What is the name for the relationship between a firm’s output and the quantities of factor inputs that it employs?
A a long-run production function
B a long-run average cost function
C productive efficiency
D returns to scale
[JWP3/Q6]

➡Answer A

Production function shows how output will be affected by changes in the quantity of one or more of the inputs.






What explains why both large and small firms arc often found within the same industry?

A There are significant barriers to the entry of new firms into the industry.
B Firms that assemble the final product buy component parts from other specialist firms.
C Production is subject to diseconomies of scale.
D All firms in the industry produce identical products.
[J08/P3/Q8]

➡Answer B
Small firms exist because they supply parts of the products produced by large firms at low cost.













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.
[N08/P3/Q4]

➡Answer B
In the short run, as more workers are applied to a fixed amount of capital the ratio with which the two inputs are combined decreases and gives way to diminishing returns.









When a firm increases all its inputs by 300 %, its output increases by 200 %. What does this illustrate?
A the law of diminishing returns
B increasing returns to scale
C diseconomies of scale
D the law of variable proportions
[N08/P3/Q7]

➡Answer C

All inputs increase in the long run. Hence, options A and D are incorrect as both suggest short run. The percentages given in the statement suggest decreasing returns to scale (diseconomies of scale) where a given perenetage increase in inputs results in a smaller % increase in output. Although option B indicates long run but is incorrect in the given situation













A manufacturing firm has one plant of optimum size. The firm builds a second plant identical to its first plant. The firm then finds that its long-run average cost has risen. What could account for the change in its long-run average cost?
A diminishing returns
B external diseconomies of scale
C managerial diseconomies of scale
D technical diseconomies of scale
[J09/P3/Q6]


➡Answer C

Increase in the number of plants might make it difficult to co-ordinate planning, marketing. production and so on. causing the firm’s LRAC to rise. Option A suggests short run production function whereas option B indicates rising per unit cost due to the growth of industry.












Which is an example of an external diseconomy?
A difficulties in co-ordinating activities in a large organisation
B difficulties in motivating workers in a large organisation
C higher transport costs as a firm’s market expands
D increased traffic congestion as industries expand [J10/P3/Q7]

➡Answer D

An external diseconomy is the direct consequence of growth of industry. Options A, B & C refer to internal diseconomies









What is the name for the relationship between a firm’s output and the quantities of factor inputs that it employs?
A a long-run average cost function
B a long-run production function
C productive efficiency
D returns to scale

➡Answer B

A long run production function reflects the relationship between a firm’s output and quantities of factor inputs that it employs.










What would be most likely to constrain a firm’s ability to grow?

A the increased difficulty faced by the firm in marketing its product
B the increased risks arising from product diversification
C the increasing costs of distributing goods from a given location
D the increased difficulties faced by the management in coordinating production [N11/P3/Q9]

➡Answer D

Managerial diseconomies result in a higher per unit cost, therefore, constrains a firm’s ability to grow.














A firm experiences diseconomies of scale over its entire range of output. What is the shape of its long-run average cost curve?

A It is horizontal.
B It is *U’ shaped.
C It slopes downwards.
D It slopes upwards. [J12/P3/Q5]


➡Answer D
Diseconomies of scale cause LRAC curve to slope upward.












Which is a financial economy of scale?

A lower costs in raising capital
B lower costs of marketing
C lower risk due to diversification
D lower variable costs of production [J12/P3/Q6]

➡Answer A
Financial economy refers to a large firm being able to raise capital at lower costs.




















What is most likely to be associated with a firm that is growing rapidly?

A a high rate of labour turnover
B a low level of net investment
C a low percentage of profits paid as dividends to shareholders
D attainment of the necessary conditions for allocative efficiency
[N12/P3JQ10]

➡Answer C
Firms pay lower dividends because they need more finances in order to spend on their rapid growth.















Which feature of an economy would be most favourable for the survival of small firms?
A capital intensive production
B economics of scale in production
C the presence of a stock exchange
D the widespread availability of bank lending [J13/P3/Q9]

➡Answer D

Lack of finance s the major hindrance in survival of small firms. Options A, B & C favour large firms










What is an internal diseconomy of scale that often arises as a firm becomes larger?

A a more complex decision-making process
B an increase in the cost of raising finance for investment
C an increase in traffic congestion
D upward pressure on wages in the local labour market

➡Answer A

Complex decision-making process refers to managerial diseconomy. All other options are examples of external diseconomies.











A fourfold increase in all of a firm’s inputs results in a threefold increase in its output. What does this illustrate?

A decreasing returns to scale
B economics of scale
C the law of diminishing returns
D the law of variable proportions
[N15/P3/Q8]

➡Answer A
All inputs can change only in the long run, therefore options C & D are ruled out. Since the proportionate change in inputs is more than the proportionate change in output therefore B is ruled out.










Which is a risk-bearing economy of scale?

A greater bargaining power in purchasing from suppliers
B greater diversification of the product range
C lower costs in raising capital
D lower distribution costs by increasing market share

[J16/P3/QI0]

➡Answer B

Diversification will spread the risk on higher number of products












Which assumption is made in calculating a firm’s short-run production function?
A All factors of production are fixed.
B All factors of production are variable.
C The state of technology is fixed.
D The state of technology is variable. [N16/P3/Q8]

➡Answer C
According to the theory technology varies only in the very long run.













The government wants to regulate the consumption of a demerit good in order to increase society’s net welfare. In which situation will society’s net welfare increase?

A The fall in the marginal social benefit is greater than the fall in the marginal social cost.
B The fall in the marginal social cost is greater than the fall in the marginal social benefit.
C The fail in the total social benefit is greater than the fall in the total social cost.
D The fall in the total social cost is greater than the fall in the total social benefit.
[N16/P3/Q15]

➡Answer D

Demerit goods are associated with higher SC therefore greater 'all in SC will improve net welfare.