Unit -3 Producer’s Behaviour and Supply:
Meaning of production and production function, Short Run and Long –Run, Total product, average product and Marginal product. Returns to scale; Law of Diminishing Marginal Product and the Law of Variable Proportions Cost: Short –run cost, Long run cost, total cost ,total fixed cost, total variable cost, average cost, average fixed cost ,average variable cost and marginal cost- meaning and their relationships. Revenue-Total, Average and Marginal revenue-Meaning and their relationships Profit Maximisation: Conditions for Profit minimization. Supply: Meaning, determinants of supply, Law of Supply, Supply schedule, Short run supply curve & Long-run supply curve of a form. Market Supply, Price elasticity of Supply : Meaning and its measurement (Percentage Method)
MCQs from Chapter 3: Production and Costs
1. What is production?
a) The process of selling goods
b) The process of transforming inputs into output
c) The process of consuming goods
d) The process of buying goods
Answer: b) The process of transforming inputs into output
2. Which of the following is a fixed input in the short run?
a) Labour
b) Raw materials
c) Land
d) Electricity
Answer: c) Land
3. The relationship between inputs and maximum output is known as:
a) Cost function
b) Demand function
c) Supply function
d) Production function
Answer: d) Production function
4. When both labour and capital increase by the same proportion and output increases by the same proportion, it is called:
a) Increasing returns to scale
b) Decreasing returns to scale
c) Constant returns to scale
d) None of the above
Answer: c) Constant returns to scale
5. The law of diminishing marginal product is observed because:
a) Inputs become more efficient with increase in quantity
b) Inputs become less efficient due to overcrowding
c) Inputs remain constant
d) Technology improves
Answer: b) Inputs become less efficient due to overcrowding
6. Isoquants represent:
a) Different levels of cost
b) All combinations of inputs producing the same output
c) Demand curves for producers
d) Profit levels of a firm
Answer: b) All combinations of inputs producing the same output
7. What is marginal product?
a) Total output per unit of input
b) Change in output per unit of input change
c) Total output divided by number of workers
d) Cost of producing one more unit
Answer: b) Change in output per unit of input change
8. Total cost is the sum of:
a) Total fixed cost and total revenue
b) Total fixed cost and total variable cost
c) Average cost and marginal cost
d) Total variable cost and average fixed cost
Answer: b) Total fixed cost and total variable cost
9. A cost that remains constant irrespective of output level in the short run is:
a) Variable cost
b) Fixed cost
c) Marginal cost
d) Average cost
Answer: b) Fixed cost
10. Which cost curve is U-shaped in the short run?
a) Total cost
b) Marginal cost
c) Average fixed cost
d) Total variable cost
Answer: b) Marginal cost
11. The fixed factor in a production process is also known as:
a) Variable factor
b) Constant factor
c) Fixed cost factor
d) Input factor
Answer: c) Fixed cost factor
12. When the marginal product is greater than the average product:
a) The average product is increasing
b) The average product is decreasing
c) The total product is constant
d) The total product is decreasing
Answer: a) The average product is increasing
13. The Cobb-Douglas production function is represented by:
a)
b)
c)
d)
Answer: c)
14. What happens when the marginal product becomes zero?
a) Total product stops increasing
b) Total product decreases
c) Total product increases at a decreasing rate
d) Average product starts increasing
Answer: a) Total product stops increasing
15. Which of the following is not a characteristic of the short run?
a) At least one input is fixed
b) Firms can change all inputs
c) Variable costs can change
d) Marginal costs influence production decisions
Answer: b) Firms can change all inputs
16. The average fixed cost (AFC) curve:
a) Is U-shaped
b) Is downward sloping
c) Increases as output increases
d) Is horizontal
Answer: b) Is downward sloping
17. Which of the following concepts explains why the short-run marginal cost curve is U-shaped?
a) Law of demand
b) Law of variable proportions
c) Law of returns to scale
d) Law of diminishing returns
Answer: b) Law of variable proportions
18. Long-run costs differ from short-run costs because:
a) Fixed costs do not exist in the long run
b) Marginal costs remain constant
c) Variable costs are eliminated
d) All factors remain fixed
Answer: a) Fixed costs do not exist in the long run
19. The area under the short-run marginal cost curve represents:
a) Total fixed cost
b) Total variable cost
c) Total cost
d) Marginal product
Answer: b) Total variable cost
20. Which of the following is true about returns to scale?
a) Constant returns to scale occur when inputs increase by 10% and output increases by 20%.
b) Decreasing returns to scale occur when inputs increase by 20% and output increases by 20%.
c) Increasing returns to scale occur when inputs increase by 10% and output increases by 15%.
d) Constant returns to scale occur when inputs and output increase by the same percentage.
