Question 1

Which of the following best expresses the law of diminishing returns?

Accepted Answer

A)   Because large-scale production allows the realization of economies of scale,the real costs of production vary directly with the level of output.
B)   Population growth automatically adjusts to that level at which the average product per worker will be at a maximum.
C)   As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital) ,beyond some point the resulting extra output will decline.
D)   Proportionate increases in the inputs of all resources will result in a less-than-proportionate increase in total output.E) All of the above
F) None of the above C

Question 2

The minimum efficient scale of a firm:

Accepted Answer

A)   is realized somewhere in the range of diseconomies of scale.
B)   occurs where marginal product becomes zero.
C)   is in the middle of the range of constant returns to scale.
D)   is the smallest level of output at which long-run average total cost is minimized.E) All of the above
F) A) and D)

Question 3

The law of diminishing returns results in:

Accepted Answer

A)   an eventually rising marginal product curve.
B)   a total product curve that eventually increases at a decreasing rate.
C)   an eventually falling marginal cost curve.
D)   a total product curve that rises indefinitely.E) C) and D)
F) A) and B)

Question 4

A person receives a paper asset from a corporation that is a promise from the corporation to repay a loan at a fixed rate of interest.This type of asset is referred to as a:

Accepted Answer

A)   bank loan.
B)   share.
C)   stock.
D)   bond.E) B) and C)
F) C) and D)

Question 5

The Sunshine Corporation finds its costs are $40 when it produces no output.Its total variable costs (TVC) change with output as shown in the accompanying table.  Refer to the above information.The average total cost of 3 units of output is:

Accepted Answer

A)   $65.
B)   $21.67.
C)   $40.
D)   $35.Total costs are the sum of fixed costs and variable costs.At 3 units of output,total costs are $105,so average total costs are $105/3 = $35.E) None of the above
F) A) and B)

Question 6

If a firm doubles its output in the long run and its unit costs of production decline,we can conclude that:

Accepted Answer

A)   technological progress has occurred.
B)   economies of scale are being realized.
C)   the firm is encountering diminishing returns.
D)   diseconomies of scale are being encountered.E) A) and D)
F) A) and C)

Question 7

Refer to the above diagram.The profit-maximizing level of output for this firm:

Accepted Answer

A)   is at point a.
B)   is at point b.
C)   is at point c.
D)   cannot be determined from the information given.E) C) and D)
F) A) and D)

Question 8

Only the bondholders of a corporation have the right to vote for a corporation's directors.

Accepted Answer

A) True 
 B)False

Question 9

The ABC Corporation decreases all of its inputs by 12 percent and finds that its output falls by only 8 percent.This means that initially it was producing:

Accepted Answer

A)   in the range of diseconomies of scale.
B)   in the range of economies of scale.
C)   where AP is less than MP.
D)   at the point of minimum efficient scale.E) None of the above
F) A) and B) A

Question 10

The basic characteristic of the short run is that:

Accepted Answer

A)   barriers to entry prevent new firms from entering the industry.
B)   the firm does not have sufficient time to change the size of its plant.
C)   the firm does not have sufficient time to cut its rate of output to zero.
D)   a firm does not have sufficient time to change the amounts of any of the resources it employs.E) A) and C)
F) B) and C)

Question 11

Shares of ownership in corporations are referred to as:

Accepted Answer

A)   limited liability.
B)   collateral.
C)   stocks.
D)   bonds.E) C) and D)
F) B) and D)

Question 12

Accounting profits are typically:

Accepted Answer

A)   greater than economic profits because the former do not take explicit costs into account.
B)   equal to economic profits because accounting costs include all opportunity costs.
C)   smaller than economic profits because the former do not take implicit costs into account.
D)   greater than economic profits because the former do not take implicit costs into account.E) None of the above
F) B) and C)

Question 13

The law of diminishing returns explains why short-run marginal cost curves are upward sloping.

Accepted Answer

A) True 
 B)False

Question 14

Implicit and explicit costs are different in that:

Accepted Answer

A)   explicit costs are relevant only in the short run.
B)   implicit costs are relevant only in the short run.
C)   the latter refer to nonexpenditure costs and the former to out-of-pocket costs.
D)   the former refer to nonexpenditure costs and the latter to out-of-pocket costs.E) All of the above
F) A) and C)

Question 15

A firm's total variable cost will depend on:

Accepted Answer

A)   the prices of variable resources.
B)   the production techniques that are used.
C)   the level of output.
D)   all of these.E) C) and D)
F) None of the above

Question 16

Variable costs are costs that vary directly with output.

