Understanding Economics 65 4- Cost Curves
Multiple Choice Questions
Understanding Economics 66 4- Cost Curves
N/04/3/05
4 Which statement explains why in the short run labour is subject to the law of diminishing returns?
A As additional workers are hired, output decreases.
B As employment increases, the capital-labour ratio falls.
C As employment increases, wage rates will have to be increased.
D As output expands, sooner or later diseconomies of scale will set in.
N/04/3/10
5 What is marginal cost?
A the difference between the total cost of producing n and n -1 units of output B the difference between the average variable cost of producing n units and n -1
units of output
C the difference between the average total cost of producing n units and n -1 units of output
D the average variable cost of producing one more unit J/05/3/04
6 According to the law of diminishing returns, what happens as more of a variable factor is combined with a fixed factor?
A An increase in the price of the variable factor will eventually result in an increase in production costs.
B A reduction in the quality of the variable factor will eventually result in an increase in production costs.
C Fewer units of the variable factor will be needed to produce equal increases in output.
D The proportions in which the factors are combined will eventually result in progressively smaller increases in output.
J/05/3/09
7 In the diagram, XY is a firm‟s total cost curve.
O X
Y
output total
costs
What happens to the firm‟s costs as output is increased?
average fixed costs marginal costs
A decrease constant
B decrease increase
C constant constant
D constant increase
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Understanding Economics 67 4- Cost Curves
N/05/3/04
8 The table shows the output of chairs at a factory when different numbers of workers are employed.
number of workers 0 1 2 3 4 5
number of chairs produced 0 7 17 29 38 42 Diminishing marginal returns to labour will set in when
A the second worker is employed.
B the third worker is employed.
C the fourth worker is employed.
D the fifth worker is employed.
N/06/3/03
9 The diagram shows the marginal product of labour curve (MPL) for a firm.
marginal product of labour
O
number of workers MPL
N
Labour is the only variable factor and the firm pays its workers the market wage.
At the level of employment ON, which statement is correct?
A The firm is maximising its output.
B The firm is minimising its total costs.
C The firm is minimising its wage bill.
D The firm is minimising its marginal cost of production.
N/06/3/06
10 If a firm experiences an increase in its fixed costs, how will its average variable cost and its marginal cost be affected?
average variable cost marginal cost
A rise rise
B rise no change
C no change rise
D no change no change
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Understanding Economics 68 4- Cost Curves
J/07/3/04
11 The diagram shows the total product curve for a single variable factor, assuming all other factor inputs are held constant.
quantity of variable factor O
total product TP
In which order do the total product (TP), average product (AP) and marginal product (MP) begin to decrease as the input of the variable factor is increased?
First Second Third
A AP MP TP
B AP TP MP
C MP AP TP
D MP TP AP
J/07/3/09
12 The short-run total costs of a firm are given by the formula SRTC = $(10 000 + 5X2)
where X is the level of output.
What are the firm‟s average fixed costs?
A $10 000
B
X X2 5 000 10
$
C X
000
$10
D
X X 10000 5 2
$
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Understanding Economics 69 4- Cost Curves
N/07/3/04
13 The diagram shows the short-run relationship between the total output of a firm and the quantity of labour.
total output
quantity of labour 0
total output
What can be concluded about the firm?
A It is experiencing increasing returns to scale.
B It is experiencing constant returns to scale.
C The marginal physical product of capital is constant.
D The marginal physical product of labour eventually diminishes.
N/07/3/07
14 The table shows a firm‟s total and marginal costs.
output total cost ($) marginal cost ($)
1 200 20
2 215 15
3 225 10
4 240 15
5 260 20
What is the average fixed cost of producing 6 units?
A $20 B $30 C $180 D $200
J/08/3/07
15 Which diagram shows a firm‟s total fixed cost curve?
O output costs
C
O output costs
D
O output costs
A
O output costs
B
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Understanding Economics 70 4- Cost Curves
N/08/3/04
16 Which statement explains why labour is subject to the law of diminishing returns in the short run?
A As additional workers are hired, total output decreases.
B As employment increases, the capital-labour ratio falls.
C As employment increases, wage rates will have to be increased.
D As output increases, eventually diseconomies of scale will occur.
N/08/3/08
17 The table shows the production of a firm.
production (tonnes)
total cost ($)
0 20
1 30
2 35
3 40
4 45
5 50
What is the average variable cost of producing 5 tonnes of output?
A $4.00 B $5.00 C $6.00 D $10.00
N/09/3/03
18 Which statement describes a situation in which a rise in input of factor X, all other factors being constant, results in no change in a firm‟s output?
A There are diminishing returns to factor X.
