## Multiple Choice Questions on Theory of Production and Cost pdf | Production, Cost, and Revenue

#### 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 revenue equals its explicit costs

(d) total revenue equals its implicit costs

Ans. b

#### 2. Total production will be maximum when

(a) marginal production is maximum

(b) average production is maximum

(c) m?rginal production is zero

(d) average production is equal to marginal production

Ans. c

#### 3. An isoquant represents all those input combinations which are capable of producing

(a) same level of output

(b) different levels of output at different points

(c) Either ‘a’ or ‘b

(d) Both ‘a’ and ‘b’

Ans. a

#### 4. If a more efficient technology was discovered by a firm, there would be

(a) an upward shift in the AVC curve

(b) an upward shift in the AFC curve

(c) a downward shift in the AFC curve

(d) a downward shift in the MC curve

Ans. d

#### 5. A firm’s long-run average total cost line is

(a) identical to its long-run marginal cost line

(b) also its long-run supply curve

(c) in tact the average total cost curve of the optimal plant

(d) tangent to all the curves of short-run average total cost

Ans. d

#### 6. Average fixed cost

(a) is u-shaped

(b) declines over the entire output range

(c) is a long-run concept only

(d) is influenced in diminishing returns to production

Ans. b

#### 7. Why the TC and TVC curves increase in a parallel way?

(a) Because of TC

(b) Because to TVC

(c) Because of TFC

(d) All of these

Ans. c

(a) MC

(c) AC

(b) AVC

(d) AFC

Ans. d

#### 9. If average total cost is Rs. 100 for a given output and marginal cost is Rs. 70, then the average fixed cost is

(a) rs 30

(b) rs 170

(c) rs 70

(d) not possible to determine with the information given

Ans. d

#### 10. Implicit costs are

(a) equal to total fixed costs

(b) comprised entirely of variable costs

(c) payments tor self-employed resources

(d) always greater in the short-run than in the long-run

Ans. c

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#### 11. Which would be an implicit cost for a firm? The cost

(a) of worker’s wages and salaries for the firm

(b) paid for leasing a building for the firm

(c) paid for production supplies for the firm

(d) of wages foregone by the owner of the firm

Ans. d

(a) zero

(b) infinity

(c) one

(d) 0 < es < 1

Ans. c

#### 13. Which of the following is not the reason for increasing returns to scale?

(a) Indivisibility of the factors

(b) Fuller utilisation of fixed factors

(c) Greater specialisation of factors

(d) Dimensional economies

Ans. a

#### 14. An isoquant for perfect substitutes would be

(a) right angled shape

(b) negatively sloped straight line

(c) straight line parallel to the X-axis

(d) straight line parallel to the Y-axis

Ans. b

#### 15. In the short-run, diminishing marginal returns are implied by

(a) rising marginal cost

(b) rising average cost

(c) rising average variable cost

(d) All of the above

Ans. a

#### 16. If all inputs are increased in the same proportion, then it is the case of

1. short-run production function

2. long-run production function

3. laws of variable proportion

4. laws of returns to scale

(a) 1 and 2

(b) 2 and 3

(d) 2 and 4

(c) 1 and 4

Ans. d

(a) AR > MR

(b) MR < AR

(c) AR = MR

(d) All of these

Ans. c

#### 18. The reason the marginal cost curve eventually increases as output increases for the typical firm is

(a) diseconomies of scale

(b) minimum efficient scale

(c) the law of diminishing returns

(d) normal profit exceeds economic profit

Ans. c

#### 19. An individual production possibility boundary line

(a) contains all efficient combinations of productions

(b) indicates firm’s boundary of the production possibility set

(c) indicates the marginal cost of an additional unit of either goods

(d) All of the above

Ans. d

#### 20. Consider the following statements.

1. MP is also called MPP.

2. Physical product refers to production as measured in terms of physical units of the commodity.

3. TP increases even when MP is decreasing

Which of the statements given above is/are correct?

(a) Only 1

(b) 2 and 3

(d) All of these

(c) 1 and 2

Ans. d

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#### 21. What is the reason for diminishing returns to a factor?

