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Economics multiple choice questions

GCSE and O level

Production, Costs, Revenues and Profits

Multiple Choice Questions and Answers

If a firm increases its output in the short run, what will happen to its average fixed cost (AFC)?
A AFC will decrease continually
B AFC will equal zero
C AFC will increase then decrease
D AFC will increase continually [J11/P1/Q20)

Answer is A

AFC is the fixed cost per unit of output. Since TFC is constant, any increase in output decreases the AFC.

A major computer company announced that its profits had fallen below the level predicted What might have caused this?

A Increased advertising costs that greatly improved sales
B Low prices that made the company’s product competitive
C New technology that reduced costs
D Reduced sales and low prices [J11/P1/Q22]

Answer is D

Reduced sales and low prices will decrease revenue. This will decrease profit. This is because profit is calculated as revenue minus expenses.

Which statement about total fixed cost is correct?

A It falls as output increases
B It is calculated by adding total cost and total variable cost
C Itis calculated by dividing total cost by output
D It must be paid even if output is zero {N11/P1/Q23]

Answer is D

Fixed costs are costs that do not change when sales or production volumes increase or decrease.

When would a firm achieve maximum profits?

A when average revenue equals average cost
B when average revenue minus variable cost is greatest
C when fixed costs are equal to variable costs
D when total revenue minus total cost is greatest (J12/P1/Q18]

Answer is D

The profit maximization formula depends on profit = Total revenue – Total cost.

What is a variable cost to a firm producing bicycles?

A the component parts of the bicycles
B the interest on money borrowed
C the rent of the bicycle factory
D the salaries of the senior man- agers saw {N12/P1/Q18]

Answer is A

A variable cost is an expense that changes in proportion to production output or sales. Therefore, the cost of he component parts of the bicycles are variable costs.

Cocoa and sugar are used in a factory to produce chocolate What is a fixed cost in the production of chocolate?

A cocoa
B electricity
C rent
D sugar


Answer is C

Fixed costs are costs that are independent of volume. Fixed costs tend to be costs that are based on time rather than the quantity produced or sold by a business. Example of fixed cost is rent.

An entrepreneur buys a workshop for $200 000 to make plastic boxes

In the first year of operation he spends $70 000 on materials, employs ten production workers paid by the amount produced (piece rate) at a total cost of $80 000 and buys two delivery vehicles for $10 000 each What are his total variable costs?

A $100000
B $150 000
C $220000
D $370 000


Answer is B

A variable cost is an expense that changes in proportion to production output or sales. Therefore cost of raw materials and labour costs are variable costs.

$70 000 + $ 80 000 = $150 000

When it produces 100 units, a firm’s total variable cost is $300 and its total fixed cost is $2700 What is the average cost?

A $3
B $24
C $27
D $30


Answer is D

Total costs = $300 + $2700 = $3000
Average costs = $3000/100 = $30

How does a firm guarantee that it makes the maximum profit?

A by maximising the difference between its total revenue and total cost
B by maximising the number of goods that it sells
C by minimising the number of goods that it keeps in stock
D by minimising the difference between average revenue and average cost (J16/P1/Q12]

Answer is A

The profit maximization formula depends on profit = Total revenue – Total cost.

A survey of managers in the USA revealed that most businessmen feel that a company’s responsibility is ‘to serve the interests of owners, employees, customers and the public’ The idea of profit maximisation, in contrast, implies that a company’s main responsibility should be to the

A customers
B employees
C owners
D public


Answer is C

The aim of profit maximisation relate to the owners.

Which costs will necessarily fall continuously as output increases?

A average fixed costs
B average variable costs
C opportunity costs
D repayment costs of borrowing(J17/P1/Q13)

Answer is A

Average fixed cost is the fixed cost per unit of output. Since Total fixed cost is constant, any increase in output decreases the AFC.

What is the definition of diseconomies of scale?

A the decrease in average revenue as output increases
B the decrease in fixed cost as output increases
C the increase in average total costs as output increases
D the increase in total costs as output increases(J19/P1/Q13)

Answer is C

In economics jargon, the diseconomies of scale happen when the average cost starts to increase.

What distinguishes a multinational company from other types of company

A. It exports its products
B. It imports its raw materials
C. It produces outside its country of origin
D. t promotes its products in trade fairs abroad (N17/P1 /Q13]

Answer is C

A multinational corporationis any corporation that is registered and operates in more than one country at a time.

What is a possible cause of diseconomies of scale?

A an increase in extra administration
B an increase in raw materials costs
C an increase in taxation on company profile
D an increase the national minimum wages


Answer is A

Diseconomies of scale happen when the average cost starts to increase. Diseconomies of scale happen when a company or business grows so large that the costs per unit increase. An increase in extra administration is an example.

A film production company purchases a group of cinemas

Of what is this an example?

A backward vertical integration
B conglomerate merger
C forward vertical integration
D horizontal integration [N18/P1! Q13)

Answer is C

A vertical merger integration can integrate backward or forward: Backward integration involves merging with upstream companies (such as suppliers and producers). Forward integration involves merging with downstream companies (such as distributors or retailers).

Firm X supplies bricks and decides to merge with firm Y that also supplies bricks Which form of merger has taken place?

A backward vertical
B conglomerate
C forward vertical
D horizontal (N20/P1! Q14)

Answer is D

Horizontal integration is the acquisition of a business operating at the same level of the value chain in the same industry—that is, they make or offer similar goods or services.

Who owns a public sector organisation?

A. Individuals
B. Shareholders
C. specialist managers
D. the government(N20/P1/Q15]

Answer is D

Public sector organisations are owned by the government. They provide goods and services for the benefit of the community. They are run by the government. They operate with money raised from taxes.

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