Production and Costs (Ch7) : ECON 140 - Multiple Choice Questions

ECON 140 | Multiple Choice Questions Mohamed Hussain Fardan |33766010 ‫للتدريس الخصوصي‬
Production and Costs (Ch7)

1. If a firm's revenues just cover all its opportunity costs, then:
A) Normal profit is zero. B) Economic profit is zero.
C) Total revenues equal its explicit costs. D) Total revenues equal its implicit costs.
Answer: B
2. Suppose a firm sells its product at a price lower than the opportunity cost of the inputs
used to produce it. Which is true?
A) The firm will earn accounting and economic profits.
B) The firm will face accounting and economic losses.
C) The firm will face an accounting loss, but earn economic profits.
D) The firm may earn accounting profits, but will face economic losses.
Answer: D
3. Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The
explicit costs of production are $1,500,000 and the implicit costs of production are
$300,000. The firm has an accounting profit of:
A) $500,000 and an economic profit of $200,000.
B) $400,000 and an economic profit of $200,000.
C) $300,000 and an economic profit of $400,000.
D) $200,000 and an economic profit of $500,000.
Answer: A
4. The short run is a time period in which:
A) all resources are fixed.
B) the level of output is fixed.
C) the size of the production plant is variable.
D) some resources are fixed and others are variable.
Answer: D
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5. The law of diminishing returns states that:
A) As a firm uses more of a variable resource, given the quantity of fixed resources, the
average product of the firm will increase.
B) As a firm uses more of a variable resource, given the quantity of fixed resources, marginal
product of the firm will eventually decrease.
C) In the short run, the average total costs of the firm will eventually diminish.
D) In the long run, the average total costs of the firm will eventually diminish.
Answer: B
6. The law of diminishing returns only applies in cases where:
A) There is increasing scarcity of factors of production.
B) The price of extra units of a factor is increasing.
C) There is at least one fixed factor of production.
D) Capital is a variable input.
Answer: C
7. The marginal product of labor curve shows the change in total product resulting from a:
A) one-unit increase in the quantity of a particular resource used, letting other resources
vary.
B) one-unit increase in the quantity of a particular resource used, holding constant other
resources.
C) Change in the cost of a variable resource.
D) Change in the cost of a fixed resource.
Answer: B
8. When the total product curve is falling, the:
A) Marginal product of labor is zero. B) Marginal product of labor is negative.
C) Average product of labor is increasing. D) Average product of labor must be negative.
Answer: B
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9. When marginal product reaches its maximum, what can be said of total product?
A) Total product must be at its maximum
B) Total product starts to decline even if marginal product is positive
C) Total product is increasing if marginal product is still positive
D) Total product levels off
Answer: C
10. Variable costs are:
A) Sunk costs.
B) Multiplied by fixed costs.
C) costs that change with the level of production.
D) Change in total cost resulting from the production of an additional unit of output.
Answer: C
11. Which is not a fixed cost?
A) monthly rent of $1,000 contractually specified in a one-year lease
B) an insurance premium of $50 per year, paid last month
C) an attorney's retainer of $50,000 per year
D) a worker's wage of $15 per hour
Answer: D
12. If you know that with 8 units of output, average fixed cost (AFC) is $12.50 and average
variable cost (AVC) is $81.25, then total cost at this output level is:
A) $93.75. B) $97.78.
C) $750. D) $880.
Answer: C
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13. With fixed costs (TFC) of $400, a firm has average total costs (ATC) of $3 and average