(a) Fixity of fixed tactor

(b) Impertect substitution of tactors

(c) Poor coordination

(d) All of the above

Ans. d

(a) 50

(b) 25

(c) 62

(d) 80

Ans. d

#### 23. Which of the following is not a reason of diminishing returns to a factor?

(a) Scarcity of foxed factor

(b) Scarcity of variable factor

(c) Indivisibility of the fixed factor

(d) Imperfect substitutability of factor

Ans. b

#### 24. Identify the implicit cost from the following.

(a) Rent paid by a shopkeeper to the real owner of the shop

(b) Salary of manager

(c) Reward for the owner

(d) All of the above

Ans. c

#### 25. Which of the following statements about the relationship between marginal cost and average cost is correct?

(a) When MC is falling, AC is falling

(b) AC equals MC at MC’s lowest point

(c) When MC exceeds AC. AOC must be rising

(d) When AC exceeds MC, MC must be rising

Ans. c

#### 26. In general, most of the production functions measure

(a) the productivity of factors of production

(b) the relation between the factors of production

(c) the economies of the scale.

(d) the relation between changes in physical inputs and physical outputs

Ans. d

#### 27. Marginal product is

(a) what is produced when all factors of production are employed at optimum efficiency

(b) the extra output obtained from employing an additional unit of a factor

(c) what is left to the entrepreneur after he has paid all his expenses

(d) annual output of the most efficient firm in a industry

Ans. b

(a) profits

(c) price

(b) factors

(d) costs

Ans. b

#### 29. When average product is falling, it is

(a) less than MP

(b) equal to MP

(d) None of these

(c) grater than MP

Ans. c

#### 30. On a production possibility curve, the amount of Y foregone to produce another unit of X has been given a special name, what is it?

(a) Substitute goods

(c) Opportunity cost

(b) Production rate

(d) Price of production

Ans. c

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#### 31. Marginal product is zero when

(a) TP is maximum

(b) TP is zero

(c) TP is at its optimum point

(d) TP is at the point of inflexion

Ans. c

#### 32. Why marginal product is otherwise known as ‘increment theory’?

(a) Because it measures the rate at which total physical product is changing as one factor varies

(b) Because it goes in a decreasing order

(c) Because it does not measure factor inputs in relation to increase in total product

(d) All of the above

Ans. a

#### 33. Law of variable proportion comes under

(a) short-run production function

(b) long-run production function

(c) Both ‘a’ and ‘b’

(d) None of the above

Ans. a

#### 34. The output where diminishing returns to production begins is also the output where

(a) marginal cost is át its minimum

(b) average total cost is at its minimum

(c) average variable cost is at Its minimum

(d) marginal and average costs intersect

Ans. a

#### 35. When the average product increases, the marginal product is

(a) less than AP

(c) greater than AP

(b) equal to AP

(d) None of these

Ans. c

#### 36. Laws of increasing and constant returns are temporary phases of

(a) law of variable proportions

(b) law of returns to scale

(c) law of proportionality

(d) law of diminishing marginal product

Ans. b

(a) a

(c) A

(b) 1-a

(d) a L

Ans. a

(a) ARXQ

(c) TVR

(b) MRXQ

(d) AR /Q

Ans. a

#### 39. If the short-run average variable costs of production for 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

Ans. c

#### 40. It is said in the assumption that, “technique of production does not change in the law of variable proportion.” What do you mean by this assumption?

(a) There is an improvement of technology

(b) There is only traditional method of production

(c) There is decline in the efficiency of technology

(d) Technology temains constant and not change at all

Ans. d

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#### 41. When there is constant returns to scale, then the production function is described as

(a) linearly homogeneous production function

(b) homogeneous production function of degree two

(c) non-homogeneous production function

(d) None of the above

Ans. a

#### 42. If we have constant returns to scale and we increase the quantity of inputs by 10%, then output will

(a) increase by 10%

(b) decrease by 10%

(c) increase by less than 10%

(d) decrease by less than 10%

Ans. a

#### 43. How the e, is derived in relation to AR and MR concepts?

(a)e, = Lower segment/ Upper segment

(b)e, = (-)(AQ / AP x P/Q)

