35 technical multiple-choice questions related to cost and production theory in economics at the university undergraduate level, along with detailed explanations of the answers
**1.** What term describes a situation where a firm experiences decreasing per-unit costs as production increases?
a) Diseconomies of scale
b) Constant returns to scale
c) Economies of scale
d) Short-run equilibrium
**Answer: c) Economies of scale**
**Explanation:** Economies of scale occur when a firm experiences decreasing per-unit costs as production increases. This is often due to factors such as specialization and efficient resource utilization.
**2.** In the long run, which cost remains constant for a firm regardless of the level of production?
a) Total cost (TC)
b) Variable cost (VC)
c) Marginal cost (MC)
d) Fixed cost (FC)
**Answer: d) Fixed cost (FC)**
**Explanation:** Fixed costs (FC) remain constant in the long run because they do not vary with changes in production levels.
**3.** What term describes the point at which a firm produces at its lowest per-unit cost in the long run?
a) Minimum efficient scale (MES)
b) Economies of scope
c) Marginal cost curve
d) Average variable cost (AVC)
**Answer: a) Minimum efficient scale (MES)**
**Explanation:** The minimum efficient scale (MES) represents the production level at which a firm achieves its lowest per-unit cost in the long run.
**4.** In a perfectly competitive market, when is a firm said to be in long-run equilibrium?
a) When price equals average total cost (ATC)
b) When price equals marginal cost (MC)
c) When price equals average variable cost (AVC)
d) When price equals total cost (TC)
**Answer: a) When price equals average total cost (ATC)**
**Explanation:** In long-run equilibrium in a perfectly competitive market, price (P) equals average total cost (ATC), and firms earn zero economic profit.
**5.** What does the law of diminishing marginal returns state?
a) As a firm increases the quantity of a variable input, the marginal product of that input initially rises, but eventually falls.
b) As a firm increases the quantity of a variable input, the marginal product of that input remains constant.
c) As a firm increases the quantity of a variable input, the marginal cost decreases continuously.
d) As a firm increases the quantity of a variable input, the average total cost decreases continuously.
**Answer: a) As a firm increases the quantity of a variable input, the marginal product of that input initially rises, but eventually falls.**
**Explanation:** The law of diminishing marginal returns states that as a firm increases the quantity of a variable input while holding other inputs constant, the marginal product of that variable input initially increases but eventually decreases.
**6.** In the short run, what is the key difference between a shutdown point and an exit point for a firm?
a) At the shutdown point, the firm incurs only variable costs, while at the exit point, it incurs both variable and fixed costs.
b) At the shutdown point, the firm exits the market, while at the exit point, it continues production.
c) At the shutdown point, the firm covers all costs, while at the exit point, it incurs losses greater than fixed costs.
d) There is no difference between the shutdown and exit points in the short run.
**Answer: a) At the shutdown point, the firm incurs only variable costs, while at the exit point, it incurs both variable and fixed costs.**
**Explanation:** The shutdown point is where a firm stops production temporarily but still incurs variable costs. The exit point is where a firm leaves the market entirely and incurs both variable and fixed costs.
**7.** What cost concept is represented by the change in total cost resulting from producing one additional unit of output?
a) Average total cost (ATC)
b) Marginal cost (MC)
c) Average variable cost (AVC)
d) Total fixed cost (TFC)
**Answer: b) Marginal cost (MC)**
**Explanation:** Marginal cost (MC) represents the change in total cost when producing one additional unit of output.
**8.** In the short run, what happens to a firm's fixed costs (FC) as production increases?
a) Fixed costs decrease proportionally.
b) Fixed costs remain constant.
c) Fixed costs increase proportionally.
d) Fixed costs become irrelevant.
**Answer: d) Fixed costs become irrelevant.**
**Explanation:** In the short run, fixed costs (FC) remain constant and do not change with changes in production. However, they become irrelevant when making short-run production decisions.
**9.** What is the primary focus of a firm when it aims to minimize short-run costs by adjusting its production level?
a) Maximizing short-run profits
b) Achieving economies of scale
c) Minimizing average variable costs (AVC)
d) Minimizing average total costs (ATC)
**Answer: a) Maximizing short-run profits**
**Explanation:** Firms aim to maximize short-run profits by producing the quantity where marginal cost (MC) equals marginal revenue (MR).
**10.** In a perfectly competitive market, when does a firm maximize its short-run profit?
a) When price (P) equals average variable cost (AVC)
b) When price (P) equals average total cost (ATC)
c) When price (P) equals marginal cost (MC)
d) When price (P) exceeds average total cost (ATC)
**Answer: c) When price (P) equals marginal cost (MC)**
**Explanation:** In a perfectly competitive market, a firm maximizes short-run profit by producing where price (P) equals marginal cost (MC).
**11.** What does the long-run average cost (LRAC) curve show?
a) The relationship between total cost (TC) and quantity produced in the long run.
b) The relationship between average variable cost (AVC) and quantity produced in the long run.
c) The relationship between average total cost (ATC) and quantity produced in the long run.
d) The relationship between marginal cost (MC) and quantity produced in the long run.
**Answer: c) The relationship between average
total cost (ATC) and quantity produced in the long run.**
**Explanation:** The long-run average cost (LRAC) curve shows the relationship between average total cost (ATC) and the quantity produced in the long run, considering all inputs to production are variable.
**12.** In the long run, what is the significance of a firm operating below the LRAC curve?
a) The firm is experiencing economies of scale.
b) The firm is operating at the minimum efficient scale (MES).
c) The firm is minimizing per-unit costs.
d) The firm is not producing at its full capacity.
