1

MULTIPLE CHOICE PRACTICE QUESTIONS

1.
A monopolistic firm may price its product so as to gain less than maximum shortterm profit in order to
a.
charge what "the traffic will bear" for its product.
b.
overcome the countervailing power of customers for its product.
c.
deter the threat of potential competition and/or government regulation.
d.
restrict its output to an even greater extent.
Answer: c
2.
In regulating the prices of monopolists, the traditional standard is that regulators
should allow firms to charge rates that will
a.
equate marginal revenue and marginal cost.
b.
cover all allowable operating expenses and yield a fair return for the
stockholders.
c.
result in the same price and output as would occur under perfect
competition.
d.
permit reasonable market share for the regulated firm.
Answer: b
3.
The theory that monopolists might have lower costs than competitive firms was
presented by
a.
Brickley, Zimmerman, and Smith
b.
Baumol.
c.
Schumpeter.
d.
Coase
e.
none of the above.
Answer: c
4.

When a firm is the only seller of a product for which there is no close substitute,
a.
it will maximize short-run profits by charging the highest price it can get for
its product.
b.
its demand-AR curve tends to be inelastic.
c.
total profits will be maximum where price exceeds average total cost by
the greatest vertical distance.
d.
total profits will be maximum at the output rate corresponding to the
minimum point of the firm's LRAC curve.
e.
none of these.
Answer: e
5.
A monopolist is producing a level of output at which price is $8, marginal revenue
is $5, average variable cost is $6, and marginal cost is $10. In order to maximize profit,
the firm should
a.
decrease price.
b.
increase price.
c.
keep price the same.
d.
increase output.
e.
shut down.
Answer: b

6.

When an agent pursues his own interests he is exhibiting

a.
strategic misrepresentation
b.
opportunism
c.
adverse selection
d.
reneging
Answer: b
7.
When a Savings Bank screens potential borrowers, they are trying to avoid
exploitation because of
a.
the risk and return trade-off
b.
false positive signaling
c.
asset specificity
d.
adverse selection
e.
moral hazard
Answer: d
8.
Which of the following factors contributed to the moral hazard problem in the U.S.
Savings and Loan industry during the 1980s?
a.
Measurement problems on the part of the Federal Governments system
of regulation
b.
Deposit insurance programs such as F.S.L.I.C. that encouraged excessive
risk taking by deposit institutions
c.
The regulated cap on maximum deposit losses thwarting market discipline
d.
All of the above
Answer: d
9.

Which of the following best describes a situation characterized by moral hazard?

a.
a partys actions, which impact a transactions value to others, are
perfectly observable
b.
at least one involved party fails to understand the ethics of a given
situation
c.
a party puts forth less effort than they would if their actions could be
effectively monitored.
d.
an exchange is made subject to the standard neoclassical, competitive
conditions.
Answer: c
10.
An insured agent who has not misrepresented the risk he is to the insurance
company
a.
cannot present a moral hazard situation to his insurance company
b.
has not presented an adverse selection problem to the insurance
company
c.
is guilty of pre-contractual opportunism if he has not kept his asymmetric
information concealed.
d.
represents an adverse selection problem and may also represent a moral
hazard problem if, as a result of being insured, he behaves in a manner
that increases the likelihood of his making an insurance claim.
Answer: b

11.

Monopolistic competition is like monopoly in that

a.
the monopolistically competitive firm must often be regulated
b.
the monopolistically competitive firm does not face a horizontal demand
curve
c.
both industries have the same robber baron heritage
d.
both industries have interdependence and uncertainty
e.
all of the above are true.
Answer: b. Now let me explain why other answers are wrong.
Answer a: wrong because the level of competition is such that no regulation is
necessary.
c is wrong because the robber baron heritage belongs alone to the large, rather antisocial monopolies in the U.S. of a century ago.
d is wrong because interdependence and uncertainty exist in oligopoly, not monopolistic
competition.
12.

Monopolistic competition is like pure competition in that

a.
both represent cases of imperfect competition
b.
both can be characterized by decreasing costs
c.
both can block energy only through the granting of patents
d.
both industries are characterized by interdependence and uncertainty
e.
Baumol invented both industries before the invention of game theory.

Answer: b. Answer a is incorrect because of the two types, only monopolistic

competition is a form of imperfect competition, a term which refers to all industry types
other than pure competition. Answer c is untrue, since of the two industries, only
monopolistic competition can block entry, but that is only through licensing
arrangements, not advertizing. Answer e is a nonsense answer; it is both untrue and
irrelevant to this question.
13.

How many firms are in the product groups of monopolistic competition

a.
few enough so that interdependence remains strong
b.
few enough so that entry is always a problem
c.
just enough so that if a firm reduces its price he will expect no retaliation
d.
just enough so that if a firm reduces its price he will expect quick
retaliation
e.
all of the above are true except d

Answer: c
Answer a is false because there is no interdependence in monopolistic
competition.
Answer b is untrue because entry is open (not a problem) in monopolistic competition.
Answer d is wrong because without interdependence, no retaliation will result.
14.

In monopolistic competition we speak of a product group as being

a.
the set of firms which, through vertical coordination, produce first the
parts, then a common final commodity.
b.
the set of firms which, through horizontal coordination, produce a group of

c.
d.
e.

similar products.
the same industry all producing complementary products
different industries all producing roughly substitute products
none of the above. Monopolistic competition has nothing to do with
product groups.

Answer: d is correct, since in this kind of model, the product of each firm is unique (by
differentiation), so each firm is an industry and all the producers of similar or substitute
products are a product group. a might describe a group of products, but not a product
group. I dont what b means; horizontal coordination is not something that occurs in
monopolistic competition. Answer c cant be correct, because product groups are made
up of similar or substitute products, not complements. Answer e is incorrect because
monopolistic competition is the industry for which Chamberlain (and I didnt even
mention his name to you or ask you to learn it) developed the term product group.
15.