variable costs (AVC) of $2.50. Its output is:
A) 200 units. B) 400 units.
C) 800 units. D) 1,600 units.
Answer: C
14. The reason the marginal cost curve eventually increases as output increases for the
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.
Answer: C
15. If the short-run average variable costs (AVC) of production for a firm are rising, then
this indicates that:
A) Average total costs are at a maximum.
B) Average fixed costs are constant.
C) Marginal costs are above average variable costs.
D) Average variable costs are below average fixed costs.
Answer: C
16. If a more efficient technology was discovered by a firm, there would be:
A) An upward shift in the AVC curve. C) a downward shift in the AFC curve.
B) An upward shift in the AFC curve. D) a downward shift in the MC curve.
Answer: D
17. The firm's short-run marginal-cost curve is increasing when:
A) Marginal product is increasing. C) Total fixed cost is increasing.
B) Marginal product is decreasing. D) Average fixed cost is decreasing.
Answer: B
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18. A firm encountering economies of scale over some range of output will have a:
A) rising long-run average cost curve. B) falling long-run average cost curve.
C) constant long-run average cost curve. D) rising, then falling, then rising LRAC
Answer: B
19. When a firm doubles its inputs and finds that its output has more than doubled, this is
known as:
A) economies of scale. B) constant returns to scale.
C) diseconomies of scale. D) a violation of the law of diminishing returns.
Answer: A
20. If all resources used in the production of a product are increased by 20 percent and
output increases by 20 percent, then there must be:
A) economies of scale. C) constant returns to scale.
B) diseconomies of scale. D) increasing average total costs.
Answer: C
21. Economies and diseconomies of scale explain why the:
A) short-run average fixed cost curve declines so long as output increases.
B) Marginal cost curve must intersect the minimum point of the firm's average total cost
curve.
C) long-run average total cost curve is typically U-shaped.
D) short-run average variable cost curve is U-shaped.
Answer: C
22. A cost that does not affect a decision is called an
a. opportunity cost b. incremental cost
c. avoidable cost d. irrelevant cost
Answer: D
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23. Costs that change between alternatives are called
a. fixed costs. b. opportunity costs.
c. relevant costs. d. sunk costs.
Answer: C
24. A cost incurred in the past that cannot be changed by any future action is a(n)
a. opportunity cost b. sunk cost
c. relevant cost d. avoidable cost
Answer: B
25. An implicit cost is
a. the cost of giving up an alternative
b. the cost of a chosen alternative
c. calculated by subtracting the monetary cost.
d. none of the above
Answer: A
26. Cost in the short-run can be classified into………and variable cost.
a. fixed cost
b. asset
c. both (a) and (b)
d. None of these
Answer: A
27. Marginal costs is the change in total cost resulting from unit change in……..
a. output b. input
c. both(a) and (b) d. None of these
Answer: A
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28. The ………………….. Implies that the cost of production continues to be low till the firm
reaches the optimum scale (Marginal cost = Average cost).
a. V-shape b. Q-shape
c. U-shape d. All of these
Answer: C
29. Which of the following are used in calculating opportunity costs?
a. monetary costs b. the cost of time
c. preference d. all of the above
Answer: D
30. An explicit cost is
a. the cost of giving up an alternative
b. the cost of a chosen alternative
c. calculated by subtracting the monetary cost of an alternative by the time invested
d. none of the above Answers for Self Assessment Questions
Answer: B
31. The most important goal of the firm is to
A) Maximize its revenues. B) Maximize its sales volume.