Answer: d) Constant returns to scale occur when inputs and output increase by the same percentage.
21. Isoquants are analogous to which concept in consumer theory?
a) Demand curves
b) Indifference curves
c) Supply curves
d) Marginal utility
Answer: b) Indifference curves
22. When the sum of the exponents in a Cobb-Douglas production function equals 1, the production function exhibits:
a) Decreasing returns to scale
b) Constant returns to scale
c) Increasing returns to scale
d) Negative returns to scale
Answer: b) Constant returns to scale
23. If , then:
a) AP is decreasing
b) MP is at its maximum
c) AP is increasing
d) TP is constant
Answer: c) AP is increasing
24. When the average variable cost curve is at its minimum:
a) AVC = AFC
b) Marginal cost equals AVC
c) Total cost is zero
d) Average fixed cost is maximum
Answer: b) Marginal cost equals AVC
25. Which cost is zero when no output is produced?
a) Total cost
b) Total fixed cost
c) Total variable cost
d) Average fixed cost
Answer: c) Total variable cost
26. The law of diminishing marginal product implies:
a) Marginal product becomes negative
b) Marginal product increases at a decreasing rate
c) Marginal product first increases, then decreases
d) Total product decreases continuously
Answer: c) Marginal product first increases, then decreases
27. In the short run, as output increases, average fixed cost:
a) Remains constant
b) Decreases continuously
c) Increases continuously
d) Becomes zero
Answer: b) Decreases continuously
28. At the minimum point of the short-run average cost curve:
a) Marginal cost is less than average cost
b) Marginal cost equals average cost
c) Marginal cost is greater than average cost
d) Average cost is zero
Answer: b) Marginal cost equals average cost
29. The total fixed cost curve is:
a) Upward sloping
b) Horizontal
c) Vertical
d) U-shaped
Answer: b) Horizontal
30. Which of the following explains a firm's decision to hire fewer workers when marginal product decreases?
a) Marginal cost increases
b) Total cost decreases
c) Average product increases
d) Fixed cost increases
Answer: a) Marginal cost increases
31. Returns to scale are observed in:
a) The short run only
b) The long run only
c) Both the short run and the long run
d) Neither the short run nor the long run
Answer: b) The long run only
32. What happens when both inputs increase by the same percentage, but output increases by a smaller percentage?
a) Constant returns to scale
b) Increasing returns to scale
c) Decreasing returns to scale
d) Negative returns to scale
Answer: c) Decreasing returns to scale
33. The marginal product of labour is undefined at:
a) Zero level of labour
b) Maximum level of labour
c) Minimum level of output
d) Zero level of output
Answer: a) Zero level of labour
34. In the long run, the shape of the long-run average cost curve is determined by:
a) Returns to scale
b) Fixed costs
c) Marginal costs
d) Variable costs
Answer: a) Returns to scale
35. A firm's profit is calculated as:
a) Revenue - Fixed Cost
b) Revenue - Variable Cost
c) Revenue - Total Cost
d) Revenue + Total Cost
Answer: c) Revenue - Total Cost
36. The sum of marginal costs up to a given level of output equals:
a) Average fixed cost
b) Total fixed cost
c) Total variable cost
d) Total cost
Answer: c) Total variable cost
37. If the output level is doubled and the average cost remains constant, the firm is experiencing:
a) Decreasing returns to scale
b) Constant returns to scale
c) Increasing returns to scale
d) No returns to scale
Answer: b) Constant returns to scale
38. In the short run, total cost increases because:
a) Fixed costs increase
b) Variable costs increase
c) Both fixed and variable costs increase
d) Average cost increases
Answer: b) Variable costs increase
39. What determines the slope of an isoquant?
a) Marginal rate of substitution between inputs
b) Total cost
c) Marginal cost
d) Total revenue
Answer: a) Marginal rate of substitution between inputs
40. The vertical distance between the total cost curve and the total variable cost curve equals:
a) Average variable cost
b) Average fixed cost
c) Total fixed cost
d) Marginal cost
Answer: c) Total fixed cost