In monopolistic competition, advertizing has the effect of

a.
making the marginal cost curves slope down in stage III of production.
b.
making the marginal revenue curve slope down
c.
wasting money, since the products are all homogeneous anyway
d.
causing the demand curve of the individual firm to drift downward over
time
e.
causing the marginal revenue curves to slope upward

Answer: b. This requires noticing that advertizing makes the demand curve slope down,
which also makes the MR curve slope down (twice as fast). MR is a straight line in pure
competition.
Answer a is wrong because marginal cost curves always slope up in stage III because
of diminishing returns. Answer c is wrong since products are homogeneous only in pure
competition. d is wrong because the curve shifts downward due to entry, not advertizing.
Answer d is incorrect because demand curves in this kind of industry always slope
down, so MR cannot rise.
16.
Which of the following does not correspond to the assumptions of the kinked
demand model?
a.
A price increase by one producer is matched by other producers
b.
A price increase by one producer is not matched by other producers
c.
A price cut by one producer is matched by other producers.
Answer: a
17.

Which of the following is not true of oligopoly?

a.
There are not many firms in the industry
b.
Producers of a similar product are not referred to as a product group
c.
The firms are generally large and independent
d.
It is possible for an oligopoly industry to consist of just two firms
e.
The managerial environment of oligopoly is characterized by uncertainty
Answer: c

18.

A kinked demand curve is

a.
highly inelastic for price increases and quite elastic for price cuts
b.
highly elastic for price increases and less elastic for price cuts
c.
highly elastic for price increases and quite elastic for price decreases
d.
infinitely elastic for price increases.
e.
none of the above.
Answer: b
19.

An oligopolist with a kinked demand curve has an MR curve

a.
that rises beyond a certain stage because of diminishing returns
b.
that follows twice as fast as the demand curve
c.
that cuts the AR curve at its minimum point
d.
that has a discontinuous segment
e.
that has the same number of kinks
Answer: d
20.

The kinked demand curve model explains

a.
why firms are motivated to price right at the kink.
b.
how the price is determined in the first place
c.
what happens when costs rise to the extent that MC is not equal to MR at
the point of the kink.
d.
the long-term dynamics of the oligopoly market
Answer: a
Use the diagram below to answer the next five questions.
21.

Between points A and B

a.
the LAC curve is falling
b.
the industrys output is falling
c.
the LAC curve is rising
d.
the industrys output is constant
e.
economies of scale permit the larger output
Answer: c
22.

The above diagram represents

Part A

Part B

a.

monopolistic competition

b.
c.
d.
e.
Answer: d

a purely competitive industry with increasing returns to scale

the welfare loss of a rise in price in a competitive industry
successive equilibria resulting from the expansion of competitive firms
a price increase resulting from the law of diminishing returns

23.

The position of the SAC curves show that

a.
economies of scale are swamping diseconomies of scale
b.
consumers are not demanding greater levels of output as time passes
c.
price increases should have come as a surprise to the individual
entrepreneur
d.
smaller plant sizes and more extensive labor use are popular in this
industry
e.
a larger scale of plant is a part of the industrys expansion
Answer: e
24.

It is apparent from the diagram that the industry in question is a (an)

a.
constant cost industry
b.
decreasing cost industry
c.
increasing cost industry
d.
fluctuating cost industry
e.
expansive cost industry
Answer: c
25.

The final output of the firm will be at

a.
A
b.
B
c.
M
d.
M
Answer: B

e.

none of the above

26.
When an agent seeks to pursue his own interests he can best be described as
exhibiting
a.
c.
Answer: b

strategic misrepresentation.
adverse selection

b.
d.

opportunism
reneging.

27.
Which of the following is not a solution to adverse selection in a contracting
environment?
a.
the use of unbiased outside appraisers.
b.
target marketing to identify certain socio-demographic and economic
groups.
c.
altering the selection, or mix, of potential trading partners.
d.
incentive-based contracting.
Answer: d
28.
When an agent seeks to pursue his own interests he can best be described as
exhibiting
a.
strategic misrepresentation
b.
opportunism

c.
Answer: b

adverse selection

d.

reneging

29.

Two types of Ex Ante opportunism are

a.
holdups, strategic misrepresentation
b.
holdups, private information
c.
adverse selection, strategic misrepresentation
d.
adverse selection, reneging
Answer: c
30.
A good example of adverse selection is found in the used car market. The
problem, in this setting, is due to:
a.
no optimal price existing
b.
the majority of used cars being "lemons" which are of low quality
c.
an excess supply in the market which is the sign of efficiency
d.
sellers having an informational advantage
e.
informational asymmetry favoring the buyer
Answer: d
31.

The slope of a line

a.
is unrelated to rates of change.
b.
c.
is not the derivative of a function.
d.
is not the value of a marginal quantity.
e.
is not constant for a curvilinear function.
Answer: e

is not the ratio rise/run.

32.
Which of the following is not considered a public good for citizens in any large
U.S. city?
a.
national defense
b.
health care
c.
police protection
d.
fire protection.
Answer: b
33.
When there is an allocation of goods or services such that there exists no other
feasible allocation that lowers the well being of any party and raises the well being of (at
least) one party, it (that allocation) is said to be:
a.
Profit-maximizing
b.
A virtual corporation
c.
Efficient
d.
In equilibrium
Answer: c
34.
One good example of a public good is national defense. The government
overcomes the market failure problem by:
a.
Excluding various people from coverage
b.
Forcing people to pay through taxes, thus making it illegal to free ride
c.
Passing laws that prevent overconsumption and the tragedy of the
commons
d.
Relying on the generosity and goodwill of every American citizen
Answer: b

35.
A cost or benefit imposed involuntarily on another party which is not regulated by
any system of prices is referred to as:
a.
Transaction cost
b.
A tax deduction
c.
Externalities
d.
Moral hazard e. A bottleneck
Answer: c
36.
If sellers try to charge a price which is above the equilibrium level, then it can be
predicted that
a.
a shortage will result and the quantity supplied will rise.
b.
competition will be adversely affected.
c.
surplus conditions will result and forces will be set in motion to cause
prices to fall.
d.
buyers will refuse to purchase anything.
e.
none of these.
Answer: c
37.
If ice cream is a normal good and average consumer income in the ice cream
market increases by 10% then
a.
There will be a movement down, to the right, along the demand for ice
cream curve.
b.
There will be movement up, to the left, along the demand for ice cream
curve.
c.
The ice cream demand curve will shift up and to the right.
d.
The ice cream demand curve will shift down and to the left.
Answer: c

Sample MCQs for Chapters 9, 10 and 11

1. "An oligopoly is an oligopoly. Firms behave the same no matter what type of
oligopoly it is." This statement is:
a)
true.
b)
false.
c)
true of homogeneous product industries.
d)
none of the above.
Answer: B Difficulty: Med
2. Both firms in a Cournot duopoly would enjoy higher profits if
a)
the firms simultaneously reduced output below the Nash equilibrium level.
b)
each firm simultaneously increased output above the Nash equilibrium
level.
c)
one firm reduced output below the Cournot Nash equilibrium level, while
the other firm continued to produce its Cournot Nash equilibrium output.

