TUTORIAL/ECO162/TOPIC 6/ODL

TOPIC 6: THEORY OF PRODUCTION

PART A

1. The relationship between a series of short run average cost curve (SRACs) and
the long run average curve (LRAC) is such that

A. all of the SRACs are tangent to the LRAC and lie above it.
B. some of the SRACs are tangent to the LRAC and lie below it.
C. some of the SRACs are tangent to the LRAC and lie above it.
D. the SRACs and the LRAC intersect at every point.

2. When total product (TP) is at its maximum

A. the average product of labour is zero.

B. the marginal product of labour is zero.
C. the average product of labour is negative.
D. the average product of labour is declining.

3. Which relationship is not associated with diminishing marginal returns?

A. diseconomies of scale.
B. upward sloping short run supply curves.
C. marginal product is the slope of the total product curve.
D. when marginal product becomes negative, total product is necessarily
declining.

4. The long run is a period of time for which

A. all resources are fixed.

B. the level of output is fixed.
C. the amount of all resources can be varied.
D. the size of the production plant is fixed.

5. Production in the short run

A. is subject to the law of diminishing marginal returns.

B. can be increased by employing another unit of a variable factor as
long as the marginal product of that factor is positive.
C. involves some fixed factors.
D. is characterized by all of the above.

6. A production function

A. is a rule for maximizing net benefits.

B. is the body of knowledge that exists about production and its
processes.
C. shows the type and amount of output that can be attained from a set of
inputs when those inputs are combined in a specific way.
D. is the body of knowledge covering general truth and the operation of
general laws.

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7. “When a variable factor of production is added continuously to a unit of fixed

factor of production, the total production will increase but at a decreasing rate”.
The statement above is related to the law of

A. diminishing marginal utility.

B. diminishing marginal return.
C. negative return.
D. increase in return.

8. 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.

9. The law of diminishing returns states that as

A. the size of plant increases, the firm’s fixed cost decreases.

B. the size of a plant increases, the firm’s fixed cost increases.
C. a firm uses more of a variable input, given the quantity of fixed input,
the marginal product of the variable input eventually diminishes.
D. a firm uses more of a variable input, given the quantity of fixed input,
the firm’s average total cost will decrease eventually.

10. A production function shows a relationship between

A. input and output.

B. production and revenue obtained from selling the products.
C. costs and output.
D. variable input and fixed input.

11. The Law of Diminishing Marginal Returns relates to the

A. returns to scale.
B. marginal output of a variable factor.
C. marginal output of a fixed factor.
D. average output of a variable factor.

12. Which of the following is true when the total product of labor is maximized?

A. Marginal product is increasing.

B. Marginal product is negative.
C. Marginal product is zero.
D. Average product is increasing.

13. Fixed input are factors of production that

A. are determined by a firm’s plant size.

B. can be increased or decreased quickly as output changes.

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C. cannot be increased as output changes in the short-run.

D. are fixed in the long-run.

14. Which of the following is true at the point where diminishing returns set in?

A. Both marginal product and marginal cost are at a maximum.

B. Both marginal product and marginal cost are at a minimum.
C. Marginal product is at a maximum and marginal cost at a minimum.
D. Marginal product is at a minimum and marginal cost at a maximum.

15. Increasing returns to labour is characterised by

A. the percentage increase in output is less than the percentage

increase in labour.
B. the percentage increase in output is equal to the percentage
increase in labour.
C. the percentage increase in output is more than the percentage
increase in labour.
D. none of the above.

16. Which of the following is NOT a factor of production?

A. Money.
B. Land.
C. Labour.
D. Capital.

17. The range of diminishing marginal productivity begins when

A. total product begins to fall.

B. average product reaches its maximum.
C. marginal product reaches its maximum.
D. marginal product begins to fall at an increasing rate.

18. If an increasing quantity of variable factors are applied to a given quantity of

fixed factors, we can predict that all of the following will occur EXCEPT

A. the average product will increase as long as marginal product

exceeds average product.
B. the total product will reach a maximum when marginal product
equals zero.
C. the marginal product will reach a maximum sooner than will the
average product.
D. the average product will reach a maximum sooner than will the
marginal product.

