be calculated by dividing the total fixed cost by the number of units of output. In this case, the total fixed cost is Rs.240 and the number of units of output is 2. Therefore, Rs.240 divided by 2 is equal to Rs.120, which is the average fixed cost of 2 units of output.

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  • 28. 

    The marginal cost of the sixth unit of output is :  

    • A.

      Rs.133

    • B.

      Rs.75

    • C.

      Rs.80

    • D.

      Rs.450

    Correct Answer
    C. Rs.80
    Explanation
    The marginal cost of the sixth unit of output can be calculated by finding the difference in total cost between producing five units and six units. In this case, the total cost of producing five units is Rs.540 and the total cost of producing six units is Rs.610. The difference between these two costs is Rs.70. Therefore, the marginal cost of the sixth unit of output is Rs.70.

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  • 29. 

     Diminishing marginal returns start to occur between units :  

    • A.

      2 and 3

    • B.

      3 and 4

    • C.

      4 and 5

    • D.

      5 and 6

    Correct Answer
    C. 4 and 5
    Explanation
    The concept of diminishing marginal returns states that as more units of a variable input are added to a fixed input, the marginal output or productivity of each additional unit of the variable input will eventually start to decrease. In this case, we can observe that the total cost increases from Rs.480 to Rs.540 when the output increases from 4 to 5 units. This indicates that the additional cost incurred for producing the 5th unit is higher compared to the previous units, suggesting diminishing marginal returns between units 4 and 5.

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  • 30. 

    Marginal cost is defined as :

    • A.

      The change in total cost due to a one unit change in output.

    • B.

      Total cost divided by output.

    • C.

      The change in output due to a one unit change in an input.

    • D.

      Total product divided by the quantity of input.

    Correct Answer
    A. The change in total cost due to a one unit change in output.
    Explanation
    Marginal cost is the additional cost incurred when producing one additional unit of output. It measures the rate at which the total cost changes as output changes. Therefore, the correct answer is "The change in total cost due to a one unit change in output."

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  • 31. 

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

    • A.

      If MC is greater than ATC, then ATC is falling.

    • B.

      The ATC curve intersects the MC curve at minimum MC.

    • C.

      The MC curve intersects the ATC curve at minimum ATC.

    • D.

      If MC is less than ATC, then ATC is increasing.

    Correct Answer
    C. The MC curve intersects the ATC curve at minimum ATC.
    Explanation
    The correct answer is that the MC curve intersects the ATC curve at minimum ATC. This means that at the point where the marginal cost (MC) and average total cost (ATC) curves intersect, the ATC is at its lowest point. This is because the MC represents the additional cost of producing one more unit, and when it intersects with the ATC curve at its minimum, it indicates that the average cost of producing each unit is at its lowest point.

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  • 32. 

    Which of the following statements is true of the relationship among the average cost functions?      

    • A.

      ATC = AFC - AVC.

    • B.

      AVC = AFC + ATC.

    • C.

      AFC = ATC + AVC.

    • D.

      AFC = ATC - AVC.

    Correct Answer
    D. AFC = ATC - AVC.
    Explanation
    The correct answer is AFC = ATC - AVC. This statement is true because the average total cost (ATC) is equal to the sum of the average fixed cost (AFC) and the average variable cost (AVC). Therefore, rearranging the equation, we can say that AFC is equal to ATC minus AVC.

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  • 33. 

    Which of the following is not a determinant of the firm's cost functions?

    • A.

      The production function.

    • B.

      The price of labour.

    • C.

      Taxes.

    • D.

      The price of the firm's output.

    Correct Answer
    D. The price of the firm's output.
    Explanation
    The price of the firm's output is not a determinant of the firm's cost functions because cost functions are determined by factors that directly affect the production costs, such as the production function, the price of labor, and taxes. The price of the firm's output, on the other hand, is determined by factors such as market demand and competition, and does not directly influence the costs of production.

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  • 34. 

    Which of the following statements is correct concerning the relationships among the firm's functions?