d) a. and c.
Answer: A Difficulty: Hard
3. The Cournot theory of oligopoly assumes
a)
rivals will keep their output constant.
b)
rivals will increase their output whenever a firm increases its output.
c)
rivals will decrease output whenever a firm increases its output .
d)
rivals will follow the learning curve.
Answer: A Difficulty: Easy
4. Which of the following is true?
a)
In Bertrand oligopoly each firm believes that their rivals will hold their
output constant if it changes its output.
b)
In Cournot oligopoly firms produce an identical product at a constant
marginal cost and engage in price competition.
c)
In oligopoly a change in marginal cost never has an affect on output or
price.
d)
None of the above are true.
Answer: D Difficulty: Med
5. If firms compete in a Cournot fashion, then
a) each firm views the output of the rival as given.
b) each firm views the prices of rivals as given.
c) each firm views the profits of rivals as given.
d) all of the above
Answer: A Difficulty: Med
6. Two firms compete in a Stackelberg fashion and firm two is the leader, then
a) firm one views the output of firm two as given.
b) firm two views the output of firm one as given.
c) all of the above
d) none of the above
Answer: A Difficulty: Hard
7. There are many different models of oligopoly because:
a) beliefs play an important role in oligopolistic competition.
b) firms do not maximize profits in oligopolistic competition.
c) oligopoly is the most complicated type of market structure.
d) both a and c.
Answer: D Difficulty: Easy

10

8. Suppose that the duopolists competing in Cournot fashion agree to produce the
collusive output. Given that firm two commits to this collusive output, it pays firm one to
a) cheat by producing a higher level of output.
b) cheat by producing a lower level of output.
c) cheat by raising prices.
d) none of the above.
Answer: A Difficulty: Med
9. If firms are in Cournot equilibrium:
a) Each firm could increase profits by unilaterally increasing output.
b) Each firm could increase profits by unilaterally decreasing output.
c) Firms could increase profits by jointly increasing output.
d) Firms could increase profits by jointly reducing output.
Answer: D Difficulty: Easy
10. When firm one acts as a Stackelberg leader:
a) Firm two produces the monopoly output.
b) Firm one's profit is less than its profit if they compete in a Cournot fashion.
c) Firm two will earn more than if they compete in a Cournot fashion.
d) None of the above.
Answer: D Difficulty: Hard
11. Sue and Jane own two local petrol stations. They have identical constant marginal
costs, but earn zero economic profits. Sue and Jane constitute
a) a Sweezy oligopoly.
b) a Cournot oligopoly.
c) a Bertrand oligopoly.
d) none of the above.
Answer: C Difficulty: Med
12. The profits of the leader in a Stackelberg duopoly
a) are greater than those of the follower.
b) equal those of the follower.
c) are less than those of the follower.
d) are greater than those of a Bertrand oligopolist.
Answer: A Difficulty: Hard
13. "Tom and Jack are two local petrol stations. Although they have different constant
marginal costs, they both survive continued competition." Tom and Jack do not
constitute:
a) a monopolistically competitive industry.

11

b) a Cournot oligopoly.
c) a Stackelberg oligopoly.
d) a Bertrand oligopoly.
Answer: D Difficulty: Med
14. Which of the following is true?
a)
In a one-shot game, a collusive strategy always represents a Nash
equilibrium.
b)
A perfect equilibrium occurs when each player is doing the best he can
regardless of what the other player is doing.
c)
Each Nash equilibrium is a perfect equilibrium.
d)
Every perfect equilibrium is a Nash equilibrium.
e)
none of the above
Answer: D Difficulty: Med
15. Consider the following information for a simultaneous move game: If you advertise
and your rival advertises, you each will earn $5 million in profits. If neither of you
advertise, you will each earn $10 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $15 million and the non
advertising firm will earn $1 million. If you and your rival plan to be in business for only
one year, the Nash equilibrium is
a)
b)
c)
d)

For each firm to advertise.

For neither firm to advertise.
For your firm to advertise and the other not to advertise.
None of the above.

Answer: A Difficulty: Med

16. Which of the following is true for a Nash equilibrium of a two-player game?
a)
b)
c)
d)

The joint payoffs of the two players are highest compared to other strategy
pairs.
Given another player's strategy stipulated in that Nash equilibrium, a
player cannot improve his welfare by changing his strategy.
A Nash equilibrium is always unique in real world problems.
b and c

Answer: B Difficulty: Med

17. Which of the following is true?
a)
In an infinitely repeated game, collusion is always a Nash equilibrium.
b)
In a finitely repeated game with a certain end period, collusion is unlikely
because effective punishments cannot be used during any time period.
c)
all of the above

12

d)

none of the above

Answer: B Difficulty: Easy

18. Which of the following is true?
a)
b)
c)
d)

For a finitely repeated game, the game is played enough times to

effectively punish cheaters and therefore collusion is likely.
In an infinitely repeated game with a low interest rate, collusion is unlikely
because the game unravels so that effective punishment cannot be used
during any time period.
A secure strategy is the optimal strategy for a player no matter what the
opponent does.
none of the above

Answer: D Difficulty: Med

19. Economists use game theory to predict the behavior of oligopolists. Which of the
following is crucial for the success of the analysis?
a)
Make sure the payoffs reflect the true payoffs of the oligopolists.
b)
Make sure whether the oligopolists move simultaneously or sequentially.
c)
Make sure the problem considered is of a one-shot or repeated nature.
d)
All of the above.
Answer: D Difficulty: Med
20. It is easier to sustain tacit collusion in an infinitely repeated game if:
a)
the present value of cheating is higher.
b)
there are more players in the game.
c)
the interest rate is lower.
d)
both a and c.
Answer: C Difficulty: Med
21. A finitely repeated game differs from an infinitely repeated game in that:
a)
The former needs a lower interest rate to support collusion than the latter
needs.
b)
There is an "end-of-period" problem for the former.
c)
A collusive outcome can usually be sustained in the former but not the
latter.
d)
All of the above.
Answer: B Difficulty: Hard
22. A Nash equilibrium with a non-credible threat as a component is:
a)
a perfect equilibrium.