19. In production theory, the long run is characterized by

A. the relevance of the law of diminishing returns.

B. at least one fixed input.
C. insufficient time for firms to enter or leave the industry.
D. none of the above.

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20. Marginal product is

A. the increase in total output attributable to the employment of one

more worker.
B. the increase in total revenue attributable to the employment of one
more worker.
C. the increase in total cost attributable to the employment of one more
worker.
D. total product divided by the number of workers employed.

21. At what point in the graph shown below does the Law of Diminishing Returns
set in?
Product

AP
Input
A B C D
MP
A. Point A
B. Point B
C. Point C
D. Point D

22. Which of the following is NOT correct?

A. Marginal product becomes negative after total product falls.

B. Where marginal product is zero, total product is at maximum.
C. Where total product is at a maximum, average product is also at a
maximum.
D. Where marginal product is greater than average product, average
product is rising.

23. 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.
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C. maximum.
D. negative.

PART B

1. Mardi Bhd. a fruit producer has the following production function. Answer the questions
based on the table given.

Land (Acre) Number of Fruit Pickers Total Number of Mangoes Picked

5 10 1800

5 20 2400

5 30 3100

5 40 4200

5 50 5500

5 60 6300

5 70 7000

5 80 6300

5 90 6000

a) Is Mardi Bhd. operating in the short run? Give a reason for your answer.
(2 marks)

b) Calculate the values of average and marginal product of the mangoes picked.
(4 marks)

c) At what number of picker does the total product start to diminish?

(1 mark)

d) At what number of picker does the marginal product begin to diminish?

(1 mark)

e) At what number of picker does the marginal product becomes negative?

(1 mark)

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f) Name the law that the governs the production of the firm above.
(1 mark
2. The table below shows the production function of an agricultural product. Answer the
following question.

Fertilize Land Average Product Total Product Marginal Product

r
(Acre) (kg) (kg) (kg)
(Tonne)

1 2 70

2 2 80

3 2 90

4 2 90

5 2 80

6 2 70

7 2 60

8 2 50

a) Fill in the column for total product and marginal product.

(4 marks)

b) Sketch a diagram showing the three production stages.

(3 marks)

c) Explain the law of diminishing returns and identify the level of variable input in which
it starts to take place.
(3 marks)

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3. The following table shows the output of Ahmad Satay Sdn. Bhd. Based on the table
given answer question (a) to (c).

Labour Output (kg/per week)

0 0

1 40

2 100

3 140

4 170

5 190

6 200

a) Calculate the average product and marginal product of labour.

(3 marks)

b) What is the relationship between the AP and MP when Ahmad Satay produces:
i) less than 100 satay a week.
(1.5 marks)

ii) more than 100 satay a week.

(1.5 marks)

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c) Draw a diagram of total product (TP), marginal product(MP), and average

product(AP) and determine the stages of production.
(4 marks)

4. A firm Primajaya produces Good Q using two factors: Capital and Labour. The total
product of good Q and the number of workers employed are shown in table below.

No. of Total Product Average Product Marginal Product

Workers
(unit) (unit) (unit)

0 0

1 7

2 15

3 25

4 30

5 34

6 37

7 40

a) Complete the columns for average product and marginal product.

(2 marks)

b) Sketch and label the average product and marginal product curves.
(2 marks)

c) Define the law of diminishing marginal returns and state at which number of
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workers does the diminishing marginal returns set in.

(3 marks)

5. Based on the information provided below, answer the following questions.

Labour employed Total output Average output Marginal output

per day
per worker per worker
(unit per day) (unit per day) (unit per day)

0 0

1 21

2 50

3 69

4 76

5 80

6 80

7 78

i) Complete the table above.