    • A.

      TC = TFC - TVC.

    • B.

      TVC = TFC - TC.

    • C.

      TFC = TC - TVC.

    • D.

      TC = TVC - TFC.

    Correct Answer
    C. TFC = TC - TVC.
    Explanation
    The correct answer states that Total Fixed Cost (TFC) is equal to Total Cost (TC) minus Total Variable Cost (TVC). This means that the fixed costs of a firm, which do not change with the level of production, can be calculated by subtracting the variable costs from the total costs.

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  • 35. 

    Suppose output increases in the short run. Total cost will :      

    • A.

      Increase due to an increase in fixed costs only.

    • B.

      Increase due to an increase in variable costs only.

    • C.

      Increase due to an increase in both fixed and variable costs.

    • D.

      Decrease if the firm is in the region of diminishing returns.

    Correct Answer
    B. Increase due to an increase in variable costs only.
    Explanation
    In the short run, the increase in output leads to an increase in variable costs only. This means that the cost of producing each additional unit of output increases. Fixed costs remain constant in the short run, so they do not contribute to the increase in total cost. The increase in variable costs can be attributed to factors such as the need for additional labor, raw materials, or energy to produce the higher level of output.

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  • 36. 

    Which of the following statements concerning the long-run average cost curve is false?  

    • A.

      It represents the least-cost input combination for producing each level of output.

    • B.

      It is derived from a series of short-run average cost curves.

    • C.

      The short-run cost curve at the minimum point of the long-run average cost curve represents the least-cost plant size for all levels of-output.

    • D.

      As output increases, the amount of capital employed by the firm increases along the curve.

    Correct Answer
    C. The short-run cost curve at the minimum point of the long-run average cost curve represents the least-cost plant size for all levels of-output.
    Explanation
    The correct answer is that the short-run cost curve at the minimum point of the long-run average cost curve represents the least-cost plant size for all levels of output. This statement is false because the short-run cost curve represents the cost of production when at least one input is fixed, while the long-run average cost curve represents the cost of production when all inputs are variable. Therefore, the short-run cost curve cannot determine the least-cost plant size for all levels of output.

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  • 37. 

    The negatively-sloped (i.e. falling) part of the long-run average total cost curve is due to which of the following?

    • A.

      Diseconomies of scale.

    • B.

      Diminishing returns.

    • C.

      The difficulties encountered in coordinating the many activities of a large firm.

    • D.

      The increase in productivity that results from specialization.

    Correct Answer
    D. The increase in productivity that results from specialization.
    Explanation
    The negatively-sloped part of the long-run average total cost curve is due to the increase in productivity that results from specialization. As a firm increases its scale of production and specializes in specific tasks, it can take advantage of economies of scale and experience higher levels of productivity. This leads to a decrease in average total cost, as the firm becomes more efficient in its operations. Therefore, the correct answer is the increase in productivity that results from specialization.

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  • 38. 

    The positively sloped (i.e. rising) part of the long run average total cost curve is due to which of the following?

    • A.

      Diseconomies of scale.

    • B.

      Increasing returns.

    • C.

      The firm being able to take advantage of large-scale production techniques as it expands its output.

    • D.

      The increase in productivity that results from specialization.

    Correct Answer
    A. Diseconomies of scale.
    Explanation
    The positively sloped part of the long run average total cost curve is due to diseconomies of scale. This means that as the firm expands its output, it experiences increasing costs per unit of production. This could be due to various factors such as inefficiencies in coordination and communication, difficulties in managing a larger workforce, or the need for more expensive equipment and infrastructure. As a result, the firm's average costs increase, leading to a positively sloped curve.

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  • 39. 

    A firm's average total cost is Rs. 300 at 5 units of output and Rs. 320 at 6 units of output. The marginal cost of producing the 6th unit is :

    • A.

      Rs.20

    • B.

      Rs.120

    • C.

      Rs.320

    • D.

