MCQs:

1. 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.

Answer: A

2. 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.

Answer: D

3. 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) It is calculated by dividing total cost by output.
D) It must be paid even if output is zero.

Answer: D

4. 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.

Answer: D

5. 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 managers.

Answer: A

6. 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: C

7. 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) $100,000.
B) $150,000.
C) $220,000.
D) $370,000.

Answer: B

8. When it produces 100 units, a firm’s total variable cost is $300 and its total fixed cost is $2,700. What is the average cost?
A) $3.
B) $24.
C) $27.
D) $30.

Answer: D

9. How does a firm guarantee that it makes the maximum profit?
A) By maximizing the difference between its total revenue and total cost.
B) By maximizing the number of goods that it sells.
C) By minimizing the number of goods that it keeps in stock.
D) By minimizing the difference between average revenue and average cost.

Answer: A

10. 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 maximization, in contrast, implies that a company’s main responsibility should be to the
A) Customers.
B) Employees.
C) Owners.
D) Public.

Answer: C

11. 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.

Answer: A

12. 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.

Answer: C

13. 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) It promotes its products in trade fairs abroad.

Answer: C

14. 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 profit.
D) An increase in the national minimum wages.

Answer: A

15. 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.

Answer: D

16. Who owns a public sector organization?
A) Individuals.
B) Shareholders.
C) Specialist managers.
D) The government.

Answer: D