Accepted Answer

A) True 
 B)False

Question 17

Suppose that you could prepare your own tax return in 15 hours,or you could hire a tax specialist to prepare it for you in 2 hours.You value your time at $11.00 an hour.The tax specialist will charge you $55 an hour.The opportunity cost of preparing your own tax return is:

Accepted Answer

A)   $40.
B)   $55.
C)   $110.
D)   $165.The use of your time to do the tax returns is 15*$11.00 = $165.00.This is your opportunity cost.E) A) and B)
F) All of the above

Question 18

Refer to the above diagram.At output level Q average fixed cost:

Accepted Answer

A)   is equal to EF.
B)   is equal to QE.
C)   is measured by both QF and ED.
D)   cannot be determined from the information given.E) B) and C)
F) B) and D) C

Question 19

The law of diminishing returns indicates that:

Accepted Answer

A)   as extra units of a variable resource are added to a fixed resource,marginal product will decline beyond some point.
B)   because of economies and diseconomies of scale,a competitive firm's long-run average total cost curve will be U-shaped.
C)   the demand for goods produced by purely competitive industries is downsloping.
D)   beyond some point,the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.E) A) and B)
F) A) and C)

Question 20

If a firm increases all of its inputs by 10 percent and its output increases by 15 percent,then:

Accepted Answer

A)   it is encountering diseconomies of scale.
B)   it is encountering economies of scale.
C)   the law of diminishing returns is taking hold.
D)   the firm's long-run ATC curve will be rising.E) A) and B)
F) A) and C)

Exam 6: Businesses and Their Costs

Which of the following best expresses the law of diminishing returns?

Correct AnswerverifiedC

The minimum efficient scale of a firm:

Correct AnswerverifiedShow Answer

The law of diminishing returns results in:

Correct AnswerverifiedShow Answer

A person receives a paper asset from a corporation that is a promise from the corporation to repay a loan at a fixed rate of interest.This type of asset is referred to as a:

Correct AnswerverifiedShow Answer

The Sunshine Corporation finds its costs are $40 when it produces no output.Its total variable costs (TVC) change with output as shown in the accompanying table. Refer to the above information.The average total cost of 3 units of output is:

Correct AnswerverifiedShow Answer

If a firm doubles its output in the long run and its unit costs of production decline,we can conclude that:

Correct AnswerverifiedShow Answer

Refer to the above diagram.The profit-maximizing level of output for this firm:

Correct AnswerverifiedShow Answer

Only the bondholders of a corporation have the right to vote for a corporation's directors.

Correct AnswerverifiedShow Answer

The ABC Corporation decreases all of its inputs by 12 percent and finds that its output falls by only 8 percent.This means that initially it was producing:

Correct AnswerverifiedA

The basic characteristic of the short run is that:

Correct AnswerverifiedShow Answer

Shares of ownership in corporations are referred to as:

Correct AnswerverifiedShow Answer

Accounting profits are typically:

Correct AnswerverifiedShow Answer

The law of diminishing returns explains why short-run marginal cost curves are upward sloping.

Correct AnswerverifiedShow Answer

Implicit and explicit costs are different in that:

Correct AnswerverifiedShow Answer

A firm's total variable cost will depend on:

Correct AnswerverifiedShow Answer

Variable costs are costs that vary directly with output.

Correct AnswerverifiedShow Answer

Suppose that you could prepare your own tax return in 15 hours,or you could hire a tax specialist to prepare it for you in 2 hours.You value your time at $11.00 an hour.The tax specialist will charge you $55 an hour.The opportunity cost of preparing your own tax return is:

Correct AnswerverifiedShow Answer

Refer to the above diagram.At output level Q average fixed cost:

Correct AnswerverifiedC

The law of diminishing returns indicates that:

Correct AnswerverifiedShow Answer

If a firm increases all of its inputs by 10 percent and its output increases by 15 percent,then:

Correct AnswerverifiedShow Answer

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C

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A

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C

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