MCQs Unit 1 and 2

1. As output expands, LAC curve falls. This is due to

(a) Law of variable proportions
(b) Law of diminishing returns
(c) Economies of scale
(d) Diseconomies of scale
Explanation:
In the long run, when output expands total cost
first increases, then becomes constant and finally
decreases. When output expands, and cost curve
falls it is the first stage of returns to scale which
occurs due to economics of scale.
2. …......... shows the overall output generated at a given
level of input
(a) Iso cost
(b) Production function
(c) MRTS
(d) Cost function

3. In order to manufacture 1000 pairs of shoes in a

week, a firm can use 1000 workers and
4. 50 machines, or 1500 workers and 100 machines.
Which method is technically efficient?
3. In order to manufacture 1000 pairs of shoes in a
week, a firm can use 1000 workers and 50
 machines, or 1500 workers and 100 machines.
Which method is technically efficient?
(a) 1000 workers and 50 machines.
(b) 1500 workers and 100 machines.
(c) Both could be technically efficient.
(d) Neither are technically efficient.
Explanation- The technically efficient method of
production uses fewer inputs to produce a given
amount of output.

4. Producing 3,000 vases costs a firm $18,000, while

producing 4,000 vases costs$20,000. This most
likely represents:
(a) Diminishing marginal utility.
(b) Diseconomies of Scale.
(c) Economies of Scale.
(d) Diminishing marginal productivity.

(e) The long run average total cost of producing 15

units of output is $45, while long run
(f) average total cost of producing 16 units is $49.
These figures suggest that the firm is
(g) experiencing:
5. The long run average total cost of producing 15
units of output is $45, while long run average total
 cost of producing 16 units is $49. These figures
suggest that the firm is experiencing:
(a) Economies of Scale.
(b) Constant Economies of Scale.
(c) Diseconomies of Scale.
(d) Increasing marginal productivity.
Explanation- Diseconomies of scale occurs when
average unit cost start to increase.

6. The long run average total cost curve:

(a) Will always be either below or just touching the
short run average total cost curve at every level
of output.
(b) Will always be above or just touching the short
run average total cost curve at every level of
output.
(c) Will always be just touching the short run
average total cost curve at every point at every
level of output.
(d) Will sometimes be above and sometimes
below the short run average total cost curve
at every level of output.
(e) will always be either below or just touching the
short run average total cost curve at every level
of
(f) output.
 (g) will always be above or just touching the short
run average total cost curve at every level of
(h) output.
(i) will always be just touching the short run
average total cost curve at every point at every
level of
(j) output.
(k) will sometimes be above and sometimes below
the short run average total cost curve at every
(l) level of output.
(m) will always be either below or just touching the
short run average total cost curve at every level
of
(n) output.
(o) will always be above or just touching the short
run average total cost curve at every level of
(p) output.
(q) will always be just touching the short run
average total cost curve at every point at every
level of
(r) output.
(s) will sometimes be above and sometimes below
the short run average total cost curve at every
(t) level of output.
7. In the short run production function, which one of
the following is CORRECT
 (a) Technology is assumed to change as labour
input changes.
(b) Technology is assumed to change as capital
stock changes.
(c) Technology is assumed to change positively
until diminishing returns set in.
(d) Technology is assumed to be constant for a
given production function relationship.

1. In the long run, when average cost per unit decreases

as output increases, we say that
2. there are economies of scale in production.1

8. In the law of variable proportion, the point of

inflexion is where,
(a) Total product starts decreasing at increasing rate.
(b) Total product starts decreasing at diminishing
rate.
(c) Total product starts increase at increasing rate.
(d) Total product starts increase at diminishing
rate.
9. The relationship between rate of inputs of
productive services and the rate of output is known
as
(a) Production Function
(b) Utility Function
(c) Supply Function
(d) None of these

10. Business profit is equal to total revenue minus

(a) Economic costs
(b) Explicit costs
(c) Implicit costs
(d) Managerial costs

11. Which of the following is an example of an

implicit cost?
(a) Dividends paid out to stockholders
(b) The uncompensated services of the spouse of a
firm's owner.
(c) Payments made to workers who are unproductive
(d) All of the above are implicit costs.

12. Implicit cost is equal to

(a) A business profit minus economic profit.
(b) A business profit plus economic profit.
(c) Economic profit minus business profit.
 (d) Economic profit minus explicit costs

13. Which of the following is the best definition of

managerial economics?
(a) A distinct field of economic theory.
(b) A field that applies economic theory and the
tools of decision science.
(c) A field that combines economic theory and
mathematics.
(d) None of the above.

14. An increase in the price of a product will reduce

the amount of it purchased because:
(a) Supply curves are upward sloping.
(b) The higher price means that real incomes have
risen.
(c) Consumers will substitute other products for
the one whose price has risen.
(d) Consumers substitute relatively high-priced for
relatively low-priced products.

15. A firm's supply curve is upward sloping because:

(a) The expansion of production necessitates the use
of qualitatively inferior inputs.
(b) Mass production economies are associated with
larger levels of output.
(c) Consumers envision a positive relationship
between price and quality.
(d) Beyond some point the production costs of
additional units of output will rise.

16. Refer to the above diagram. The equilibrium

price and quantity in this market will be:
(a) $1.00 and 200.
(b) $1.60 and 130.
(c) $.50 and 130.
(d) $1.60 and 290.

17. An effective ceiling price will:

(a) Induce new firms to enter the industry.
(b) Result in a product surplus.
(c) Result in a product shortage.
(d) Clear the market.
18. The income elasticity of demand for a good is
negative. This most likely mean that the good is
a/an:
(a) Normal good
(b) Complementary good
(c) Inferior good
19. For a Veblen good, the demand curve (against
own price) is most likely:
(a) Upward sloping
(b) Upward sloping till a limit
(c) Downward sloping

20. A caterer recently hired more cooks to cope with

increasing demand. In the short run, marginal
returns are MOST likely to increase if:
(a) The cooks are currently required to
multitask and share duties
(b) The cooks currently have a lot of free time
(c) The kitchen is operating at full capacity

21. Which among the following factor does not lead

to a shift in the demand curve?
(a) Income
(b) Advertisement
(c) Price of related products
(d) Price of the product
 22. After expanding capacity, a manufacturing firm
finds that the average total cost of production has
gone up. What is the most appropriate action for the
firm to ensure long-term viability? (Assume the firm
operates in a perfectly competitive industry)
(a) Scale up operations to reach economies of scale
(b) Maintain at current operational level
(c) Scale down operation to try to reach the
minimum efficient scale
Explanation: Increase in ATC likely means the
firm has expanded beyond the minimum
efficient scale to diseconomies of scale. In a
perfectly competitive industry, only firms that
operate at the minimum efficient scale can
continue in the long run. Therefore, the firm
should scale down its operations.

In the long run, when average

cost per unit decreases as output
increases, we say that
there are economies of scale in
production.
In the long run, when average
cost per unit decreases as output
increases, we say that
there are economies of scale in
production.
In the long run, when average
cost per unit decreases as output
increases, we say that
there are economies of scale in
production.