Ch.

6 - Production and Costs

2007
19. The input – output relationship of Firm A is as follows:

Capital (units) Labour (units) Marginal output (units)

1 10 10
1 11 9
1 12 8
1 13 7

From the above table, we can conclude that, as the labour input increases

A. total output is increasing,

B. average output is increasing.
C. firm A is experiencing diseconomies of scale.
D. the average cost of production is decreasing.

2008
16. The input-output relationship of a firm is as follows:

Labour (units) Machine (units) Average product of

labour (units)
1 2 14
2 2 15
3 2 16

Diminishing marginal returns set in after the 3rd unit of labour is employed. The marginal product of the
4th unit of labour must be any number of output smaller than ________ units.

A. 15
B. 16
C. 17
D. 18

18. When a firm expands production by only employing more labour,

A. the wage rate of its workers will increase.

B. the average productivity of its workers will increase.
C. the firm will enjoy economies of scale.
D. the marginal product of its workers will eventually decrease.

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Ch. 6 - Production and Costs
2009
19 Refer to the following information about the inputs, outputs and average cost of a firm. The only inputs
required for production are capital and labour.

Capital (units) Labour (units) Total output (units) Average cost ($)
500 5 3000 3
1000 10 4500 4
1500 15 5500 5

Within the above range of output, we can conclude that

A. The firm is producing at the optimal scale of production.

B. The law of diminishing marginal return applies to the firm.
C. The firm does not have a comparative advantage in the production of this good.
D. The firm suffers from diseconomies of scale.

2010
19. The input-output relationship of a firm is as follows.

Machine (unit) Labour (unit) Average Product of labour

(unit)
3 1 20
3 2 12
3 3 11
3 4 10

According to the above table, diminishing marginal returns set in after __________ unit(s) of labour
is/are employed.

A. 1
B. 2
C. 3
D. 4

2
Ch. 6 - Production and Costs
2011
20. During the busy season before Christmas, a factory increases the number of workers to increase output.
This can be shown in the following table:

No. of workers Average output (units)

5 100
6 105
7 108
8 109

The change in output can be explained by _______.

A. the law of diminishing marginal returns
B. diseconomies of scale
C. economies of scale
D. the principle of comparative advantage

SP
7. A firm increases all its inputs to double its output. The following table shows the change in total cost
after a change in output.

Total Output (Units) Total Cost ($)

10 000 60 000
20 000 140 000

Based on the above information, we can conclude that

A. the firm enjoys economies of scale.
B. the firm suffers from diseconomies of scale.
C. the firm cannot cover its cost after doubling the output.
D. the optimal scale of production is 10 000 units of output.

PP
5. The following table shows the monthly production of a firm with two inputs, machines and labour.

If the law of diminishing marginal returns applies to the firm, X

A. must be smaller than 42.
B. must be greater than 42.
C. can be equal to 42.
D. is equal to 52.
3
Ch. 6 - Production and Costs
2013
3. The following table shows the cost-output relationship of a firm

Output (units) 0 1 2 3 4 5
Total cost ($) 10 28 42 52 60 72

Based on the above table, we can conclude that

A. the firm enjoys the benefits of economies of scale.

B. the firm’s optimal scale of production is 5 units of outputs.
C. the average variable cost is increasing.
D. the total fixed cost is $10.

4.
Machines (units) Labour (units) Average Product (units)
2 3 30
2 4 40
2 5 50
2 6 55

The above table shows a ________________ situation in which ______________.

A. short run … the law of diminishing returns does not apply

B. short run … the law of diminishing returns applies
C. long run … economies of scale exists
D. long run … diseconomies of scale exists

5. In order to increase the number of nurses for expanding medical services, the government has allocated
more resources to expand the nursing programme in universities. In this case, private hospitals will

A. enjoy internal economies of scale.

B. suffer internal diseconomies of scale.
C. enjoy external economies of scale.
D. suffer external diseconomies of scale.

4
Ch. 6 - Production and Costs
2014
5. The following table shows a production plan of a firm which employs two factors only, namely labour
and machinery.