C) Maximize its profits. D) Minimize its costs.
Answer: C
32. Typically a firm’s opportunity costs are
A) only its explicit costs.
B) only its implicit costs.
C) the sum of its explicit costs and its implicit costs.
D) neither its explicit costs nor its implicit costs
Answer: C
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33. implicit cost is an opportunity cost that
A) requires no actual payment of cash.
B) is adjusted for the rate of inflation.
C) is measured by the amount of cash the firm actually pays out.
D) is actually part of the firm’s normal profit.
Answer: A
34. Most typically, a firm incurs an implicit cost when it
A) uses labor. B) pays for its utilities, such as electric power.

C) uses its capital equipment. D) pays interest on a loan to a bank.
Answer: C
35. The return that an entrepreneur can expect to earn, on average, is called
A) profit. B) normal profit.
C) economic profit. D) accounting profit.
Answer: B
36. Economic profit is the difference between total revenue and
A) implicit costs of production. B) interest costs of production.

C) opportunity costs of production. D) explicit costs of production
Answer: C
37. Economic profit is equal to
A) total cost minus opportunity cost. B) total revenue minus opportunity cost.
C) explicit costs minus implicit costs. D) explicit costs plus implicit costs.
Answer: B
38. Economic profit is equal to
A) total cost minus opportunity cost. B) total revenue minus opportunity cost.
C) explicit costs minus implicit costs. D) explicit costs plus implicit costs.
Answer: B
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39. Mohammed started his own pizza centre in his place lactated in Seef . Before joining
the business, he was working as an Assistant manager and earned $ 40,000 /year . Before
occupying the place for his business, he rented the place to some other business firm and
he was earning $ 30,000 /year . He has 2 workers in his pizza centre and he pays $ 400
/month to each worker and spends $ 10,000 /year on raw materials to make pizza . His
total revenue from the pizza business is $ 120,000 /year
The total explicit cost for Mohammed is
A) $10,800/year B) $19,600/year
C) $70,000/year D) $89,600/year
Answer: B
the business, he was working as an Assistant manager and earned $ 40,000 /year. Before
he was earning $ 30,000 /year. He has 2 workers in his pizza centre and he pays $ 400
/month to each worker and spends $ 10,000 /year on raw materials to make pizza . His
total revenue from the pizza business is $ 120,000 /year
The total implicit cost for Mohammed is
A) $10,800/year B) $30,400/year
C) $70,000/year D) $89,600/year
Answer: C
/month to each worker and spends $ 10,000 /year on raw materials to make pizza. His
total revenue from the pizza business is $ 120, 000 /year
The total opportunity cost for Mohammed is
A) $10,800/year B) $30,400/year
C) $70,000/year D) $89,600/year
Answer: D
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The total economic profit for Mohammed is
A) $10,800/year B) $30,400/year
C) $70,000/year D) $89,600/year
Answer: B
The total economic profit for Mohammed is
A) $10,800/year B) $30,400/year
C) $70,000/year D) $89,600/year
Answer: B
44. The short run is a period of time in which
A) the quantity used of at least one resource is fixed.
B) the quantities used of all resource are fixed.
C) output prices are fixed.
D) resource prices are fixed.
Answer: A
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45. The long run is a time frame in which
A) The quantities of some resources are fixed and the quantities of other resources can be
varied.
B) the quantities of all resources can be varied.
C) the quantities of all resources are fixed.
D) all costs are sunk costs
Answer: B
46. An example of a variable resource in the short run is
A) a building. B) capital equipment.

C) an employee. D) land.
Answer: C
47. The marginal product of labor is the change in total product from a one-unit increase in
A) the quantity of labor employed, holding the quantity of capital constant.
B) the quantity of capital employed, holding the quantity of labor constant.
C) both the quantity of labor and the quantity of capital employed.
D) the wage rate.
Answer: A
48. Average product is the
A) total product per unit of an input.
B) maximum output attainable with fixed factors and one variable factor.
C) change in total product due to a one unit change in input.
D) total product divided by the total cost.
Answer: A
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49. The law of diminishing returns implies that, with the use of capital fixed, as the use of
labor rises,
A) total product will fall eventually.
B) the marginal product of labor will fall eventually.
C) the total product of labor will fall below the marginal product of labor.
D) the production process will become technologically inefficient eventually.
Answer: B
50. The law of diminishing returns states that as
A) the size of a 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 inputs, the marginal
product of the variable input eventually diminishes.
D) a firm uses more of a variable input, given the quantity of fixed inputs, the firm’s average
total cost will decrease eventually.
Answer: C
51. A firm has fixed costs
A) in the short run and in the long run.
B) in the short run but not in the long run.
C) in the long run but not in the short run.
D) neither in the long run nor in the short run.
Answer: B
52. A firm’s marginal cost is the increase in its total cost divided by the increase in its
A) quantity of labor. B) average cost.

C) output. D) average revenue.
Answer: C
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53. If a firm’s marginal product of labor is less than its average product of labor, then an
increase in the quantity of labor it employs definitely will
A) decrease its total product.
B) decrease its average product of labor.
C) increase its marginal product of labor.
D) not change its average product of labor.
Answer: B
54. By using more labor to produce more output, a firm can always reduce its
A) marginal cost. B) average variable cost.

C) average total cost. D) average fixed cost.
Answer: D
55. Which of the following is FALSE?
A) Long-run average variable costs equal long-run average total costs.
B) Fixed costs increase in the long run.
C) As a firm produces more output, eventually it experiences diseconomies of scale.
D) In the long run, both the amount of capital and labor used by the firm can be changed.
Answer: B
56. When long-run average costs decrease as output increases, there are
A) economies of scale. B) diseconomies of scale.