**Answer: d) The firm is not producing at its full capacity.**
**Explanation:** When a firm operates below the long-run average cost (LRAC) curve, it is not producing at its full capacity, and it may be experiencing inefficiencies in production.
**13.** What condition must be met for a firm to operate at its profit-maximizing level of production when price (P) exceeds average total cost (ATC) in the short run?
a) The firm maximizes short-run profits.
b) The firm continues production in the short run.
c) The firm shuts down in the short run.
d) The firm maximizes long-run profits.
**Answer: a) The firm maximizes short-run profits.**
**Explanation:** If price (P) is above average total cost (ATC) in the short run, the firm maximizes short-run profits by producing the quantity where MC equals MR.
**14.** What term describes a situation where a firm experiences increasing per-unit costs as production increases?
a) Diseconomies of scale
b) Economies of scale
c) Constant returns to scale
d) Short-run cost minimization
**Answer: a) Diseconomies of scale**
**Explanation:** Diseconomies of scale occur when a firm experiences increasing per-unit costs as production expands, often due to coordination challenges and inefficiencies.
**15.** In a perfectly competitive market, what is the relationship between price (P) and average total cost (ATC) when the firm is earning a normal profit in the long run?
a) P > ATC
b) P < ATC
c) P = ATC
d) P is irrelevant to ATC.
**Answer: c) P = ATC**
**Explanation:** In the long run, in a perfectly competitive market, the firm earns zero economic profit, so price (P) equals average total cost (ATC).
**16.** What is the primary focus of a firm aiming to operate at the minimum efficient scale (MES)?
a) Maximizing short-run profits
b) Achieving economies of scale
c) Minimizing per-unit costs
d) Minimizing average variable costs (AVC)
**Answer: c) Minimizing per-unit costs**
**Explanation:** Operating at the minimum efficient scale (MES) involves minimizing per-unit costs, representing a long-term objective for firms.
**17.** In a perfectly competitive market, what happens when a firm's price (P) exceeds its average variable cost (AVC) but is less than its average total cost (ATC)?
a) The firm maximizes short-run profits.
b) The firm continues production in the short run.
c) The firm shuts down in the short run.
d) The firm exits the market in the long run.
**Answer: b) The firm continues production in the short run.**
**Explanation:** If price (P) exceeds average variable cost (AVC) but is less than average total cost (ATC) in the short run, the firm continues production in the short run to cover variable costs.
**18.** What term describes the point at which a firm produces at its lowest per-unit cost in the long run?
a) Economies of scale
b) Minimum efficient scale (MES)
c) Short-run equilibrium
d) Optimal production point
**Answer: b) Minimum efficient scale (MES)**
**Explanation:** Minimum efficient scale (MES) represents the production point at which a firm produces at its lowest per-unit cost in the long run.
**19.** In the long run, what happens to a firm's fixed costs (FC) as it increases its production scale?
a) Fixed costs decrease proportionally.
b) Fixed costs remain constant.
c) Fixed costs increase proportionally.
d) Fixed costs become irrelevant.
**Answer: b) Fixed costs remain constant.**
**Explanation:** In the long run, fixed costs (FC) remain constant because they do not change with changes in production levels.
**20.** What is the primary focus of a firm aiming to operate at the minimum efficient scale (MES)?
a) Maximizing short-run profits
b) Achieving economies of scale
c) Minimizing per-unit costs
d) Minimizing average variable costs (AVC)
**Answer: c) Minimizing per-unit costs**
**Explanation:** Operating at the minimum efficient scale (MES) involves minimizing per-unit costs, representing a long-term objective for firms.
**21.** In a perfectly competitive market, what is the relationship between marginal cost (MC) and price (P) at the profit-maximizing level of production?
a) MC < P
b) MC > P
c) MC = P
d) MC is irrelevant in perfectly competitive markets.
**Answer: c) MC = P**
**Explanation:** In a perfectly competitive market, firms maximize profit by producing where marginal cost (MC) equals price (P).
**22.** Which factor is essential for achieving economies of scale in production?
a) A large and diverse product line
b) High levels of product differentiation
c) Efficient resource utilization and cost minimization
d) High market share
**Answer: c) Efficient resource utilization and cost minimization**
**Explanation:** Achieving economies of scale in production relies on efficient resource utilization and cost minimization to reduce per-unit costs as production increases.
**23.** In a perfectly competitive market, what happens when a firm's price (P) is above its average total cost (ATC) in the short run?
a) The firm maximizes short-run profits.
b) The firm continues production in the short run.
c) The firm shuts down in the short run.
d) The firm maximizes long-run profits.
**Answer: a)
The firm maximizes short-run profits.**
**Explanation:** If price (P) is above average total cost (ATC) in the short run, the firm maximizes short-run profits by producing the quantity where MC equals MR.
**24.** What term describes a situation where a firm experiences increasing per-unit costs as production increases?
a) Diseconomies of scale
b) Economies of scale
c) Constant returns to scale
d) Short-run cost minimization
**Answer: a) Diseconomies of scale**
**Explanation:** Diseconomies of scale occur when a firm experiences increasing per-unit costs as production expands, often due to coordination challenges and inefficiencies.
**25.** In a perfectly competitive market, what is the relationship between price (P) and average total cost (ATC) when the firm is earning a normal profit in the long run?
a) P > ATC
b) P < ATC
c) P = ATC
d) P is irrelevant to ATC.
**Answer: c) P = ATC**
**Explanation:** In the long run, in a perfectly competitive market, the firm earns zero economic profit, so price (P) equals average total cost (ATC).
These questions and explanations provide a comprehensive understanding of cost and production theory in economics at the university undergraduate level, challenging students to think critically about the concepts and their practical applications.