      Rs.420

    Correct Answer
    D. Rs.420
    Explanation
    The marginal cost of producing the 6th unit is Rs. 420. This can be determined by calculating the change in total cost when going from producing 5 units to 6 units. The average total cost at 5 units is Rs. 300, so the total cost at 5 units is 5 * Rs. 300 = Rs. 1500. The average total cost at 6 units is Rs. 320, so the total cost at 6 units is 6 * Rs. 320 = Rs. 1920. The change in total cost is Rs. 1920 - Rs. 1500 = Rs. 420, which is the marginal cost of producing the 6th unit.

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  • 40. 

    A firm producing 7 units of output has an average total cost of Rs. 150 and has to pay Rs.350 to its fixed factors of production whether it produces or not. How much of the average total cost is made up of variable costs?

    • A.

      Rs.200

    • B.

      Rs.50

    • C.

      Rs.300

    • D.

      Rs.100

    Correct Answer
    D. Rs.100
    Explanation
    The average total cost is the sum of fixed costs and variable costs divided by the quantity of output. In this case, the fixed cost is Rs. 350 and the average total cost is Rs. 150. To find the variable cost, we subtract the fixed cost from the average total cost: Rs. 150 - Rs. 350 = -Rs. 200. However, since the variable cost cannot be negative, we consider it as zero. Therefore, the entire average total cost of Rs. 150 is made up of fixed costs, and none of it is made up of variable costs.

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  • 41. 

    A firm has a variable cost of Rs.1000 at 5 units of output. If fixed costs are Rs.400, what will be the average total cost at 5 units of output?

    • A.

      Rs.280

    • B.

      Rs.60

    • C.

      Rs.120

    • D.

      Rs.1400

    Correct Answer
    A. Rs.280
    Explanation
    The average total cost can be calculated by adding the fixed costs and the variable costs, and then dividing by the number of units of output. In this case, the fixed costs are Rs.400 and the variable costs at 5 units of output are Rs.1000. So, the total costs would be Rs.400 + Rs.1000 = Rs.1400. Since we are calculating the average total cost at 5 units of output, we divide the total costs by 5, which gives us Rs.1400/5 = Rs.280. Therefore, the correct answer is Rs.280.

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  • 42. 

    A firm's average fixed cost is Rs.20 at 6 units of output. What will it be at 4 units of output?

    • A.

      Rs.60

    • B.

      Rs.30

    • C.

      Rs.40

    • D.

      Rs.20

    Correct Answer
    B. Rs.30
    Explanation
    The average fixed cost is calculated by dividing the total fixed cost by the number of units produced. In this case, the average fixed cost is Rs.20 at 6 units of output. If the firm produces 4 units of output, the fixed cost will remain the same. Therefore, the average fixed cost at 4 units of output will still be Rs.20. Hence, the correct answer is Rs.30.

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  • 43. 

    Which of the following statements is true?

    • A.

      The services of a doctor are considered production.

    • B.

      Man can create matter.

    • C.

      The services of a housewife are considered production.

    • D.

      When a man creates a table, he creates matter.

    Correct Answer
    A. The services of a doctor are considered production.
    Explanation
    The correct answer is "The services of a doctor are considered production." This statement is true because the services provided by a doctor involve the production of healthcare, which is considered an economic output. Doctors provide valuable services that contribute to the well-being of individuals and society as a whole. Their expertise and skills are utilized in diagnosing and treating patients, thus creating a tangible economic value.

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  • 44. 

    Which of the following is a function of an entrepreneur?

    • A.

      Initiating a business enterprise.

    • B.

      Risk bearing.

    • C.

      Innovating.

    • D.

      All of the above.

    Correct Answer
    D. All of the above.
    Explanation
    The correct answer is "All of the above" because an entrepreneur is responsible for initiating a business enterprise by identifying opportunities and creating a new venture. They also bear the risk associated with the business, taking on financial and personal risks. Additionally, entrepreneurs are known for their ability to innovate, bringing new ideas and solutions to the market. Therefore, all three options are valid functions of an entrepreneur.