(2 marks)

ii) Determine the corresponding number of labour employed by this firm when the
diminishing returns set in.
(1 mark)

iii) Explain why the firm is still hiring labour even when diminishing returns has occurred.
(2 marks)

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TOPIC 6 – COST OF PRODUCTION AND REVENUE

PART A

1. One reason for economies of scale is

A. increased specialization as the firms builds larger factories.

B. problems in managing large operations.
C. total output increases.
D. the law of diminishing marginal returns.

2. If a firm’s total cost is RM 50 when 10 units are produced and RM 55 when 11 units
are produced, the marginal cost of the 11th unit is

A. RM 5
B. RM 1
C. RM 0.50
D. RM 605

3. Marginal cost can be defined as the

A. change in fixed cost resulting from one more unit of production.

B. difference between fixed and variable cost at any level of output.
C. amount which one more unit or output adds to total cost.
D. difference between price and average total cost at the profit maximizing level of
output.

4. Which would contribute most to a firm experiencing “economies of scale”?

A. rising long run average costs.

B. Law of diminishing marginal returns.
C. specialization of production within a firm.
D. deterioration of information and control within a firm.

5. The reason that the marginal cost curve eventually increases as output increases for
a typical firm is because

A. of diseconomies of scale.
B. of minimum efficient scale.
C. of the law of diminishing returns.
D. normal profit exceeds economic profit.

6. The change in total cost resulting from a one-unit increase in production is called

A. average cost.
B. average variable cost.
C. total variable cost.
D. marginal cost.
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7. Economies and diseconomies of scale are associated with

A. a downward and upward sloping of the long run average total cost curve
respectively.
B. a vertical long run average total cost curve.
C. a horizontal long run average total cost curve.
D. a persistent increase in the cost of production of a firm.

8. The cost that is greater than zero when nothing is produced and that changes as the
level of output changes

A. total fixed cost.

B. total variable cost.
C. short-run total cost.
D. long-run total cost.

9. The main objective of an entrepreneur is to

A. maximize total profit.

B. maximize total revenue.
C. minimize total cost.
D. maximize sales.

10. Diseconomies of scale is the result of

A. discount given for bulk purchases.

B. the use of by product.
C. specialization in the us of machinery.
D. inefficient management.

11. Ceteris paribus, an increase in production will not lead to an increase in

A. marginal cost.
B. average variable cost.
C. average cost.
D. average fixed cost.

12. Average revenue is the

A. revenue from one unit of good or service sold.

B. revenue from the total amount of a good or service sold.
C. change in revenue from selling an additional unit of good or service.
D. difference between the revenue from selling a good or service and its cost of
production.

13. Constant return to scale means that as all inputs are increased,

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A. total output remain constant.

B. average total cost rises.
C. average total cost rises at the same rate as do the inputs.
D. total output increases in the same proportion as do the inputs.

14. A company could produce 99 units of a good for RM316 or produce 100 units of the
same good for RM320. The marginal cost of the 100th unit is

A. RM 3.20
B. RM 4.00
C. RM 320
D. cannot be calculated with this information.

Question number 15 and 16 are based on the following table:

Labour Output Total Variable Cost Total Cost
(units per day) (RM) (RM)
0 0 0 30
1 3 20 50
2 8 40 70
3 12 60 90
4 14 80 110
5 15 100 130

15. In the above table, the total fixed cost is:

A. RM 0
B. RM 20
C. RM 30
D. RM 50

16. In the above table, the total fixed cost at 3 units of output is:

A. RM 20
B. RM 60
C. RM 30
D. RM 90

17. The Law of Diminishing Marginal Returns relates to the

A. returns to scale.
B. marginal output of a variable factor.
C. marginal output of a fixed factor.
D. average output of a variable factor.

18. If a firm’s fixed costs are doubled, marginal cost will

A. increase by 40%.
B. double.

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C. more than double.

D. remain unchanged.

19. Which of the following statement about long run average cost curve of a firm is true?

A. The firm is facing diseconomies of scale when average total cost decreases as
output expands.
B. The firm is facing economies of scale when average total cost decreases as
output expands.
C. The firm is facing diseconomies of scale when average total cost increases as
output falls.
D. The firm is facing diseconomies of scale when average total cost remains
constant as output expands.

