Deck 4: Background to Supply

Question 1

According to the law of diminishing marginal returns:

A) as more units of a fixed input are added to a variable input in the long run, the additional output produced by each additional unit of the fixed input will eventually decrease
B) as more units of a variable input are added to a fixed input in the long run, the additional output produced by each additional unit of the variable input will eventually decrease
C) as more units of a fixed input are added to a variable input in the short run, the additional output produced by each additional unit of the fixed input will eventually decrease
D) as more units of a variable input are added to a fixed input in the short run, the additional output produced by each additional unit of the variable input will eventually decrease

Answer 1

D

Question 2

Marginal cost is:

A) the increase in total cost resulting from producing one more unit of a good
B) always equal to average cost
C) the average cost of production divided by output
D) the increase in fixed cost resulting from producing one more unit of a good

Answer 2

A

Question 3

A firm will shut down in the short run if:

A) it is suffering an economic loss
B) average total costs exceed average total revenues
C) marginal revenue is zero
D) variable costs exceed revenues

Answer 3

D

Question 4

Diminishing marginal returns relates to the:

A) rate at which output increases in the short run
B) way output decreases when we add more variable inputs in the short run
C) rate of substitution of one input for another
D) way output increases less than proportionately to all inputs

Question 5

If a profit- maximising firm is producing where marginal revenue is below zero, while its average revenue is positive, it should:

A) reduce the price of its product and increase output
B) remain at its current level of production
C) increase the price of its product and decrease output
D) cease production

Question 6

If a firm is experiencing diseconomies of scale, then it must be operating at a point where its:

A) average revenue curve is upward sloping
B) long- run average total cost curve is upward sloping
C) long- run average total cost curve is downward sloping
D) marginal cost curve is downward sloping

Question 7

Which of the following is most likely to be a variable cost for a firm?

A) the taxes that are paid on employee wages
B) the interest payments made on loans
C) the franchiser's fee that a restaurant must pay to the national restaurant chain
D) the monthly rent on office space that it leased for a year

Question 8

In the long run, a firm will continue to produce:

A) if it earns abnormal profit
B) if it earns normal profit
C) if it earns supernormal profit
D) if it earns above normal profit

Question 9

If a firm's demand curve is negatively (downward) sloping and sales increase by one unit, marginal revenue will be:

A) increasing, as a result of the increase in sales
B) less than the new lower price
C) equal to the original price
D) less than the new higher price

Question 10

Once the profit- maximising level of output is determined, a profit- maximising firm facing a downward- sloping demand curve sets the price:

A) at the value that maximises revenue
B) by reference to the demand curve
C) by subtracting total cost from total revenue
D) where marginal revenue is equal to marginal cost

Question 11

A firm may be unable to maximise profits because it:

A) does not know its MC and MR
B) has too much information
C) has too little information
D) A and C

Question 12

The formula for average variable costs is:

A) OTVC/OQ
B) OQ/OTVC
C) TVC/Q
D) Q/TVC

Question 13

The time period when all factors are fixed is called:

A) the long run
B) the very long run
C) the very short run
D) the short run

Question 14

Diminishing marginal returns are realised in the _ and economies of scale in the .

A) long run; short run
B) long run; long run
C) short run; long run
D) short run; short run

Question 15

Division of labour is an important cause of:

A) diminishing returns
B) economies of scale
C) redundancies
D) strikes

Question 16

After a merger, 'rationalisation' usually takes place. It consists of:

A) simplifying the product range
B) reducing the duplication of processes to save costs
C) downsizing
D) re- launching the merged company with a single corporate identity

Question 17

The phrase 'sometimes profit maximisation means loss minimisation' is most appropriate for a firm which is producing where:

A) P = ATC
B) P > ATC
C) P = AVC
D) AVC < P < ATC

Question 18

Malthus' forecast of mass starvation as world population increases depends on the existence of:

A) economies of scale
B) diminishing returns
C) free market economics
D) the green revolution

Question 19

Average variable cost is equal to:

A) average total cost minus marginal cost
B) average fixed cost plus marginal cost
C) average total cost minus average fixed cost
D) average fixed cost minus marginal cost

Question 20

Public limited companies may not maximise their profits because:

A) shareholders want higher dividends
B) shareholders have little control over managers
C) they are afraid of encouraging takeovers
D) A and C

Question 21

At the profit- maximising output level:

A) demand is elastic
B) marginal revenue is positive and increasing
C) demand is unit elastic
D) demand is inelastic

Question 22

If it costs the Delicious Donuts firm $400 to produce 2000 donuts, the average cost for each donut is:

A) $0.50
B) $0.80
C) $5.00
D) $0.20

Question 23

A firm's total revenue is:

A) marginal revenue multiplied by quantity sold
B) price multiplied by quantity sold
C) marginal revenue divided by quantity sold
D) price divided by quantity sold

Question 24

When price is greater than marginal revenue, and marginal revenue is greater than marginal cost, a profit- maximising firm should:

A) not change output or price, as marginal revenue is greater than marginal cost and profits are being made
B) increase price and decrease the output level
C) decrease both the price and the output level
D) decrease price and increase the output level

Question 25

When a firm sells each unit of output for the same price, its total revenue curve:

A) is a straight line through the origin
B) is an downward- sloping line with a vertical intercept at the price of the good
C) is an upward- sloping line with a vertical intercept at the price of the good
D) is a horizontal line

Question 26

On the upward- sloping portion of a total revenue curve, the absolute value of the price elasticity of demand is:

A) tending toward infinity
B) less than one
C) greater than one
D) equal to one

Question 27

Which of the following statements is FALSE?

A) The length of time that the short run lasts will vary from firm to firm and industry to industry.
B) In the short run there is at least one fixed factor of production.
C) In the short run at least one input is variable.
D) Labour can never be fixed in the short run.

Question 28

If all factors are variable and their quality and productivity can be changed, then we must be operating in:

A) the long run
B) the short run
C) the very long run
D) the very short run

Question 29

A firm that is a price taker:

A) has a downward negatively sloped average revenue curve
B) has a downward negatively sloped marginal revenue curve
C) has a horizontal marginal revenue curve
D) has a horizontal total revenue curve

Question 30

If a firm doubles its use of all inputs and output more than doubles, the firm is experiencing:

A) constant returns to scale
B) decreasing returns to scale
C) increasing marginal returns to a fixed factor
D) increasing returns to scale

Question 31

We can construct a LRAC curve from a succession of SRAC curves. We call this LRAC curve:

A) the exponential curve
B) the envelope curve
C) the expansion curve
D) the encompass curve

Question 32

Which of the following defines profit satisficing?

A) when profits are the only objective of a firm
B) where satisfactory profits are insufficient
C) when a firm is unable to maximise profits and so simply accepts whatever profit level it can achieve
D) where decision makers in a firm aim to for a target level of profit rather than the absolute maximum level

Question 33

A firm's total profit is equal to:

A) TR - TC
B) P × AR
C) P × Q
D) TR - MC

Question 34

Total revenue divided by quantity is:

A) normal profit
B) average revenue
C) economic profit
D) marginal revenue

Question 35

Which of the following is not a cause of diseconomies of scale?

A) deteriorating industrial relations
B) problems of coordination
C) shoddy work from unmotivated workers
D) the industry becomes larger

Question 36

The formula for average fixed costs is:

A) OQ/OTFC
B) TFC/Q
C) TFC - Q
D) Q/TFC

Question 37

Diminishing marginal returns implies:

A) decreasing average fixed costs
B) decreasing average variable costs
C) increasing marginal costs
D) decreasing marginal costs

Question 38

A firm is producing 100 units, which is its profit- maximising quantity. The price is $3, the total fixed costs are $40 and the average variable cost for each unit is $1.20. The firm's opportunity costs of being in business are included in both the fixed and variable costs. The firm's supernormal profit is:

A) $140
B) $0
C) - $60
D) $180

Question 39

A firm calculates that if it produces one more unit of output, the additional revenue will be less than the additional cost, the firm should:

A) produce the additional unit and increase the price for all units sold
B) shut down
C) not produce the additional unit
D) produce the additional unit

Question 40

The economist who was concerned that human misery would result from unlimited population growth when food supply was subject to diminishing returns was:

A) David Ricardo
B) Adam Smith
C) Karl Marx
D) Thomas Malthus

Question 41

If marginal cost is increasing and is below marginal revenue, a profit- maximising firm should:

A) increase output
B) shut down
C) increase price
D) decrease output

Question 42

The law of diminishing returns:

A) applies only in the short run
B) is true only when all inputs are variable
C) implies that as we add more workers our output decreases
D) all of the above

Question 43

Advances in logistics allow firms to decrease costs by:

A) enabling firms to source lower cost inputs from all over the world
B) enabling firms to make more revenue from fewer sales
C) offering better storage facilities
D) enabling firms to produce more with fewer inputs

Question 44

The law of diminishing returns applies when:

A) one or more factors of production are held fixed while inputs of one factor are increased
B) all factors of production can be varied
C) all factors of production are fixed
D) none of the above

Question 45

Which of the following is not a potential source of economies of scale?

A) negotiating cheaper inputs with suppliers
B) labour specialisation
C) reduced input requirements
D) specialisation in capital

Question 46

Which statement is FALSE?

A) Fixed costs are the difference between total costs and total variable costs.
B) Fixed costs do not depend on the firm's level of output.
C) Fixed costs are zero if the firm is producing nothing.
D) There are no fixed costs in the long run.

Question 47

If the average revenue curve facing a firm is downward sloping to the right, the price elasticity of demand will be different at different prices. Marginal revenue (MR) will be zero at the price where price elasticity of demand is:

A) equal to 1
B) maximised
C) minimised
D) none of the above

Question 48

If a firm sells each unit of its output at the same price, then:

A) price and average revenue are equal
B) price and marginal revenue are equal
C) price and total revenue are equal
D) both answers A and B are correct

Question 49

A firm that is a price taker:

A) can increase marginal revenue by increasing its price level
B) can sell as much output as it wants to at the market determined price
C) can increase its total revenue by increasing its price
D) could force other firms to lower their prices by dropping its own price level

Question 50

The marginal cost curve intersects the average variable cost curve at:

A) the minimum point of the average variable cost curve
B) the peak of the average variable cost curve
C) the beginning of the average variable cost curve
D) the maximum point of the average variable cost curve

Question 51

In the long run, a firm will shut down when:

A) marginal revenue is zero
B) average total costs exceed average total revenues
C) economic profit is zero
D) marginal costs are greater than average fixed costs

Question 52

Suppose Bill's Bike Works experiences economies of scale up to a certain output and diseconomies of scale beyond that output. Its long- run average cost curve is likely to:

A) slope downwards to the right
B) be horizontal
C) be U- shaped
D) slope upwards to the right

Question 53

A firm which earns normal profit:

A) is covering all its costs including the opportunity costs of being in business
B) is covering the opportunity costs of being in business, but not its input costs
C) is covering the cost of its inputs, but not the opportunity costs of being in business
D) is covering neither the opportunity costs of being in business nor its input costs

Question 54

Moving along a straight line demand curve, where demand is , marginal revenue is .

A) elastic; equal to one
B) elastic; negative
C) inelastic; positive
D) inelastic; negative

Question 55

When the price of a product decreases and marginal revenue is negative, demand must be:

A) elastic
B) perfectly elastic
C) perfectly inelastic
D) inelastic

Question 56

A firm that is making normal profits in the long run will have an incentive to:

A) remain in production
B) produce a different product
C) expand output
D) shut down

Question 57

If a firm wishes to increase output in the short run, it can do so:

A) only by increasing fixed inputs
B) by increasing its capital inputs
C) by increasing both fixed and variable inputs
D) only by increasing variable inputs

Question 58

Economies of scale exist when:

A) increasing the scale of production leads to a lower cost per unit output
B) doubling the amount of capital more than doubles total output
C) doubling the amount of labour more than doubles the amount of output
D) any of the conditions under A, B, or C occurs

Question 59

External economies of scale occur because:

A) the firm becomes large and so gains the advantages of international trade
B) the firm becomes larger and its industry becomes larger
C) the industry becomes larger
D) the firm becomes large and is able to obtain favourable terms from suppliers

Question 60

Where jobs are broken down into simple tasks this is called:

A) container principle
B) diminishing returns
C) specialisation and division of labour
D) indivisibilities

Question 61

If a firm faces a downward- sloping demand curve the marginal revenue curve will be and lay _ the demand curve.