C) constant returns to scale. D) constant marginal costs
Answer: A
57. When long-run average costs increase as output increases, there are
A) economies of scale. B) diseconomies of scale.

C) constant returns to scale. D) constant marginal costs.
Answer: B
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Perfect Competition Market (Ch8)

1. Which of the following is a characteristic of a perfectly competitive market?
a. Firms are price setters.
b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of these
Answer: C
2. If a perfectly competitive firm currently produces where price is greater than marginal
cost it
a. will increase its profits by producing more.
b. will increase its profits by producing less.
c. is making positive economic profits.
d. is making negative economic profits.
Answer: A
3. When a perfectly competitive firm makes a decision to shut down, it is most likely that
a. Price is below the minimum of average variable cost.
b. Fixed costs exceed variable costs.
c. Average fixed costs are rising.
d. Marginal cost is above average variable cost.
Answer: A
4. In the long run, a profit-maximizing firm will choose to exit a market when
a. Fixed costs exceed sunk costs.
b. Average fixed cost is rising.
c. Revenue from production is less than total costs.
d. marginal cost exceeds marginal revenue at the current level of production.
Answer: C
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5. When firms have an incentive to exit a competitive market, their exit will
a. Drive down market prices.
b. Drive down profits of existing firms in the market.
c. Decrease the quantity of goods supplied in the market.
d. All of the above are correct.
Answer: C
6. In a perfectly competitive market, the process of entry or exit ends when
a. Firms are operating with excess capacity.
b. Firms are making zero economic profit.
c. Firms experience decreasing marginal revenue.
d. Price is equal to marginal cost.
Answer: B
7. A perfectly competitive firm will maximize profit at the quantity at which the firm's
marginal revenue equals
a. price b. average revenue
c. total cost d. marginal cost
Answer: D
8. Which of the following is not a valid option for a perfectly competitive firm?
a. Increasing its output. b. Decreasing its output.
c. Increasing its price. d. Increasing its resources.
Answer: C
9. In the long run, a perfectly competitive firm will achieve all but which of the following:
a. Economic profit b. Allocate Efficiency
c. Productive Efficiency d. Normal profit
Answer: A
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10. If the price a firm receives for its product is equal to the marginal cost of producing
that product, the firm is:
a. Always earning an economic profit b. always productively efficient.
c. Always allocatively efficient. d. Always experiencing an economic loss.
Answer: C
11. A firm that is producing at the lowest possible average cost is always:
a. Earning an economic profit. b. Productively efficient.
c. Dominating the other firms in the market. d. Not producing enough output.
Answer: B
12. Which of the following is the best example of a perfectly competitive market?
a. diamonds b. athletic shoes
c. soft drinks d. farming
Answer: D
13. Perfect competition is an industry with
a. a few firms producing identical goods.
b. many firms producing goods that differ somewhat.
c. a few firms producing goods that differ somewhat in quality.
d. many firms producing identical goods.
Answer: D
14. In a perfectly competitive industry, there are
a. many buyers and many sellers.
b. many sellers, but there might be only one or two buyers.
c. many buyers, but there might be only one or two sellers.
d. one firm that sets the price for the others to follow.
Answer: A
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15. In perfect competition, the product of a single firm
a. is sold to different customers at different prices.
b. has many perfect complements produced by other firms.
c. has many perfect substitutes produced by other firms.
d. is sold under many differing brand names.
Answer: C
16. In perfect competition, restrictions on entry into an industry
a. do not exist. b. apply to labor but not to capital.
c. apply to both capital and labor. d. apply to capital but not to labor.
Answer: A
17. A perfectly competitive firm faces ………..production alternatives based on a