20. A Firm’s average fixed cost when producing 1500 units of output equals RM5. When
750 units of output are produced

A. total fixed cost is equal to RM1000.

B. average fixed cost is equal to RM100.
C. total fixed cost is equal to RM10.
D. average fixed cost is equal to RM10.

21. Average variable cost and marginal cost are equal at the output where;

A. AVC is at its minimum.

B. AP is at its maximum.
C. MP is at its maximum.
D. MC is at its minimum.

22. As output increases, average fixed costs:

A. fall.
B. initially fall, and then increase.
C. remain constant.
D. increase.

23. The costs that depend on output in the short run are:

A. total fixed costs only.

B. total variable costs only.
C. total costs only.
D. both total variable costs and total costs.
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24. Diseconomies of scale are reflected in:

A. the downward sloping segment of the long run average total cost curve
B. the downward sloping segment of the long run marginal cost curve
C. a downward shift of the long run average total cost curve
D. the upward sloping segment of the long run average total cost curve

25. The period at which at least one input is fixed in quantity is the:

A. long run
B. production run
C. short run
D. investment decision

26. When the average total cost curve is rising, then the marginal cost curve will be:

A. below the average fixed cost curve

B. falling with greater output
C. above the average total cost curve
D. below the average total cost curve

PART B

1. The following table shows the costs of an accounting firm with fixed cost of RM100.
Fill in the blanks.

Total Total Variable Total Cost Average Cost Marginal Cost Average
Product Cost Variable Cost
(RM)
(RM)
(RM) (RM) (RM)

1 90

2 170

3 240

4 300

5 370

6 450

7 540

8 650

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9 780

10 930

( 4 marks)

2. The following is the production and cost schedule of a firm in the short run.
Labour Total Cost Average Marginal Average Total Marginal
Cost Cost Variable Product Product
Cost (RM) (unit)
(RM) (RM) (unit)
(RM)

0 100 ∞ - - 0 -

1 160 5

2 210 12

3 250 21

4 300 28

5 360 33

a) Complete the above table production and cost schedule.

(4 marks)

b) In one diagram, show the relationship between average cots, average variable cost and
marginal cost.
(3 marks)

c) If marginal revenue is RM12, determine the profit maximizing level of output.

(1 marks)

d) What is the relationship between marginal cost and marginal product?

(1 marks)

e) At what quantity of labour usage does the law of diminishing returns start to set in?

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(1 marks)

3. The table below shows the cost of production for a firm that sells its product at RM10
each.

Output Fixed Cost Variable Cost Total Cost Marginal Cost

(RM) (RM) (RM) (RM)

0 10 -

1 23

2 8

3 6

4 5

5 7

6 10

7 14

a) Based on the data given, complete the columns of fixed cost, variable cost
and total cost.
(5 marks)

b) What type of profit is the firm experiencing at the equilibrium?.

(2 marks)

c) Based on your answer in question (b), should the firm continue its operation?
Justify your answer.
(3 marks)

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4. The next table shows the amount of output produced by a firm using two (2) types of
inputs, Labour (L) and Capital (K). Answer the questions below.

Output per day Input

Labour Capital

100 10 5

250 20 10

600 40 20

1200 80 40

2000 160 80

2500 320 160

i) Is the firm operating in the short-run or long-run? Why?

(2 marks)

ii) Identify the range of output, when the firm experiences:

a) increasing return to scale.
(1 mark)

b) constant return to scale.

(1 mark)

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c) decreasing return to scale.

(1 mark)

5. Based on the table answer the following questions

Price Quantity Total Marginal Quantity Total Marginal

Demanded Revenue Revenue Cost Cost
(RM) Produced
(RM)
(kg/day)

2200 5 - 5 8000 -

2000 6 6 9000

1800 7 7 10 200

1600 8 8 11 600

1400 9 9 13 200

1200 10 10 15 000

a) Fill in the columns for total revenue, marginal revenue and marginal cost.
(3 marks)

b) What are the profit maximizing level of output and price?

(2 marks)

c) Is there any economic profit at the profit maximizing level of output and price?
If yes, how much? Show your calculation. Draw a diagram to show the
economic profit earned by the firm.
(4 marks)

d) State two (2) sources of diseconomies of scale.

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(1 marks)

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