B Returns to scale are constant.
C There are diseconomies of scale.
D The marginal product of X is zero.
J/10/3/06
19 The schedule shows the short-run marginal cost of producing good X.
units of X 1 2 3 4 5
marginal cost ($) 40 30 30 60 120
Given that the total fixed cost is $20, what level of output minimises average total cost?
A 2 units B 3 units C 4 units D 5 units
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Understanding Economics 71 4- Cost Curves
N/10/3/05
20 In the diagram, the curve shows the various combinations of labour and capital that can be employed to produce a given level of output.
A firm chooses the combination of labour and capital shown by point X on the curve.
X
Y
O capital
labour
What could explain why the firm later chooses the combination of labour and capital shown by point Y?
A an increase in capital productivity B an increase in interest rates C an increase in labour productivity D an increase in wage rates
N/10/3/08
21 The diagram shows a firm's short-run marginal cost curve.
SRMC
O Q
cost
output
What explains why the curve is upward sloping at output levels above OQ?
A diseconomies of scale B inelasticity of supply C rising fixed costs
D the law of variable proportions
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Understanding Economics 72 4- Cost Curves
J/11/32/04
22 Which diagram correctly shows the relationship between the average product (AP) and the marginal product (MP) of labour given that the quantities of other factor inputs remain constant?
product
O labour
MP AP A
product
O labour MP AP B
product
O labour AP MP C
product
O labour MP AP
D
N/11/32/08
23 The short-run total costs (SRTC) of a firm are given by the formula SRTC = $(10 000 + 5X2)
where X is the level of output.
What are the firm‟s average fixed costs?
A $10 000 B $ 10000
5X2
X
C $10000
X D $100002
5X
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Understanding Economics 73 4- Cost Curves
N/13/32/08
24 In the diagram, TC is a firm‟s short-run total cost curve.
O Q1 Q2 Q3
output costs
TC
Which statement is correct?
A Average total cost is minimised at output OQ2. B Average variable cost is minimised at output OQ1. C Average variable cost is minimised at output OQ3. D Marginal cost is minimised at output OQ1.
J/14/32/03
25 The table shows the output of chairs at a factory when different numbers of workers are employed.
number of workers 1 2 3 4 5
number of chairs produced 6 17 27 32 30
Diminishing marginal returns to labour will set in when A the second worker is employed.
B the third worker is employed.
C the fourth worker is employed.
D the fifth worker is employed.
J/14/32/09
26 The table shows a firm‟s marginal costs.
output marginal cost ($)
1 40
2 30
3 20
4 30
5 40
The average fixed cost of producing 5 units is $6.
What is the total cost of producing 5 units?
A $46 B $70 C $190 D $230
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Understanding Economics 74 4- Cost Curves
J/14/32/10
27 What could explain why the proportion of total employment in an economy accounted for by small firms decreases?
A a trend towards the use of sub-contractors to produce specialised components B growing technical economies of scale in manufacturing
C growth of the service sector and a decline in manufacturing D the opening up of specialist markets as real incomes rise J/15/32/04
28 The diagram shows the total product of labour (TPL) curve for a firm whose only variable factor input is labour.
total product of labour
number of workers employed O
TPL
What explains the shape of the curve?
A diminishing marginal disutility of work B increasing marginal disutility of work C technical diseconomies of scale D the law of variable proportions J/15/32/08
29 The table shows a firm‟s total and marginal costs.
output total cost ($) marginal cost ($)
1 340 40
2 375 35
3 400 25
4 435 35
5 475 40
What is the average fixed cost of producing 6 units?
A $50 B $60 C $180 D $300
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Understanding Economics 75 5- Cost Curves in the Long Run
Section: 5 Cost Curves in the Long Run
Long run is a period of time where quantity of all factors of production can be changed and consequently, all costs become variable. Long run production function describes the relationship between the output firm produces and quantities of factors of production it hires.
There are no fixed factor constraints in the long run and costs are determined using the concept of returns to scale. Law of returns to scale examines the effects on output of varying the scale or the size of the business. The scale or the size of the business changes only in the long run, since that is when the quantities of all inputs may be changed. This is why it becomes possible for a firm to employ production factors in a fixed proportion contrasting with variable proportions in the short run.
Increasing returns to scale occur when the percentage increase in output is greater than the percentage increase in the quantities of all inputs whereas diminishing returns to scale mean that doubling all inputs brings a less than 100% increase in output.
The following diagram shows the corresponding Long Run Marginal Cost function. Cost decreases where there are increasing returns to scale and increases when diminishing returns set in i.e. beyond output Q1.
Diagram 5.1
Costs LMC
Output Q1