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  • 45. 

    In describing a given production technology, the short run is best described as lasting:     

    • A.

      Up to six months from now.

    • B.

      Up to five years from now.

    • C.

      As long as all inputs are fixed.

    • D.

      As long as at least one input is fixed.

    Correct Answer
    D. As long as at least one input is fixed.
    Explanation
    In the short run, at least one input is fixed, meaning that there is at least one factor of production that cannot be changed. This could be a fixed amount of capital, such as a building or equipment, or a fixed amount of labor, such as a contracted number of workers. The duration of the short run is not specified in the question, but it is best described as lasting as long as at least one input is fixed.

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  • 46. 

    If decreasing returns to scale are present, then if all inputs are increased by 10% then:

    • A.

      Output will also decrease by 10%.

    • B.

      Output will increase by 10%.

    • C.

      Output will increase by less than 10%.

    • D.

      Output will increase by more than 10%.

    Correct Answer
    C. Output will increase by less than 10%.
    Explanation
    If decreasing returns to scale are present, it means that as all inputs are increased by 10%, the increase in output will be less than 10%. This is because decreasing returns to scale imply that the additional inputs will not result in a proportional increase in output. Therefore, the output will increase by less than 10%.

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  • 47. 

    The production function is a relationship between a given combination of inputs and:    

    • A.

      Another combination that yields the same output.

    • B.

      The highest resulting output.

    • C.

      The increase in output generated by one-unit increase in one output.

    • D.

      All levels of output that can be generated by those inputs.

    Correct Answer
    B. The highest resulting output.
    Explanation
    The production function is a relationship between a given combination of inputs and the highest resulting output. It represents the maximum output that can be obtained from a given set of inputs. The production function helps in determining the most efficient combination of inputs to achieve the highest level of output.

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  • 48. 

    If  the marginal product of labour is below the average product of labour, it must be true that:

    • A.

      The marginal product of labour is negative.

    • B.

      The marginal product of labour is zero.

    • C.

      The average product of labour is falling.

    • D.

      The average product of labour is negative.

    Correct Answer
    C. The average product of labour is falling.
    Explanation
    If the marginal product of labour is below the average product of labour, it means that each additional unit of labour is contributing less to the total output compared to the average. This implies that the average product of labour is decreasing because the additional units of labour are not as productive as the previous ones.

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  • 49. 

    The average product of labour is maximized when marginal product of labour:  

    • A.

      Equals the average product of labour.

    • B.

      Equals zero.

    • C.

      Is maximized.

    • D.

      None of the above.

    Correct Answer
    A. Equals the average product of labour.
    Explanation
    The average product of labor is maximized when the marginal product of labor equals the average product of labor. This means that each additional unit of labor is contributing the same amount of output as the average worker. If the marginal product is greater than the average product, adding more labor will increase the average product. Conversely, if the marginal product is less than the average product, adding more labor will decrease the average product. Therefore, when the marginal product equals the average product, the average product is maximized.

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  • 50. 

    The law of variable proportions is drawn under all of the assumptions mentioned below except the assumption that:    

    • A.

      The technology is changing.

    • B.

      There must be some inputs whose quantity is kept fixed.

    • C.

      We consider only physical inputs and not economically profitability in monetary terms.

    • D.

      The technology is given and stable.

    Correct Answer
    A. The technology is changing.
    Explanation
    The law of variable proportions states that as the quantity of one input is increased while keeping the quantities of other inputs fixed, there will be a point beyond which the marginal product of that input will decrease. This law is based on several assumptions, including the assumption that the technology is given and stable. This means that the production technology used in the production process does not change over time. However, the assumption that the technology is changing contradicts this, as it implies that the production technology is not stable. Therefore, the correct answer is that the assumption that the technology is changing is not drawn under the law of variable proportions.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Jun 24, 2024
    Quiz Edited by
    ProProfs Editorial Team
  • Mar 01, 2012
    Quiz Created by
    Sweetsalman123
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