13

b)
c)
d)

not a perfect equilibrium.

a sequential equilibrium.
a somewhat perfect equilibrium.

Answer: B Difficulty: Med

23. Which of the following is a valid critique of the use of game theory in economics?
a)
Payoffs to players may be difficult to measure.
b)
Players may not have complete information about each other's payoffs.
c)
Game theory assumes rational players.
d)
All of the above.
Answer: D Difficulty: Hard
24.
When analyzing the behavior of oligopolists, which of the following is crucial for
the success of game theoretic analysis?
a)
b)
c)
d)

Payoffs do not need to reflect the true payoffs of the oligopolists, they just
need to be greater than or equal to zero.
Assume that oligopolists always move simultaneously.
Do not construct the payoffs of the oligopolists to be interdependent, as
the payoff of one player usually does not affect the payoff of the other
players.
Make sure the problem you are considering is of a one-shot or repeated
nature, and you model it accordingly because the order in which players
make decisions is important.

Answer: D Difficulty: Med

25.
You are the manager of a Mom and Pop store that can buy milk from a supplier
at $3.00 per gallon. If you believe the elasticity of demand for milk by customers at your
store is -4, then your profit-maximizing price is
a)

2.00.

b)

2.50.

c)

4.00.

d)

5.00.

Answer: C Difficulty: Med

26.
You are the manager of a gas station and your goal is to maximize profits. Based
on your past experience, the elasticity of demand by Texans for a car wash is -4, while
the elasticity of demand by non-Texans for a car wash is -6. If you charge Texans $20
for a car wash, how much should you charge a man with Oklahoma license plates for a
car wash?
a)

1.50.

b)

Answer: C Difficulty: Hard

15.00.

c)

18.00.

d)

20.00.

14

27.
Cinemas sometimes give senior citizens discounts. What is the possible privately
motivated purpose for them to do so?
a)
b)
c)
d)

Purely because entrepreneurs are benevolent.

Senior citizens have a more elastic demand for movies than ordinary
citizens.
Senior citizens lack recreational activities.
None of the above.

Answer: B Difficulty: Med

28.
Which of the following pricing strategies does not usually enhance the profits of
firms with market power?
a)
c)

price matching.
two-part pricing.

b)
d)

cross-subsidies.
marginal cost pricing.

Answer: D Difficulty: Med

29.

Which of the following statements is true?

a)
b)
c)
d)

The more elastic the demand, the higher is the profit-maximizing markup.
The more elastic the demand, the lower is the profit-maximizing markup.
The higher the marginal cost, the lower the profit-maximizing price.
The higher the average cost, the lower the profit-maximizing price.

Answer: B Difficulty: Easy

30.

Price matching strategies may fail to enhance profits when:

a)
b)
c)

firms cannot prevent customer's from deceptive claims.

firms have different marginal costs.
either a or b.
d)
none of the above.

Answer: C Difficulty: Med

31.
A Broadway theater sells weekday show tickets at a lower price than for a
weekend show. This is an example of:
a)
c)

price discrimination.
all of the above.

b)
d)

peak-load pricing.
none of the above.

Answer: C Difficulty: Med

32.

Which of the following statements about a price matching strategy is incorrect?

15

a)
b)
c)
d)

It may be applied in situations besides Bertrand oligopoly.

It requires that the firms can monitor their rival's prices.
It reduces the incentive for a rival firm to initiate a price war.
It only guarantees to match prices that are advertised publicly.

Answer: B Difficulty: Hard

33.
Suppose two types of consumers buy suits. Consumers of type A will pay $100
for a coat, and $50 for pants. Consumers of type B will pay $75 for a coat, and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. If
the firm sells coats and pants for $25 each, but offers a bundle containing both a coat
and pants for $150, how many bundles will the firm sell?
a)

0.

b)

1.

c)

2.

d)

insufficient information.

Answer: A Difficulty: Med

34.
Suppose two types of consumers buy suits. Consumers of type A will pay $100
for a coat, and $50 for pants. Consumers of type B will pay $75 for a coat, and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. The
optimal commodity bundling strategy is:
a)
c)

Charge $150 for a suit.

Charge $100 for a suit.

b)
d)

Charge $75 for a suit.

Charge $125 for a suit.

Answer: A Difficulty: Med

35.

Firms will often implement randomized pricing in an attempt to reduce

a)
b)
c)
d)

only competitor price information.

only consumer price information.
both customer and competitor information about price.
Randomized pricing does not affect information available to consumers or
competitors.

Answer: C Difficulty: Med

http://www.csub.edu/~agrammy/Courses/econ100/testBank/2011/spring/Chap004.pdf
Chapter 04 Firm Production, Cost, and Revenue
Multiple Choice Questions

16

1. A key assumption about the way firms behave is that they

a.
c.
2.
a/an

Minimize costs
Maximize market share

B.
d.

Maximize profit
Maximize revenue

A graph that maps output against the input required to make that output is called
a.
c.

Average cost function

A cost function

B.
d.

A production function
A marginal cost function

3.
A graph which maps the total costs of production against the amount made is
called the
a.
C.
4.

Average cost function

A cost function

b.
d.

A production function
A marginal cost function

If an input must be increased for output to increase it is called a

a.
C.

Fixed input
Variable input

b.
d.

Changeable input
Unchangeable input.

5.
If the level of an input cannot be increased because there is insufficient time to
put them in place, they are called
A.
c.

Fixed input
Variable input

b. Changeable input
d. Unchangeable input

6.
When workers subdivide the tasks of a job in such a way so as to become more
efficient economists refer to this as
A.
c.

The division of labor

The division of tasks

b.
d.

Use the following to answer questions 7-9:

The separation of powers

The degrees of freedom

17

Figure 4.1

7.
Referring to Figure 4.1 above, the increase in output from point A to B is less
than the increase in output from point B to C because
a.
b.
C.
d.

More workers always produce more

Better workers are usually hired after the earlier ones
A small number of workers cannot take as good advantage of the
division of labor as a larger number
Eventually workers are up against the fact that there are fixed inputs and
more workers do not add as much

8.
Referring to Figure 4.1 above, the increase in output from point B to C is greater
than the increase in output from point C to D because
a.
b.
c.
D.