41. The law of variable proportions operates:
a) In the short run only
b) In the long run only
c) In both the short run and the long run
d) Only when all factors are variable
Answer: a) In the short run only
42. What does the slope of the total cost curve represent?
a) Marginal cost
b) Average cost
c) Total fixed cost
d) Variable cost
Answer: a) Marginal cost
43. Which of the following is not a feature of the long-run average cost curve?
a) U-shaped
b) Horizontal when constant returns to scale exist
c) Reflects economies of scale in its downward slope
d) Derived from fixed costs
Answer: d) Derived from fixed costs
44. The point where marginal cost intersects average cost is:
a) At the average cost's maximum
b) At the average cost's minimum
c) Above the average cost
d) Below the average cost
Answer: b) At the average cost's minimum
45. If marginal cost is greater than average cost, then:
a) Average cost is rising
b) Average cost is falling
c) Average cost is constant
d) Total cost is decreasing
Answer: a) Average cost is rising
46. The relationship between input proportions and output in the long run is analyzed using:
a) Total product curves
b) Isoquants
c) Indifference curves
d) Cost curves
Answer: b) Isoquants
47. A firm’s decision to produce where marginal cost equals marginal revenue ensures:
a) Maximum output
b) Profit maximization
c) Minimum cost
d) Constant returns to scale
Answer: b) Profit maximization
48. If total fixed cost is Rs. 100 and output is 10 units, the average fixed cost is:
a) Rs. 100
b) Rs. 10
c) Rs. 50
d) Rs. 90
Answer: b) Rs. 10
49. What happens to total product when marginal product becomes negative?
a) Total product stops increasing
b) Total product decreases
c) Total product increases at a constant rate
d) Total product increases at an increasing rate
Answer: b) Total product decreases
50. Marginal cost reflects:
a) The additional cost of producing one more unit of output
b) The cost of all fixed inputs
c) The average variable cost of production
d) Total cost divided by output
Answer: a) The additional cost of producing one more unit of output
51. The downward slope of the average fixed cost curve reflects:
a) Increasing marginal cost
b) Economies of scale
c) The spreading effect of fixed costs over larger output
d) Increasing returns to scale
Answer: c) The spreading effect of fixed costs over larger output
52. Marginal product can be derived from:
a) Total cost curve
b) Average cost curve
c) Total product curve
d) Isoquant curve
Answer: c) Total product curve
53. The shape of the long-run average cost curve is explained by:
a) The law of diminishing returns
b) The concept of returns to scale
c) The marginal cost curve
d) The marginal rate of substitution
Answer: b) The concept of returns to scale
54. The cost of inputs that do not vary with the level of production is:
a) Marginal cost
b) Average cost
c) Fixed cost
d) Variable cost
Answer: c) Fixed cost
55. When does the U-shape of the marginal cost curve occur?
a) At increasing marginal returns only
b) At diminishing marginal returns only
c) Due to economies of scale
d) Due to the law of variable proportions
Answer: d) Due to the law of variable proportions
56. The total cost curve is:
a) A horizontal line
b) Downward sloping
c) Positively sloped
d) U-shaped
Answer: c) Positively sloped
57. The concept of economies of scale is reflected in:
a) The long-run average cost curve's downward slope
b) The short-run average cost curve's upward slope
c) Marginal cost always exceeding average cost
d) Fixed cost remaining constant
Answer: a) The long-run average cost curve's downward slope
58. At zero output level, total cost is equal to:
a) Total variable cost
b) Marginal cost
c) Total fixed cost
d) Zero
Answer: c) Total fixed cost
59. Returns to scale focus on:
a) Changes in input proportions in the short run
b) Changes in total cost
c) Proportional changes in inputs and resulting changes in output
d) Fixed cost adjustments
Answer: c) Proportional changes in inputs and resulting changes in output
60. When all inputs are scaled up by a certain proportion, and output increases by less than that proportion, the production function exhibits:
a) Constant returns to scale
b) Increasing returns to scale
c) Decreasing returns to scale
d) Negative returns to scale
Answer: c) Decreasing returns to scale
61. What is the shape of the total fixed cost (TFC) curve?
a) U-shaped
b) Vertical line
c) Horizontal line
d) Downward sloping
Answer: c) Horizontal line
62. What happens to the average fixed cost as output increases?
a) Increases
b) Decreases
c) Remains constant
d) Becomes zero
Answer: b) Decreases
63. When the total cost equals total variable cost:
a) Output is zero
b) Marginal cost is undefined
c) Fixed cost is zero
d) All inputs are variable
Answer: d) All inputs are variable
64. The short-run average cost (SAC) curve is U-shaped because of:
a) Law of variable proportions
b) Law of diminishing returns
c) Economies and diseconomies of scale
d) Increasing fixed cost
Answer: c) Economies and diseconomies of scale
65. The additional cost incurred to produce an additional unit of output is known as:
a) Average cost
b) Marginal cost
c) Variable cost
d) Fixed cost
Answer: b) Marginal cost
66. In the short run, a firm can adjust its:
a) Fixed inputs only
b) Variable inputs only
c) Both fixed and variable inputs
d) Neither fixed nor variable inputs
Answer: b) Variable inputs only
67. In the long run, fixed costs:
a) Become variable
b) Remain constant
c) Increase exponentially
d) Are irrelevant
Answer: a) Become variable
68. If the total product curve is at its maximum, then the marginal product is:
a) Positive
b) Zero
c) Negative
d) Undefined
Answer: b) Zero
69. A firm’s cost structure depends on:
a) Technology and input prices
b) Fixed costs only
c) Output levels only
d) Variable costs only
Answer: a) Technology and input prices
70. If marginal cost is less than average cost, then average cost:
a) Increases
b) Decreases
c) Remains constant
d) Is equal to marginal cost
Answer: b) Decreases
71. Total product is maximized when:
a) Marginal product is zero
b) Marginal product is maximum
c) Average product is maximum
d) Marginal product is increasing
Answer: a) Marginal product is zero
72. The short-run marginal cost curve intersects the short-run average variable cost curve:
a) At the minimum point of AVC
b) At the maximum point of AVC
c) Above the AVC curve
d) Below the AVC curve
Answer: a) At the minimum point of AVC
73. The vertical distance between total cost and total variable cost curves represents:
a) Total fixed cost
b) Marginal cost
c) Average fixed cost
d) Variable cost
Answer: a) Total fixed cost
74. What is the slope of the isoquant curve called?
a) Marginal rate of substitution
b) Marginal product
c) Average product
d) Marginal cost
Answer: a) Marginal rate of substitution
75. In the long run, all costs are:
a) Fixed
b) Variable
c) Constant
d) Zero
Answer: b) Variable
76. The minimum point of the long-run average cost curve indicates:
a) Diseconomies of scale
b) Economies of scale
c) Optimal scale of production
d) Zero fixed cost
Answer: c) Optimal scale of production
77. Returns to scale are analyzed in which time frame?
a) Short run
b) Long run
c) Both short run and long run
d) Neither short run nor long run
Answer: b) Long run
78. A firm experiences increasing returns to scale when:
a) Output increases by more than the proportional increase in inputs
b) Output increases proportionally to inputs
c) Output increases by less than the proportional increase in inputs
d) Output remains constant despite changes in inputs
Answer: a) Output increases by more than the proportional increase in inputs
79. The U-shape of the short-run average cost curve is due to:
a) Increasing and decreasing returns to scale
b) Increasing and decreasing marginal returns
c) Increasing fixed costs
d) Constant returns to scale
Answer: b) Increasing and decreasing marginal returns
80. Which cost curve continuously declines as output increases?
a) Average variable cost
b) Average fixed cost
c) Total variable cost
d) Marginal cost
Answer: b) Average fixed cost
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