W9_THE COSTS OF PRODUCTION
PRACTICE QUESTIONS (PART 2)
1. What is total cost for a firm?
a) Total revenue minus explicit costs.
b) Total revenue minus implicit costs.
c) The market value of all inputs used.
d) The opportunity cost of capital.
Answer: c) The market value of all inputs used.
Explanation: Total cost includes both explicit costs (like wages and materials) and implicit
costs (like opportunity costs), representing the full value of inputs used in production.
2. What does economic profit measure?
a) Revenue minus explicit costs only.
b) Revenue minus implicit costs only.
c) Revenue minus all opportunity costs.
d) Costs minus revenue plus taxes.
Answer: c) Revenue minus all opportunity costs.
Explanation: Economic profit accounts for both explicit and implicit costs, showing the profit
after considering all opportunity costs of resources used.
3. How does accounting profit differ?
a) Includes all opportunity costs incurred.
b) Excludes implicit costs but includes taxes.
c) Measures profit using only explicit costs.
d) Only includes opportunity costs of capital.
Answer: c) Measures profit using only explicit costs.
Explanation: Accounting profit only subtracts explicit costs (monetary outlays) from
revenue, unlike economic profit, which also includes implicit costs.
4. What is a production function?
a) Shows total revenue by input levels.
b) Illustrates costs with variable changes.
c) Relates input levels to output levels.
d) Measures profit from resource use.
Answer: c) Relates input levels to output levels.
Explanation: The production function shows the relationship between the quantity of inputs
used and the quantity of output produced.
5. How does marginal product behave?
a) Increases indefinitely with input use.
b) Rises initially then decreases gradually.
c) Remains constant as inputs are used.
d) Becomes zero beyond certain limits.
Answer: b) Rises initially then decreases gradually.
Explanation: Marginal product often increases due to initial efficiency gains, but diminishing
returns set in as more of an input is added while other inputs remain fixed.
6. Why does diminishing marginal product occur?
a) All factors of production increase equally.
b) Fixed inputs limit additional output.
c) Workers become less skilled over time.
d) Total product falls as inputs increase.
Answer: b) Fixed inputs limit additional output.
Explanation: Diminishing marginal product happens because, with fixed resources, each
additional unit of variable input adds less to total output.
7. How is total cost calculated?
a) Fixed cost plus variable cost combined.
b) Explicit cost minus implicit cost only.
c) Total revenue minus economic profit.
d) Opportunity cost minus fixed cost.
Answer: a) Fixed cost plus variable cost combined.
Explanation: Total cost is the sum of fixed costs (constant regardless of output) and variable
costs (which change with output).
8. What are fixed costs for a firm?
a) Costs that vary with output changes.
b) Sunk costs affecting market prices.
c) Costs that remain constant over time.
d) Marginal costs divided by total costs.
Answer: c) Costs that remain constant over time.
Explanation: Fixed costs, such as rent or equipment, do not change with the level of
production and must be paid regardless of output.
9. What are variable costs defined as?
a) Costs that decrease with lower inputs.
b) Costs that change with output levels.
c) Marginal costs minus fixed costs only.
d) Total revenue minus explicit costs.
Answer: b) Costs that change with output levels.
Explanation: Variable costs, like raw materials and labor, fluctuate depending on the
quantity of goods or services produced.
10. How is average total cost determined?
a) Total cost divided by total output units.
b) Fixed cost divided by average revenue.
c) Total revenue minus implicit costs only.
d) Variable cost divided by fixed costs.
Answer: a) Total cost divided by total output units.
Explanation: Average total cost measures the cost per unit of output and is found by
dividing total cost by the quantity produced.
11. Why are cost curves U-shaped?
a) Fixed costs increase at higher outputs.
b) Marginal cost rises beyond fixed points.
c) Increasing returns occur initially, then fall.
d) Variable costs stay constant over time.
Answer: c) Increasing returns occur initially, then fall.
Explanation: Cost curves are U-shaped because average costs initially decrease due to
spreading fixed costs but eventually increase due to diminishing marginal returns.
12. What does marginal cost represent?
a) Cost of producing one additional unit.
b) Total cost divided by output changes.
c) Fixed cost divided by revenue amounts.
d) Opportunity cost minus implicit costs.
Answer: a) Cost of producing one additional unit.
Explanation: Marginal cost is the change in total cost when one more unit of output is
produced, reflecting the cost of that additional unit.
13. When does marginal cost intersect ATC?
a) At the highest point of the ATC curve.
b) At the minimum of the ATC curve level.
c) At zero output when ATC equals MC.
d) At the maximum revenue point level.
Answer: b) At the minimum of the ATC curve level.
Explanation: Marginal cost intersects the average total cost curve at its lowest point because
at that point, producing an additional unit no longer reduces average cost.
14. How do long-run costs behave?
a) Fixed costs stay constant throughout.
b) Economies of scale lead to lower costs.
c) Diseconomies reduce fixed cost levels.
d) Marginal costs increase indefinitely.
Answer: b) Economies of scale lead to lower costs.
Explanation: In the long run, economies of scale occur when increasing production leads to
lower average costs due to efficiencies gained.
15. Why do economies of scale exist?
a) Larger firms have greater marginal costs.
b) Average costs fall as output expands.
c) Fixed costs decrease with higher input.
d) Variable costs stay constant in output.
Answer: b) Average costs fall as output expands.
Explanation: Economies of scale arise because higher production levels allow fixed costs to
be spread over more units and may improve operational efficiencies.
16. What causes diseconomies of scale?
a) Coordination problems at larger firms.
b) Falling variable costs beyond capacity.
c) Excess fixed costs at higher output levels.
d) Marginal costs falling indefinitely.
Answer: a) Coordination problems at larger firms.