More workers always produce more

Better workers are usually hired after the earlier ones
A small number of workers cannot take as good advantage of the division
of labor as a larger number
Eventually workers are up against the fact that there are fixed inputs
and more workers do not add as much

9.
Referring to Figure 4.1 above, the increase in output from point A to B and from
point B to C happens because
A.
b.
c.
d.
10.

More workers will produce more

Better workers are usually hired after the earlier ones
A small number of workers cannot take as good advantage of the division
of labor as a larger number
Eventually workers are up against the fact that there are fixed inputs and
more workers do not add as much

When firms add workers and get more efficient they are benefiting from
A.
c.

The division of labor

Diminishing returns

b.
d.

The law of large numbers

Diminishing marginal utility

18

11.
When firms add workers and find that the additional workers add less to output
than their predecessors did, they are experiencing
a.
C.
12.

b.
d.

The law of large numbers

Diminishing marginal utility

Costs which increase with an increase in output are called

a.
C.

13.

The division of labor

Diminishing returns

Fixed costs
Variable costs

b.
d.

Changeable costs
Unchangeable costs

Costs which do not increase with an increase in output are called

A.
c.

Fixed costs
Variable costs

b.
d.

Changeable costs
Unchangeable costs

Use the following to answer questions 14-17:

Figure 4.2

14.
In Figure 4.2 above, the reason that point A is not through the origin but starts up
on the vertical axis is that
a.
c.
d.

There are fixed outputs

B.
There are fixed costs
There is no cost associated with producing no output
There is waste

15.
In Figure 4.2 above, the reason that point D is higher than point C and C is
higher than B is that
A.
b.
c.

It always costs more money to increase output

Small levels of production are often inefficient and that significant
increases in production can occur thereafter at only a small additional cost
It is very difficult and very expensive to increase output once the capacity

19

d.

of the machinery has been reached

There is waste

16.
In Figure 4.2 above, the reason that the increase in output from point A to B is
much less than the increase in output from point B to C is that
a.
B.
c.
d.

It always costs more money to increase output

Small levels of production are often inefficient and that significant
increases in production can occur thereafter at only a small
additional cost
It is very difficult and very expensive to increase output once the capacity
of the machinery has been reached
There is waste

17.
In Figure 4.2 above the reason that the increase in output from point B to C is
much greater than the increase in output from point C to D is that
a.
b.
C.
d.

It always costs more money to increase output

Small levels of production are often inefficient and that significant
increases in production can occur thereafter at only a small additional cost
It is very difficult and very expensive to increase output once the
capacity of the machinery has been reached
There is waste

18.

The Total Cost Function in the book

a.
Is an up-ward sloping straight line
b.
Is U-shaped
c.
Is shaped as an upside down U
D.
Begins by sharply rising, flattens out then sharply rises again

19.

Marginal Cost is
A.
The addition to cost associated with one additional unit of output
b.
The per unit cost of production
c.
The per unit variable cost of production
d.
The per unit fixed cost of production

20.

Average Total Cost is

a.
The addition to cost associated with one additional unit of output
B.
The per unit cost of production
c.
The per unit variable cost of production
d.
The per unit fixed cost of production

21.

Average Variable Cost is

a.
The addition to cost associated with one additional unit of output
b.
The per unit cost of production
C.
The per unit variable cost of production

20

d.
22.

The per unit fixed cost of production

Average Fixed Cost is

a.
The addition to cost associated with one additional unit of output
b.
The per unit cost of production
c.
The per unit variable cost of production
D.
The per unit fixed cost of production

23.
Suppose a firm has $1,000,000 in fixed costs and variable costs equal to $100
for every unit they produce,
a.
Their marginal costs are decreasing
B.
Their average costs are decreasing
c.
Their fixed costs are decreasing
d.
The marginal costs are increasing
24.
The Average Total Cost curve will be cut by the Marginal Cost curve from below
as long as
a.
Fixed costs are rising
B.
Marginal costs eventually increase
c.
Average costs are decreasing
d.
Marginal costs continually decrease
25.

Which of the following is true

a.
The average total cost curve is U-shaped
b.
The average variable cost curve is U-shaped
c.
Neither A nor B
D.
Both A and B

26.

The Marginal Cost curve usually

a.
Is J-shaped
b.
Cuts through the minimum of the average variable cost curve
c.
Cuts through the minimum of the average total cost curve
D.
All of the above

27.
Given the production function and total cost function shown in Chapter 4, as
production increases, marginal costs
a.
Decrease constantly
B.
Decrease for a while and then increase
c.
Increase constantly
d.
Increase for a while and then decrease
28.
Given the production function and total cost function shown in Chapter 4, as
production increases, average fixed costs
A.
Decrease constantly
b.
Decrease for a while and then increase
c.
Increase constantly

21

d.

Increase for a while and then decrease

29.
Given the production function and total cost function shown in Chapter 4, as
production increases, average variable costs
a.
Decrease constantly
B.
Decrease for a while and then increase
c.
Increase constantly
d.
Increase for a while and then decrease
30.
Given the production function and total cost function shown in Chapter 4, as
production increases, average total costs
a.
Decrease constantly
B.
Decrease for a while and then increase
c.
Increase constantly
d.
Increase for a while and then decrease
31.
Given the production function and total cost function shown in Chapter 4, as
production increases, total costs
a.
Decrease constantly
b.
Decrease for a while and then increase
C.
Increase constantly
d.
Increase for a while and then decrease
32. Given the production function and total cost function shown in Chapter 4, as
production increases, total variable costs
a.
Decrease constantly
b.
Decrease for a while and then increase
C.
Increase constantly
d.
Increase for a while and then decrease
33. Given the production function and total cost function shown in Chapter 4, as
production increases, total fixed costs
a.
c.

Decrease constantly
Increase constantly

B.
d.

Remain constant
Increase for a while and then decrease

Use the following to answer questions 34-42:

Table 4.1

22

34.

Referring to Table 4.1 above, Box A should be filled with

a.

35.

42.

$200

$0

b.

$1

C.

$100

d.

$200

$0

b.

$2

C.

$100

d.

$200

$0

b.

$1

C.

$100

d.

$200

$0

b.

$10

C.

$100

d.

$200

$0

b.

$10

c.

$100

D.

$110

d.

$125

d.

$150

d.

$200

Referring to Table 4.1 above, Box G should be filled with

a.

41.

d.

Referring to Table 4.1 above, Box F should be filled with

a.

40.

$100

Referring to Table 4.1 above, Box E should be filled with

a.

