MCQs:

1. 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

Answer: A

2. 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.

Answer: B

3. 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

Answer: C

4. 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

Answer: C

5. Which is an example of an external diseconomy?
A) Difficulties in coordinating activities in a large organization
B) Difficulties in motivating workers in a large organization
C) Higher transport costs as a firm’s market expands
D) Increased traffic congestion as industries expand

Answer: D

6. What is most likely to be associated with a firm that is growing rapidly?
A) A high rate of labor 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

Answer: C

7. Which feature of an economy would be most favorable for the survival of small firms?
A) Capital-intensive production
B) Economies of scale in production
C) The presence of a stock exchange
D) The widespread availability of bank lending

Answer: D

8. 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) Economies of scale
C) The law of diminishing returns
D) The law of variable proportions

Answer: A

9. 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

Answer: B

10. 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.

Answer: C

11. The government wants to regulate the consumption of a demerit good 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 fall 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.

Answer: D