Explanation: Diseconomies of scale occur when firms become too large to manage
efficiently, leading to higher average costs due to complexity and inefficiencies.
17. Case: Factory Expansion
Scenario: A factory doubles its size and halves average costs. What is this an example of?
a) Diseconomies of scale occurring rapidly.
b) Economies of scale reducing production costs.
c) Marginal cost crossing fixed cost amounts.
d) Long-run average costs increasing gradually.
Answer: b) Economies of scale reducing production costs.
Explanation: Economies of scale occur when increased production reduces the average cost
per unit due to efficiencies gained.
18. Case: Diminishing Marginal Product
Scenario: A farm hires more workers, but additional output decreases with each worker.
What does this show?
a) Fixed costs are limiting marginal product.
b) Diminishing marginal product of labor.
c) Diseconomies of scale in production.
d) Long-run costs are decreasing overall.
Answer: b) Diminishing marginal product of labor.
Explanation: As additional workers are hired while other inputs remain fixed, the additional
output from each worker diminishes due to overcrowding or limited capital.
19. What defines implicit costs for a firm?
a) Costs involving direct monetary payments.
b) Opportunity costs of using owned resources.
c) Total revenue minus fixed cost levels.
d) Variable costs subtracted from total costs.
Answer: b) Opportunity costs of using owned resources.
Explanation: Implicit costs represent the value of opportunities foregone, such as income a
business owner could earn elsewhere.
20. When is a firm experiencing constant returns to scale?
a) Output increases at the same rate as inputs.
b) Fixed costs decrease as output expands.
c) Total revenue rises faster than fixed costs.
d) Average variable cost increases continuously.
Answer: a) Output increases at the same rate as inputs.
Explanation: Constant returns to scale occur when doubling all inputs results in an exact
doubling of output, keeping average costs unchanged.
21. What happens to fixed costs when output rises?
a) Fixed costs remain unchanged in total.
b) Fixed costs increase at the same rate.
c) Fixed costs decrease proportionally.
d) Fixed costs become variable gradually.
Answer: a) Fixed costs remain unchanged in total.
Explanation: Fixed costs, such as rent or machinery, do not vary with output levels and
remain constant regardless of production.
22. What is the key difference between short-run and long-run costs?
a) Fixed costs exist only in the long run.
b) All costs are variable in the long run.
c) Variable costs are constant in the short run.
d) Marginal costs decrease in the short run.
Answer: b) All costs are variable in the long run.
Explanation: In the long run, firms can adjust all inputs, making costs fully variable, unlike
the short run where some costs remain fixed.
23. Case: Short-Run Cost Analysis
Scenario: A bakery’s rent increases, but its total output remains unchanged. What type of
cost is affected?
a) Variable costs are impacted immediately.
b) Fixed costs increase with no output change.
c) Marginal costs rise significantly overall.
d) Total revenue declines proportionally.
Answer: b) Fixed costs increase with no output change.
Explanation: Fixed costs, such as rent, are incurred regardless of the level of production,
leading to higher total fixed costs without output changes.
24. How is average variable cost (AVC) calculated?
a) Variable cost divided by total output level.
b) Fixed cost divided by average output produced.
c) Total cost divided by output minus revenue.
d) Marginal cost divided by revenue changes.
Answer: a) Variable cost divided by total output level.
Explanation: Average variable cost represents the variable cost per unit of output and is
calculated by dividing total variable cost by the quantity produced.
25. Case: Marginal Cost Intersection
Scenario: A firm’s marginal cost equals average total cost at a specific output level. What is
this point called?
a) The maximum cost efficiency level.
b) The breakeven quantity for production.
c) The minimum of the ATC curve overall.
d) The point where fixed costs are zero.
Answer: c) The minimum of the ATC curve overall.
Explanation: Marginal cost intersects average total cost at its minimum point, representing
the lowest cost per unit.
26. Why do diseconomies of scale occur at high output levels?
a) Variable costs become increasingly fixed.
b) Coordination problems arise with scale.
c) Marginal cost decreases rapidly initially.
d) Fixed costs increase as output doubles.
Answer: b) Coordination problems arise with scale.
Explanation: Diseconomies of scale occur when firms grow too large to manage efficiently,
leading to higher average costs.
27. What distinguishes economic profit from accounting profit?
a) Economic profit includes implicit costs.
b) Economic profit ignores opportunity costs.
c) Accounting profit subtracts all opportunity costs.
d) Accounting profit includes sunk costs only.
Answer: a) Economic profit includes implicit costs.
Explanation: Economic profit accounts for both explicit and implicit costs, unlike accounting
profit, which only includes explicit costs.
28. Case: Long-Run Adjustments
Scenario: A car manufacturer builds a larger factory, and output increases faster than costs.
What is this?
a) Constant returns to scale overall.
b) Diseconomies of scale expanding.
c) Economies of scale are achieved.
d) Marginal product declines slowly.
Answer: c) Economies of scale are achieved.
Explanation: Economies of scale occur when a larger production scale reduces average costs,
improving efficiency.
29. How is marginal cost linked to total cost?
a) Marginal cost equals total cost changes.
b) Marginal cost is fixed cost minus revenue.
c) Marginal cost is variable cost per unit.
d) Marginal cost measures output elasticity.
Answer: a) Marginal cost equals total cost changes.
Explanation: Marginal cost is the additional cost incurred when producing one more unit of
output, reflecting changes in total cost.
30. What does the long-run average cost curve show?
a) The minimum cost of producing each level of output.
b) The total fixed costs at all output levels.
c) The relationship between output and revenue.
d) The opportunity costs for multiple firms.
Answer: a) The minimum cost of producing each level of output.
Explanation: The long-run average cost curve depicts the lowest cost at which each quantity
of output can be produced when all inputs are variable.