39.

C.

Referring to Table 4.1 above, Box D should be filled with

a.

38.

$10

Referring to Table 4.1 above, Box C should be filled with

a.

37.

b.

Referring to Table 4.1 above, Box B should be filled with

a.

36.

$0

$0

b.

$110

C.

$115

Referring to Table 4.1 above, Box H should be filled with

a.
$0
b.
$110
C.
$125
Referring to Table 4.1 above, Box I should be filled with
a.

$0

b.

$115

Use the following to answer questions 43-60:

C.

$150

23

Table 4.2
43.

Referring to Table 4.2 above, Box A should be filled with

a.

44.

$10

c.

$20

d.

$30

$0

B.

$5

c.

$1

d.

$2

$0

B.

$2

c.

$17

d.

$27

$0

B.

$3

c.

$20

d.

$30

$0

B.

$10

c.

$30

d.

$40

$0

b.

$10

c.

$20

D.

Undefined

$0

B.

$10

c.

$20

d.

$30

$0

B.

$7.50

c.

$12.50

d.

$2

d.

$17

d.

$2

Referring to Table 4.2 above, Box J should be filled with

a.

53.

B.

Referring to Table 4.2 above, Box I should be filled with

a.

52.

$0

Referring to Table 4.2 above, Box H should be filled with

a.

51.

Nothing

Referring to Table 4.2 above, Box G should be filled with

a.

50.

D.

Referring to Table 4.2 above, Box F should be filled with

a.

49.

$20

Referring to Table 4.2 above, Box E should be filled with

a.

48.

c.

Referring to Table 4.2 above, Box D should be filled with

a.

47.

$10

Referring to Table 4.2 above, Box C should be filled with

a.

46.

b.

Referring to Table 4.2 above, Box B should be filled with

a.

45.

$0

$0

B.

$5.67

c.

$9.00

Referring to Table 4.2 above, Box K should be filled with

A.

$5.00

b.

$7.50

c.

$12.50

24

54.

Referring to Table 4.2 above, Box L should be filled with

A.

55.

d.

$30

$0

b.

$10

c.

$20

D.

Undefined

$0

b.

$10

C.

$20

d.

$30

$0

b.

$7.50

C.

$12.50

d.

$2

$0

b.

$67

C.

$9.00

d.

$17

d.

$2

d.

$30

Referring to Table 4.2 above, Box Q should be filled with

a.

60.

$12.50

Referring to Table 4.2 above, Box P should be filled with

a.

59.

c.

Referring to Table 4.2 above, Box O should be filled with

a.

58.

$8.00

Referring to Table 4.2 above, Box N should be filled with

a.

57.

b.

Referring to Table 4.2 above, Box M should be filled with

a.

56.

$6.00

$00

B.

$7.50

c.

$12.50

Referring to Table 4.2 above, Box R should be filled with

a.

$6.00

B.

$8.00

c.

$12.50

61.
The shape of the firm's marginal revenue curve depends ultimately on whether
the firm is
A.
A monopolist or a perfect competitor
b.
A revenue maximizer or a profit maximizer
c.
A market share maximizer or a sales maximizer
d.
Owned by a man or a woman
62.
The shape of the firm's marginal revenue curve depends on
a.
How high its costs are
b.
How high production is
C.
How many competitors it has
d.
Whether the firm is a profit
maximizer
63.

Whether marginal revenue is constant or decreasing depends on

a.
Whether the firm is benefiting from the division of labor
b.
Whether the firm is dealing with diminishing returns
c.
How much the firm sells
D.
Whether the firm faces competition

64.

The assumption we usually make about all firms is that they wish to
a.
Maximize market share
b.
Minimize costs

25

c.
65.

Maximize sales

D.

Maximize profits

If the firm has no competitors, the marginal revenue curve is

a.
c.

Flat (horizontal)
Upward sloping

b.
D.

Vertical
Downward sloping

66.

If the firm has many competitors, the marginal revenue curve is

A.
Flat (horizontal)
b.
Vertical
c.
Upward sloping
d.
Downward sloping

67.

Marginal Revenue is
A.
b.
c.
d.

68.

An increase in the demand for a good that is produced by many firms will
a.
B.
c.
d.

69.

Increase all of their respective marginal cost curves

Increase all of their respective marginal revenue curves
Decrease all of their respective marginal cost curves
Decrease all of their respective marginal revenue curves

If price is greater than average variable cost, a profit maximizing firm will always
a.
b.
c.
D.

71.

Increase all of their respective marginal cost curves

Increase all of their respective marginal revenue curves
Decrease all of their respective marginal cost curves
Decrease all of their respective marginal revenue curves

A decrease in the demand for a good that is produced by many firms will
a.
b.
c.
D.

70.

The extra revenue associated with one additional unit of sales

The extra cost associated with one additional unit of output
The revenue associated with the first unit of sales
The revenue associated with the sale of the average unit

Produce where Marginal Cost is minimized

Produce where Average Total Cost is minimized
Where Total Revenue is maximized
Produce where Marginal Cost equals Marginal Revenue

The shutdown condition for a firm is to

a.
b.
c.
D.

Shutdown if losses are made

Shutdown if price is less than Average Total Cost
Shutdown if price is less than marginal revenue
Shutdown if price is less than Average Variable Cost

26

72.

When a firm chooses to shutdown, it is

a.
b.
c.
D.

Making a poor decision because it should always produce where marginal

cost equals marginal revenue
Making a poor decision because it should always produce where average
costs exceed average revenue
Making a good decision as long as the price it is getting is less than its
average total costs
Making a good decision as long as the price it is getting is less than
its average variable costs

73.
The result that a firm should produce where MC=MR except when the shutdown
condition is met is based on the assumption that it is attempting to
A.
c.

Maximize profit
Maximize market share

b.
d.

Minimize marginal costs

Minimize average costs

74.
When a firm has many competitors selling the same good, in order to sell more of
the good
A.
b.
c.
d.
75.

It only need produce more of the good

It must, ironically, increase prices
It must reduce the price it charges
It must advertise

If a firm can increase output by hiring more workers then

a.
C.
d.