comparison of price, average total cost, and average variable cost.
a. four short-run
b. three short-run
c. five short-run
d. All of these
Answer: B
18. A perfectly competitive firm’s marginal cost curve that lies above the ………..of the
average variable cost curve is its supply curve.
a. minimum
b. maximum
c. both(a) and (b)
d. None of these Answers for Self Assessment Questions
Answer: A
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19. In perfect competition,
A) each firm can influence the price of the good.
B) there are few buyers.
C) there are significant restrictions on entry.
D) all firms in the market sell their product at the same price.
Answer: D
20. Perfect competition is an industry with
A) a few firms producing identical goods.
B) a few firms producing goods that differ somewhat in quality.
C) many firms producing identical goods.
D) many firms producing goods that differ somewhat.
Answer: C
21. The price elasticity of demand for the firm in a perfectly competitive market is
A) less than 1. B) 1.
C) equal to zero. D) infinite.
Answer: D
22. In perfect competition, the price of the product is determined where the industry
(market)
A) elasticity of supply equals the industry elasticity of demand.
B) supply curve and industry demand curve intersect.
C) average variable cost equals the industry average total cost.
D) fixed cost is zero.
Answer: B
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23. Which of the following is NOT a characteristic of a perfectly competitive industry?
A) There are many firms.
B) There are no restrictions on entry into the industry.
C) Each firm produces a slightly differentiated product.
D) Each firm takes price as given, determined by the equilibrium of industry supply and
industry demand.
Answer: C
24. The difference between a firm’s total revenue and its total opportunity cost is the
firm’s
A) normal profit. B) economic profit.

C) marginal profit. D) marginal revenue.
Answer: B
25. The return that the entrepreneur can obtain in the best alternative business is called
the
A) normal profit. B) economic profit.

C) marginal profit. D) marginal revenue
Answer: A
26. Perfectly competitive firms have a total revenue curve that is
A) upward sloping with an increasing slope.
B) downward sloping with a constant slope.
C) upward sloping with a decreasing slope.
D) upward sloping with a constant slope.
Answer: D
27. Because the demand for a perfectly competitive firm’s product is perfectly elastic,
marginal revenue is equal to
A) one. B) zero.
C) the price of the product. D) negative one.
Answer: C
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28. Which of the following is always true for a perfectly competitive firm?
A) P = MR
B) P = ATC
C) MR = ATC
D) P = AVC
Answer: A
29. The marginal revenue curve for perfectly competitive firms is
A) an upward sloping curve. B) a downward sloping curve.

C) a horizontal line. D) None of the above answers is correct
Answer: C
30. The goal of a perfectly competitive firm is to maximize its
A) normal profit. B) revenue.

C) output. D) economic profit
Answer: D
31. If a firm has a fixed plant and equipment stock, and it is deciding on its best output
level, the firm must be
A) in the short-run. B) in the long-run.

C) in the business cycle. D) at the shutdown point.
Answer: A
32. Which of the following statement is NOT a shortrun decision?
A) What quantity to produce. B) Whether to enter or exit an industry.

C) Whether to produce or shut down. D) Both answers A and C are correct
Answer: B
33. A firm is producing the profit-maximizing amount of output when it is producing where
A)its MC curve crosses its MR curve. B) its MC curve crosses its AVC curve.
C) its MC curve crosses its ATC curve. D) its MC curve crosses its TR curve.
Answer: A
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34. For a perfectly competitive firm, as its output increases its marginal revenue ____ and
its marginal cost ____.
A) Changes, changes B) changes; does not change

C) does not change; changes D) does not change; does not change
Answer: C
35. At its shutdown point, a perfectly competitive firm earns total revenue that
A) exceeds its total cost. B) generates a normal profit.

C) just equals its total variable cost. D) exceeds its total variable
cost.
Answer: C
36. In the short run, a perfectly competitive firm might
A) set its price above marginal cost.
B) set its price above marginal revenue.
C) adjust the size of its fixed inputs.
D) operate even though it is incurring an economic loss.
Answer: D
37. In the short run, a perfectly competitive firm will shut down if
A) P < AVC.
B) AVC < ATC .
C) P > ATC .
D) P > MC .
Answer: A
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38. Which of the following statements is true? The firm is at break-even point when
A) Firm just earn normal profit B) P = ATC .

C) Economic Profit = 0 . D) All the above are true
Answer: D
39. For a perfectly competitive firm, in the long-run equilibrium,
A) P = MC = ATC = MR .
B) MR = MC = AFC.
C) MR = P = ATC = AFC .
D) P = MC > ATC .
Answer: A
40. In the long-run equilibrium, perfectly competitive firms produce the level of output
such that
A) marginal cost is minimized. B) average total cost is minimized.

