CHAPTER 6

PRODUCTION AND COST THEORY

PART A : MULTIPLE CHOICE

1. To economists the main difference between the short run and long run is that

A. the law of diminishing returns applies in the long run, but not in the short run.
B. in the long run all the resources are variable, while in the short run at least one
resource is fixed.
C. fixed costs are more important to decision making in the long run than they are
in the short run.
D. in the short run all the resources are fixed, while in the long run all resources are
variable.

2. In the relationship between total product, average product and marginal product, the
average product equals the marginal product when average product is

A. decreasing.
B. increasing.
C. maximum.
D. negative.

3. Economies and diseconomies of scale explain

A. the profit-maximization level of production.

B. why the firm’s long run average cost curve is a u-shaped.
C. why the firm’s short run marginal cost curve cuts the short run average variable
cost curve at its minimum point.
D. the distinction between fixed and variable costs.

Answer the next two (2) questions on the basis of the following output data for a firm. Assume
that the amounts of all non-labour resources are fixed.

Number of Workers Units of Output

0 0
1 40
2 90
3 126
4 150
5 165
6 180
4. Diminishing returns become evident with the addition of

A. the sixth worker.

B. the fourth worker.
C. the third worker.
D. the second worker.

5. The marginal product of the sixth worker

A. is 180 units of output.

B. is 30 units of output.
C. is 15 units of output.
D. cannot be determined from the data given.

6. Which of the following statements is correct?

A. Marginal product equals to zero when total product is at its maximum.

B. Marginal product equals to marginal revenue.
C. Total product starts to decrease as average product decreases and becomes
negative.
D. Average product increases as total product decreases.

7. Economies and diseconomies of scale explain

A. why firm’s long run average cost curve is u-shaped.

B. the distinction between fixed and variable costs.
C. the profit maximization level of production.
D. why firm’s short run marginal cost curve cuts the short-run average variable cost
curve at its minimum point.

8. When average product reaches its maximum,

A. marginal product is equal to average product.

B. average product is greater than marginal product.
C. average product is less than marginal product.
D. marginal product will increase rapidly.

9. The relationship between input and output is shown by the

A. cost function.
 B. producing function.
C. demand function.
D. supply function.

10. When the total product is at maximum, the marginal product is

A. positive.
B. zero.
C. negative.
D. maximum.

11. When the output increases in higher proportion than the increase in input, the returns to
scale is

A. constant.
B. increasing.
C. decreasing.
D. negative.

12. Which of the following is most likely to be a variable cost?

A. Property insurance premiums.

B. Interest on bonded in debt ness.
C. Rental payments on IBM equipment.
D. Payment for raw materials purchased from Company S.

13. If a firm decides to produce no output in the short run, its cost will be __________.

A. zero.
B. its fixed cost.
C. its variable cost.
D. its marginal cost.

14. If more and more of a variable input is added to some fixed inputs, beyond some point,
the resulting extra output or marginal product will decline. This statement describes

A. economies and diseconomies of scale.

B. diseconomies of scale.
C. the law of diminishing returns.
D. the law of diminishing marginal utility.
 15. If the short run average variable cost is decreasing, this indicates that

A. average total cost is maximum.

B. average fixed cost is constant.
C. marginal cost is greater than average variable cost.
D. marginal cost is less than average variable cost.

16. Stage two in short run production begins from the point where

A. total products started to decrease.

B. marginal products equal zero.
C. average products is at its maximum.
D. total products increase at accelerating rate.

17. In the long run, a firm can vary

A. its capital but not its labour.

B. its labour but not its capital.
C. both its labour and capital.
D. Neither its labour nor its capital.

18. The cost that is greater than zero when nothing is produced and its value will
increases as the level of output increases. This refer to

A. total fixed cost.

B. total variable cost.
C. total cost.
D. marginal cost.

19. A firm experience economies of scale because

A. it has grown so large and the average total cost decreases as output expands.
B. It has grown so large and the average total cost increases as output expands
C. It has grown so large and the average total cost is constant as output expands.
D. It is operating at a scale where total fixed costs are not minimized.

20. The marginal cost of a good is

A. the addition to total cost of producing one more unit of output.

B. decreasing when average total cost is decreasing.
C. the difference between average total cost and average fixed cost.
D. always equal to average variable cost when firm is maximizing profit.