The marginal product of labour will start to diminish when the _________ unit of labour is put to work.
A. second
B. third
C. fourth
D. fifth

2015
9. The table below shows the total product of Firm A, which employs only capital and labour in
production.

Labour (units) Capital (units) Total Product (units)

12 2 110
12 3 130
12 4 160
12 5 X

Which of the following statements about Firm A is correct?

A. If the above data illustrate the law of diminishing marginal returns, the value of X can be equal to
180.
B. If the above data illustrate the law of diminishing marginal returns, the value of X can be equal to
190.
C. If the above data illustrate the law of diminishing marginal returns, the value of X can be equal to
200.
D. The law of diminishing marginal returns does not apply to Firm A because capital is not a fixed
factor.

5
Ch. 6 - Production and Costs
2016
Study the following information and answer Question 7:

A school is a production unit which provides educational services. The following are people and objects that
are usually found at a school:

(1) the school building

(2) teachers
(3) students
(4) private cars owned by teachers
(5) sanitizers (洗手液) in the toilets

7. In the long run, which of the above items are variable factors of production of the school?

A. (1) and (5) only

B. (1), (2) and (5) only
C. (2), (3) and (4) only
D. (1), (2), (3), (4) and (5)

2017
10. An art centre extends its business hours for one hour in order to offer more painting classes. Which
of the following are variable costs involved in the extra hour of operation?

(1) salary of the accountant

(2) electricity fee
(3) expense on paints
(4) rental payment

A. (1) and (4) only

B. (2) and (3) only
C. (1), (2) and (4) only
D. (1), (2), (3) and (4)

6
Ch. 6 - Production and Costs
2018
10. The following table shows the input-output relationship of a firm. The only inputs required are
capital and labour.

Capital (units) Labour (units) Marginal product of labour

(units)
2 1 5
2 2 7
2 3 9
2 4 8
2 5 6

The average product of labour is at the highest when the quantity of labour is ____________ units.

A. 2
B. 3
C. 4
D. 5

12. Which of the following statements about economies of scale is correct?

A. It could be a source of monopoly power.
B. It exists when the average fixed cost is falling.
C. Only large firms enjoy economies of scale.
D. It is the result of the law of diminishing marginal returns.

2019
5. The following table shows the production data of a firm. The only inputs required are capital and
labour.

Capital (units) Labour (units) Total Product Total cost of

(units) production ($)
2 2 10 100
3 3 30 270
4 4 45 360
5 5 55 385

Based on the above table, we can conclude that

A. the law of diminishing returns applies to the firm.
B. the total fixed cost is $100.
C. the optimal scale is 45 units.
D. the firm enjoys economies of scale.

7
Ch. 6 - Production and Costs
2020
7.
Tai On Building (太安樓) in eastern Hong Kong Island is well-known as a 'foodie paradise'. A variety
of street snacks such as cart noodles, egg waffles, dumplings and mango mochi are sold by numerous
small vendors. Customers from different districts fill their stomaches at Tai On Building.

Based on the above information, street snack vendors at Tai On Building can __________________.

A. enjoy internal economies of scale

B. enjoy external economies of scale
C. suffer internal diseconomies of scale
D. suffer external diseconomies of scale

8. The following table shows the production plan of a firm which employs two factors only, namely
labour and machinery.

Machinery (units) Labour (units) Average product of labour (units)

4 1 20
4 2 21
4 3 22
4 4 X

If the above data illustrate the law of diminishing marginal returns, the value of X __________.

A. can be 23
B. can be smaller than 22
C. must be larger than 22
D. must be smaller than 22

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Ch. 6 - Production and Costs
Answer Key
Year Q Answer Correct %
2007 19 A 42
2008 16 D 53
18 D 78
2009 19 D 66
2010 19 C 44
2011 20 A 65
SP 7 B /
PP 5 C /
2013 3 D 45
4 B 82
5 C 71
2014 5 C 79
2015 9 A 79
2016 7 B 52
2017 10 B 87
2018 10 C 65
12 A 51
2019 5 D 71
2020 7 B 79
8 B 58

Average % (CE+DSE) 64.8%

Average Marks Distribution in DSE paper 1 (30% of the subject) 1.33/ 45
Average Marks Distribution in DSE Economics 0.89/30