(c) TE = Px0

(d)e, = AR/ AR – MR

Ans. d

#### 44. ed will be equal to one when

(a) MA= 1/2AR

(b) AR= 1/2 MR

(c) MR= AR

(d) None of these

Ans. a

#### 45. The Cobb-Douglas production function Q=4K L03 exhibits … returns to scale.

(a) corfstant

(c) decreasing

(b) increasing

(d) None of these

Ans. c

(b) never

(d) often

(a) always

(c) sometimes

Ans. a

#### 47. Normally, the isoquants slope

(a) upwards from left to right

(b) upwards from right to lett

(c) downwards from left to right

(d) backwards from let to right

Ans. c

#### 49. By marginal revenue, we mean

(a) the revenue the firm earns when it has increased its output by one unit

(b) the increase in costs a firm incurs when it increases its output by one unit

(c) the change in revenue a firm earns when it increases its output by one unit

(d) the change in fixed revenue but not the variable revenue due to one unit change in sales

Ans. c

#### 50. The slope of the total variable cost curve equals

(a) average variable cost

(b) marginal cost

(c) average cost

(d) marginal physical product

Ans. b

### Multiple Choice Questions on Theory of Production and Cost pdf

#### 51. The law of diminishing returns depends on the assumption that

(a) land is a factor kept constant

(b) the state of technical knowledge is unchanged

(c) total output is constant

(d) average output declines taster than marginal output

Ans. b

#### 52. If average fixed cost is 7 40 and average variable cost is 7 80 for a given output, then average total cost is

(a) 40

(b) ? 120

(c) 3 80

(d) not possible to determine with the information given

Ans. b

#### 53. Within the relevant range, isoquants

(a) are negatively sloped

(c) cannot intersect

(b) are convex to origin

(d) All of these

Ans. d

(a) rs. 30

(b) rs. 40

(c) rs. 50

(d) rs. 80

Ans. c

(a) MR=AR

(C) AR =MR =TR

(b) MA =TR

(d) MR=MC

Ans. a

#### 56. Which of the following is not true about isoquants?

(a) An isoquant slopes downward to the origin

(b) Isoquants are concave to the origin

(c) Isoquants are convex to the origin

(d) Isoquants cannot intersect each other

Ans. b

#### 57. MR < AR, when

(a) AR falls

(c) AR and MR both fall

(b) MR fals

(d) None of these

Ans. a

#### 58. Which revenue curve is always positive?

(a) MR

(c) Both AR and MR

(b) AR

(d) None of these

Ans. b

#### 59. MR is zero, when

(a) AR is positive

(b) AR is zero

(d) All of these

(c) TR is zerO

Ans. a

(a) MR > 1

(c) MR > AR

(b) MR=0

(d) AR > MR

Ans. b

#### 62. AR and MR curves are more flatter in

(b) oligopoly

(a) monopoly

(c) monopolistic competition

(d) duopoly

Ans. c

#### 63. All of the following curves are U-shaped except

(a) the AVC curve

(c) the AC curve

(b) the AFC curve

(d) the MC curve

Ans. b

#### 64. 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 stil positive

(d) Total product levels off

Ans. c

#### 65. When the total product curve is falling the

(a) marginal product of labour is zero

(b) marginal product of labour is negative

(c) average product of labour is increasing

(d) average product of labour must be negative

Ans. b

#### 66. When AR becomes constant, MR becomes equal to

(a) TR

(b) AR

(d) None of these

(c) MC

Ans. b

#### 67. Suppose a manufacturing firm learns that its annual property tax payments will decrease, we would depict this by

(a) shifting the average fored cost. the marginal cost and the average cost curves up

(b) shifting the marginal cost, the average variable cost and the average foxed cost curves down

(c) shifting the marginal cost, the average total cost and the average fixed cost curves down

(d) shifting the average total cost and the average fixed cost curves down

Ans. d

#### 68. Which one of the following statements is incorrect?

(a) Economic profit = Total revenue – Total cost, including both explicit and implicit costs