It will always do so
b.
It will never do so
It will do so only if the cost of hiring the workers (and purchasing the
materials) is less than the increase in revenues associated with the
increase in sales
It will do so only if the cost of hiring the workers (and purchasing the
materials) is more than the increase in revenues associated with the
increase in sales

76. When a firm has no competitors, in order to sell more of the good
a.
b.
C.
d.

It only need produce more of the good

It must, ironically, increase prices
It must reduce the price it charges
It must keep prices steady

77.
When a firm shuts down because the market price of its product is less than its
average variable cost of producing that product, it suffers a loss equal to
a.

Its total revenue

b.

Its total variable cost

27

C.

Its total fixed cost

d.

All of the above

78.
When a firm shuts down because the market price of its product is less than the
average variable cost of producing that product, the loss it suffers is
a.
c.
D.

Equal to its total revenue

b.
Equal to its total variable cost
Equal to zero
Less than the loss it would earn from continuing to operate

79.
When a firm shuts down because the market price of its product is less than the
average variable cost of producing that product, the shut-down decision is
a.
c.
d.

Made for the long run

B.
Made only for the short run
Followed by declaration of bankruptcy
Made just before it sells all of its fixed assets

80.
If a firm's marginal cost is greater than its average total cost, its average total
cost is
A.
c.

Increasing
Decreasing

b.
d.

Constant
Not U-shaped

http://econweb.rutgers.edu/blair/102/olquiz/lrcostqz/quiz6.htm

Quiz on Long-run Production, Cost, and Supply

Directions: This quiz contains 15 multiple choice questions. Select the correct answer
by clicking on the appropriate button. After you have finished the quiz, click on the
Grade my Quiz button at the bottom of the page.
After taking the quiz and scoring it, you may wish to change some of your wrong
answers and re-grade yourself. Before each retake of the quiz, click on the RELOAD or
REFRESH button on your browser to make sure your new answers are graded correctly.
1. If brach is to chrone production exhibits decreasing returns to scale, then
(a) Increasing labor by 50 percent raises output by less than 50 percent.
(b) Increasing labor by 50 percent raises output by more than 50 percent.
(c) Increasing all inputs by 50 percent raises output by less than 50 percent.
(d) Increasing all inputs by 50 percent raises output by more than 50 percent.

28

2. If the production of panegyrics occurs under conditions of increasing returns

to scale, a possible set of long-run cost functions is illustrated by:

(a)

(b)

(c)

(d)

3. Suppose that a manufacturer of architraves increases production and finds

that per-unit production costs fall. Then the production process may be said to
exhibit:
(a) decreasing returns to scale.
(b) increasing returns to scale.
(c) constant returns to scale.
(d) diminishing returns to stonemasons.
4. The prices of inputs used by the medicinal leech industry do not change as the
industry's output expands or contracts. In the long run, the burden of any tax

29

levied on the producers of medicinal leeches:

(a) falls equally on buyers and sellers.
(b) falls on buyers and sellers in proportions that cannot be determined from the
information provided.
(c) falls entirely on sellers since they bear the legal obligation to pay the tax.
(d) falls entirely on buyers because the long-run industry supply curve is perfectly
elastic.

Questions 5 through 11 refer to the following table of cost data for producers
of dithyrambs:
q
1
2
3
4
5
6
7
8
9
q
10
11
12
13
14
15
16
17
q
18
19
20
21
22
23
24

LAC
$29.36
$28.76
$28.20
$27.69
$27.22
$26.80
$26.42
$26.09
$25.80
LAC
$25.56
$25.36
$25.20
$25.09
$25.02
$25.00
$25.02
$25.09
LAC
$25.20
$25.36
$25.56
$25.80
$26.09
$26.42
$26.80

LMC
$28.73
$27.60
$26.60
$25.73
$25.00
$24.40
$23.93
$23.60
$23.40
LMC
$23.33
$23.40
$23.60
$23.93
$24.40
$25.00
$25.73
$26.60
LMC
$27.60
$28.73
$30.00
$31.40
$32.93
$34.60
$36.40

SATC
$34.17
$32.56
$31.11
$29.83
$28.71
$27.75
$26.96
$26.33
$25.86
SATC
$25.56
$25.42
$25.44
$25.62
$25.97
$26.49
$27.16
$28.00
SATC
$29.01
$30.17
$31.50
$33.00
$34.65
$36.47
$38.46

AVC
$4.17
$17.56
$21.11
$22.33
$22.71
$22.75
$22.67
$22.58
$22.53
AVC
$22.56
$22.69
$22.94
$23.32
$23.83
$24.49
$25.29
$26.24
AVC
$27.34
$28.59
$30.00
$31.57
$33.29
$35.17
$37.21

SMC
$32.48
$29.50
$27.02
$25.02
$23.51
$22.50
$21.97
$21.93
$22.39
SMC
$23.33
$24.77
$26.69
$29.11
$32.01
$35.41
$39.29
$43.67
SMC
$48.54
$53.89
$59.74
$66.07
$72.90
$80.22
$88.03

30

25
q

$27.22
LAC

$38.33
LMC

$40.60
SATC

$39.40
AVC

$96.32
SMC

5. Refer to the cost table above. When the market price of dithyrambs is $60, the
short-run profit-maximizing output is:
(a) 5.
(b) 10.
(c) 15.
(d) 20.
6. Refer to the cost table preceding question 5. When the market price of
dithyrambs is $75 and a representative producer of dithyrambs produces the
profit-maximizing output, the profit received by the firm is:
(a) 22 x (75.00 - 72.90) = $46.20.
(b) 22 x (75.00 - 34.65) = $887.70
(c) 22 x (75.00 - 32.93) = $925.54.
(d) 22 x (75.00 - 26.09) = $1076.02.
7. Refer to the cost table preceding question 5. Suppose again that the market
price of dithyrambs is $75 and that a representative producer of dithyrambs
produces the profit-maximizing output. If the firm also adjusts its fixed factors of
production to their optimal values, the profit received by the firm is:
(a) 22 x (75.00 - 72.90) = $46.20.
(b) 22 x (75.00 - 34.65) = $887.70
(c) 22 x (75.00 - 32.93) = $925.54.
(d) 22 x (75.00 - 26.09) = $1076.02.
8. Refer to the cost table preceding question 5. If the prices of inputs used in
dithyramb production do not change as the industry expands or contracts, then
the long-run equilibrium price of dithyrambs is
(a) $23.33.
(b) $25.00.
(c) $25.56.