C) marginal cost equals the price. D) Both answers B and C are correct.
Answer: D
41. A perfectly competitive firm’s supply curve
A) shows the relationship between the price and the quantity the firm will produce.
B) is the portion of the marginal cost curve above the average variable cost curve.
C) is upward sloping.
D) All of the above are correct
Answer: D
42. A perfectly competitive firm’s short-run supply curve is
A) its marginal cost curve above the shutdown point.
B) its average total cost curve above the minimum of the average variable cost.
C) its average variable cost curve above the breakeven point.
D) horizontal at the market price
Answer: A
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Monopoly Market (Ch9)

1. Price for a firm under monopolistic competition is ______.
a. equal to marginal revenue
b. greater than marginal revenue
c. less than marginal revenue
d. greater than total revenue
Answer: B
12. In the long run, monopolistically competitive firms tend to experience ______.
a. high economic profits
b. zero economic profits
c. negative economic profits
d. substantial economic losses
Answer: B
13. Marginal revenue for a monopolist is ______
a. equal to price
b. greater than price
c. less than price
d. equal to average revenue
Answer: C
‫تمنياتي للجميع بالتوفيق والنجاح‬

‫ن‬
" ‫حسي فردان‬ ‫" محمد‬
33766010 :‫للإستفسار‬
23 | P a g e

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ECON 140 | Multiple Choice Questions Mohamed Hussain Fardan |33766010 ‫للتدريس الخصوصي‬

Production and Costs (Ch7)

A) Normal profit is zero. B) Economic profit is zero.

A) The firm will earn accounting and economic profits.

B) The firm will face accounting and economic losses.

A) $500,000 and an economic profit of $200,000.

B) $400,000 and an economic profit of $200,000.

C) $300,000 and an economic profit of $400,000.

D) $200,000 and an economic profit of $500,000.

4. The short run is a time period in which:

A) all resources are fixed.

B) the level of output is fixed.

C) the size of the production plant is variable.

D) some resources are fixed and others are variable.

5. The law of diminishing returns states that:

6. The law of diminishing returns only applies in cases where:

A) There is increasing scarcity of factors of production.

B) The price of extra units of a factor is increasing.

C) There is at least one fixed factor of production.

D) Capital is a variable input.

C) Change in the cost of a variable resource.

D) Change in the cost of a fixed resource.

8. When the total product curve is falling, the:

A) Marginal product of labor is zero. B) Marginal product of labor is negative.

C) Average product of labor is increasing. D) Average product of labor must be negative.

A) Total product must be at its maximum

B) Total product starts to decline even if marginal product is positive

C) Total product is increasing if marginal product is still positive

D) Total product levels off

10. Variable costs are:

B) Multiplied by fixed costs.

C) costs that change with the level of production.

11. Which is not a fixed cost?

A) monthly rent of $1,000 contractually specified in a one-year lease

B) an insurance premium of $50 per year, paid last month

C) an attorney's retainer of $50,000 per year

D) a worker's wage of $15 per hour

A) 200 units. B) 400 units.

C) 800 units. D) 1,600 units.

A) of diseconomies of scale. B) of minimum efficient scale.

C) of the law of diminishing returns. D) normal profit exceeds economic profit.

A) Average total costs are at a maximum.

B) Average fixed costs are constant.

C) Marginal costs are above average variable costs.

D) Average variable costs are below average fixed costs.

B) An upward shift in the AFC curve. D) a downward shift in the MC curve.

17. The firm's short-run marginal-cost curve is increasing when:

A) Marginal product is increasing. C) Total fixed cost is increasing.

B) Marginal product is decreasing. D) Average fixed cost is decreasing.

A) economies of scale. B) constant returns to scale.

C) diseconomies of scale. D) a violation of the law of diminishing returns.

A) economies of scale. C) constant returns to scale.

B) diseconomies of scale. D) increasing average total costs.

21. Economies and diseconomies of scale explain why the:

A) short-run average fixed cost curve declines so long as output increases.

C) long-run average total cost curve is typically U-shaped.

D) short-run average variable cost curve is U-shaped.

22. A cost that does not affect a decision is called an

a. opportunity cost b. incremental cost