(b) Accounting profit = Total revenue – Total explicit cost

(c) Marginal product = The increase in output that arises from an additional unit of input

(d) Marginal product = The decrease in output that arises from an additional unit of input

Ans. d

#### 69. 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

Ans. d

#### 71. The opportunity cost of a factor of production is

(a) what it is earning in its present use

(b) what it can earn in the long period

(c) what it can earn in somie other uses

(d) what has to be paid to retain it in its present use

Ans. d

#### 72. Which of the following could shift a firm’s average variable cost curve upward?

(a) A decrease in the productivity of labour

(b) An increase in the productivity of labour

(c) An increase in fixed cost

(d) A decrease in the demand for the good produced by that firm

Ans. a

#### 73. Arrange the following in chronological order.

1. Diminishing returns

3. Increasing returns

2. Negative returns Codes

(a) 1, 2, 3

(b) 3, 2, 1

(c) 2, 3, 1

(d) 3, 1, 2

Ans. d

#### 74. A firm is employing 100 units of labour and 50 units of capital to produce 200 widgets. Labour costs 10 per unit and capital ? 5 per unit. For the quantities of inputs employed, MPl = 2 and MPk =5. In this situation, the firm

(a) is producing the maximum output possible given the prices and relative productivities of the inputs

(b) could lower its production costs by using more labour and less capital

(c) could increase its output at no extra cost by using more capital and less labour

(d) should use more of both inputs in equal proportions

Ans. c

#### 75. Marginal cost is equal to marginal revenue, average cost is equal to average revenue, average revenue is equal marginal revenue and average cost is equal to marginal cost. This is the condition of

1. long period equilibrium for a firm under monopoly.

2. short period equilibrium for a firm under oligopoly.

3. long period equilibrium.

4. long period equilibrium for a firm under perfect competition.

5. short period equilibrium for a firm under perfect competition.

(a) 1 and 5

(b) 3 and 4

(c) 1 and 3

(d) Only 2

Ans. b

#### 76. Variable costs are

(a) sunk costs

(b) multiplied by fixed costs

(c) costs that change with the level of production

(d) defined as the change in total cost resulting from the production of an additional unit of output

Ans. c

#### 77. Consider the following statements.

1. Implicit costs are equal to total fixed costs.

2. When the total product curve is falling, the marginal product of labour is negative.

Which of the statements given above is/are correct?

(a) Only 1

(c) Both 1 and 2

(b) Only 2

(d) None of these

Ans. b

(a) – dK/dL

(b) dK/dL

(c) dL/dK

(d) -dL/dK

Ans. a

#### 79.The point at which the total product stops increasing at increasing rate and starts increasing at decreasing rate is called

(a) break even point

(c) intlexion point

(b) shut down point

(d) None of these

Ans. c

#### 80. Under which market, MR =P (Price)?

(a) Monopoly

(c) Duopoly

(b) Oligopoly

(d) Perfect competition

Ans. d

#### 81. When the units of factor increases, marginal revenue productivity of a factor

(a) will fall or diminish

(c) will have no change

(b) will rise or increase

(d) None of these

Ans. a

#### 82. Marginal revenue will be zero if the elasticity of demand is

(a) less than one

(b) greater than one

(C) equal to one

(d) equal to zero

Ans.c

#### 83. A firm has a production function Q= K+2L, where Q is output, Kis the capital input and L is the labour input per time period. The wage rate and the rental rate on capital is R1 per unit. The cost minimising output

(a) is achieved by producing at any point along the isoquant

(b) is achieved by using labour input only

(C) is achieved by using the capital input only

(d) is impossible to achieve

Ans. b

#### 84. Isocost line shows

(a) various combinations of two factors that the firm can buy with a given outlay

(b) various combinations which are capable of producing the same level of output

(c) various combinations of two commodities which give equal satisfaction

(d) Various combinations of two commodities that can be purchased with given income

Ans. a

#### 85. State, whether it is correct to say that when MR is constant and not equal to zero, then TR will also be constant.

(e) False

(c) Cannot say

(b) True

(d) Both ‘a’ and ‘b’

Ans. a