31

(d) $30.00.
9. Refer to the cost table preceding question 5. Suppose that the prices of inputs
used in dithyramb production do not change as the industry expands or
contracts. If the dithyramb industry is in long-run equilibrium, then a
representative firm produces output at the rate of:
(a) 5.
(b) 10.
(c) 15.
(d) 20.
10. Refer to the cost table preceding question 5. Continue to assume that the
prices of inputs used in dithyramb production do not change as the industry
expands or contracts. Suppose that the market demand for dithyrambs is
described by the equation P = 85 - .02 Q, where Q is the total output of the
industry. When the dithyramb industry is in long-run equilibrium, then total
industry output equals:
(a) 1500.
(b) 2000.
(c) 2500.
(d) 3000.
11. In the situation described in the previous question, the number of firms
operating in the dithyramb industry equals:
(a) 200.
(b) 150.
(c) 100.
(d) 50.
12. If the prices of inputs do not change as the size of the industry changes, then
a $10 per unit tax on semiquavers collected from sellers:
(a) will raise the price buyers pay by $10 in the short run but by less than $10 in
the long run.

32

(b) will raise the price buyers pay by $10 in the long run but by less than $10 in the
short run.
(c) will raise the price buyers pay by $10 in both the long run and the short run.
(d) will raise the price buyers pay by less than $10 in both the long run and the
short run.

13. Unless economic profits are zero, firms have an incentive:

(a) to enter or leave the industry.
(b) to change the level of capital employed.
(c) to change the level of labor employed.
(d) to change the quantity of output produced.

14. The cost and

revenue
functions for doit-yourself bodypiercing kits are
illustrated at
right. Assume
that the market
price is P and a
firm in the
industry is
producing
Q0 units of
output. To
maximize profit,
the firm should:

(a) change output.

(b) change capital.
(c) change labor.
(d) change to a more wholesome product.

33

15. If the prices of factors of production increase as the output of the industry
rises, then the long-run industry supply curve:
(a) equals the horizontal sum of the firms' long-run marginal cost functions.
(b) is perfectly elastic and lies at the height equal to the minimum value of the
long-run average cost function of a representative firm.
(c) does not exist because the set of firms that are operating in the industry varies
with market conditions.
(d) slopes upward.

1. C
2. B
3. B
4. D
5. D
6. B
7. D
8. B
9. C
10. D
11. A
12. B
13. A
14. B
15. D

34

Multiple Choice Quiz

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Your Results:
The correct answer for each question is indicated by a .
1
A production function measures the relation between
A)
B)
C)
D)

input prices and output prices.

input prices and the quantity of output.
the quantity of inputs and the quantity of output.
the quantity of inputs and input prices.

A short-run production function assumes that

A) the usage of at least one input is fixed.
B) the level of output is fixed.
C) all inputs are fixed inputs.
D) both a and b
E) both b and c

If average product is decreasing, then marginal product

A) must be greater than average product.
B) must be less than average product.
C) must be increasing.
D) cannot be decreasing.
E) both a and c

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t/index.html

Multiple choice questions

Try the multiple choice questions below to test your knowledge of this chapter. Once you have
completed the test, click on 'Submit Answers for Grading' to get your results.

This activity contains 20 questions.

The long run is a period of time in which:

economic efficiency is achieved
the firm may want to build a bigger plant, but cannot do so
the firm is able to maximise total profit
the firm can hire all the workers that it wants to employ, but it does not have sufficient time to buy more
equipment
the quantities of all inputs can be varied.

The 'law of diminishing marginal returns' refers to the general tendency

for ___to eventually diminish as more of the variable input is employed,
given the quantity of fixed inputs.
capital
marginal product
average total cost
marginal cost
average product

Look carefully at the table which represents a firm's short-run total cost schedule. When output
goes up from four to five shirts the marginal cost is:
Output

Total cost ()

3
4
5

25
55
75

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79

4.00
4.25
25.00
20.00
30.00

Which one of the following statements is false?

Average total cost is total cost per unit of output.
Marginal cost depends on the amount of labour hired.
Average fixed cost plus average variable cost equals average total cost.
Total cost equals total fixed cost plus total average cost.
Marginal cost is the increase in total cost resulting from a unit increase in output.

Which one of the following statements is false?

The vertical gap between curves B and C is equal to average variable cost.
The vertical gap between curves B and C is equal to average fixed cost.
Curve D represents marginal cost.
Average fixed cost decreases with output.
Curve B comes closer to curve C as output increases because of a decrease in average fixed costs.

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In the figure above the average variable cost curve is represented by the
curve labelled:
D
A
None of the above.
C
B

When the marginal product of labour is greater than the average product
of labour:
the total product curve is negatively sloped
the average product of labour is increasing
the marginal product of labour is increasing
the firm is experiencing diminishing returns
the firm is experiencing constant returns

Economies of scale exist when:

the firm is too large and too diversified
the long-run cost of producing a unit of output falls as the output increases
a firm's decision to hire additional inputs does not result in an increase in the price of inputs
the cost of finding a trading partner is low.
the firm is too small and too specialised

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Economies of scope exist when:

greater experience in producing the product reduces average cost
a fall in wages reduces average cost
doubling factor input doubles output
changing the mix of production reduces average cost.
increasing returns applies in the short run

The marginal cost (MC) curve intersects the:

ATC, AVC and AFC curves at their minimum points
ATC and AFC curves at their minimum points.
ATC curve at its maximising point
ATC and AVC curves at their minimum points
AVC and AFC curves at their minimum points

The supply of toys is relatively elastic, which suggests that the factors of
production used in producing toys can easily be switched between
different uses.
True
False

In the long-run time period it is variable costs that the firm must be able
to cover in order to remain solvent (avoid bankruptcy).
True
False

'Normal profit' is that profit which is more than sufficient to keep the
firm in the industry in the long run.
True
False

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If the firm earns more profit than is necessary to keep it in the industry
in the long run, we call this 'super-normal' profit.
True
False

When the 'long-run average cost' curve starts to rise we refer to

economies of scale having set in.
True
False

A rise in cumulative output leading to a reduction in average costs is an

example of economies of scope.
True
False

The marginal cost curve must cut the average variable cost curve at its
lowest point.
True
False

When the producer receives a price higher than that needed to bring
about his/her supply of the product, we call the difference 'producer
surplus'.
True
False

The 'indivisibility of large scale, more efficient processes of production' is

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a source of technical economies of scale.

True
False

If a 5% increase in scale of output results in a 40% fall in average cost,

we speak of a steep 'cost gradient'.
True
False

See also
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