A) downward sloping; above
B) horizontal; above
C) horizontal; below
D) downward sloping; below

Question 62

A firm which has a downward- sloping demand curve:

A) can sell all the output it wants at the market determined price
B) must decrease price to sell more output
C) can decide the price at which it will sell
D) must increase price to sell more output

Question 63

Economists use the term 'indivisibilities' to explain why:

A) economies of scale occur
B) people enjoy working in groups
C) trade unions are formed
D) diminishing returns occur

Question 64

If price is below average total cost, a profit- maximising firm will:

A) raise the price level
B) lower the price level to increase sales
C) continue to operate as long as average revenue is greater than average variable cost
D) shut down, as it cannot cover its total costs

Question 65

If firms can change the amount of labour and raw materials that they use, but they cannot adjust the level of capital, the relevant time period must be the:

A) long run
B) very long run
C) short run
D) immediate run

Question 66

The formula for total cost is:

A) TC = TFC + AVC
B) TC = ATC + TVC
C) TC = AFC + AVC
D) TC = TFC + TVC

Question 67

Cost advantages that a firm gets because it is part of a large industry are called:

A) economies of scope
B) economies of scale
C) external economies
D) infrastructure economies

Question 68

If a firm is a price taker:

A) it sells its product at the market determined price
B) average revenue is equal to marginal revenue and price
C) marginal revenue is equal to price
D) all of the above

Question 69

A profit- maximising firm would shut down in the short run when:

A) marginal revenue is less than marginal cost
B) average revenue is less than average cost
C) total revenue is less than total cost
D) average revenue is less than average variable cost

Question 70

A fixed input in production:

A) can be changed in both the short run and the long run
B) cannot be changed in either the short run or the long run
C) cannot be changed in the short run
D) cannot be changed in the long run

Question 71

The short- run shut- down point for a firm is where:

A) the average cost curve is tangential to the demand curve
B) the average variable cost curve is tangential to the marginal revenue curve
C) the average cost curve is tangential to the marginal revenue curve
D) the average variable cost curve is tangential to the demand curve

Question 72

Fixed costs are:

A) fixed by law
B) fixed in the short run
C) fixed by contracts
D) fixed in the long run

Question 73

If it costs the Delicious Donuts firm $400 to produce 2000 donuts, and $410.20 to produce 2001 donuts, the marginal cost of the last donut produced is:

A) $10.20
B) $0.80
C) $5.00
D) $0.50

Question 74

A fundamental criticism of the traditional theory of the firm is that the decision makers in the firm may not even aim to maximise profits in the first place. On which of the following ideas is this criticism based?

A) Owners of firms are not 'rational'.
B) Shareholders are not the decision makers and have different interests from them.
C) Shareholders are really utility maximisers.
D) Many shareholders do not want to maximise profits.

Question 75

If a firm produces 400 units of output per month and sells each unit at a price of $90, its total revenue is equal to:

A) $32 000
B) $36 000
C) $34 000
D) $38 000

Question 76

Logistics refers to supply chain management and includes:

A) efficient transportation of the final product
B) stock control
C) efficient input purchasing and delivery
D) all of the above

Question 77

A firm reaping economies of scale is typically also achieving:

A) decreasing returns to scale
B) decreasing marginal returns to a fixed factor
C) increasing returns to scale
D) increasing marginal returns to a fixed factor

Question 78

Which of the following is the reason behind the principal agent problem?

A) adverse selection
B) irrationality
C) asymmetric information
D) moral hazard

Question 79

A firm is producing 100 units, which is its profit- maximising quantity. The price is $1, the total fixed costs are $40 and the average variable cost for each unit is $1.20. The firm's opportunity costs of being in business are included in both the fixed and variable costs. The firm's economic profit is:

A) $180
B) $0
C) - $60
D) $140

Question 80

If marginal cost is above average variable cost, then:

A) AVC is increasing
B) AVC is decreasing
C) AC is decreasing
D) AVC is constant