1. Suppose that a firm produces 200,000 units a year and sells them all for $10 each.

The
explicit costs of production are $1,500,000 and the implicit costs of production are
$300,000. The firm has an accounting profit of:
a. $500,000 and an economic profit of $200,000.
b. $400,000 and an economic profit of $200,000.
c. $300,000 and an economic profit of $400,000.
d. $200,000 and an economic profit of $500,000.
2. The short run is a time period in which:
a. all resources are fixed.
b. the level of output is fixed.
c. the size of the production plant is variable.
d. some resources are fixed and others are variable.
3. The law of diminishing returns states that:
a. as a firm uses more of a variable resource, given the quantity of fixed resources,
the average product of the firm will increase.
b. as a firm uses more of a variable resource, given the quantity of fixed resources,
marginal product of the firm will eventually decrease.
c. in the short run, the average total costs of the firm will eventually diminish.
d. in the long run, the average total costs of the firm will eventually diminish.

4. The law of diminishing returns only applies in cases where:

a. there is increasing scarcity of factors of production.
b. the price of extra units of a factor is increasing.
c. there is at least one fixed factor of production.
d. capital is a variable input.

5. The marginal product of labor curve shows the change in total product resulting from a:
a. one-unit increase in the quantity of a particular resource used, letting other
resources vary.
b. one-unit increase in the quantity of a particular resource used, holding constant
other resources.
c. change in the cost of a variable resource.
d. change in the cost of a fixed resource.

6. When the total product curve is falling, the:

a. marginal product of labor is zero.
b. marginal product of labor is negative.
c. average product of labor is increasing.
d. average product of labor must be negative.

7. When marginal product reaches its maximum, what can be said of total product?
a. total product must be at its maximum
b. total product starts to decline even if marginal product is positive
c. total product is increasing if marginal product is still positive
d. total product levels off
8. Variable costs are:
a. sunk costs.
b. multiplied by fixed costs.
c. costs that change with the level of production.

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 d. defined as the change in total cost resulting from the production of an additional
unit of output.
9. Which is not a fixed cost?
a. monthly rent of $1,000 contractually specified in a one-year lease
b. an insurance premium of $50 per year, paid last month
c. a worker's wage of $15 per hour
d. an attorney's retainer of $50,000 per year
10. If you know that with 8 units of output, average fixed cost is $12.50 and average
variable cost is $81.25, then total cost at this output level is:
A) $93.75. B) $97.78. C) $750. D) $880.
11. With fixed costs of $400, a firm has average total costs of $3 and average variable
costs of $2.50. Its output is:
a. 200 units. B) 400 units. C) 800 units. D) 1,600 units.
12. The reason the marginal cost curve eventually increases as output increases for the
typical firm is because:
a. Diseconomies of scale.
b. Minimum efficient scale.
c. the law of diminishing returns.
d. Normal profit exceeds economic profit.

13. If the short-run average variable costs of production for a firm are rising, then this
indicates that:
a. average total costs are at a maximum.
b. average fixed costs are constant.
c. marginal costs are above average variable costs.
d. average variable costs are below average fixed costs.
14. The firm's short-run marginal-cost curve is increasing when:
a. marginal product is increasing. C) total fixed cost is increasing.
b. marginal product is decreasing. D) average fixed cost is decreasing.
15. A firm encountering economies of scale over some range of output will have a:
a. rising long-run average cost curve.
b. falling long-run average cost curve.
c. constant long-run average cost curve.
d. rising, then falling, then rising long-run average cost curve.
16. If all resources used in the production of a product are increased by 20 percent and
output increases by 20 percent, then there must be:
a. economies of scale. C) constant returns to scale.
b. diseconomies of scale. D) increasing average total costs.
17. Economies and diseconomies of scale explain why the:
a. short-run average fixed cost curve declines so long as output increases.
b. marginal cost curve must intersect the minimum point of the firm's average total
cost curve.
c. long-run average total cost curve is typically U-shaped.
d. short-run average variable cost curve is U-shaped.

18. Which of the following best defines the production function?

a. A function that describes the maximum profit a firm can achieve

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 b. A table that shows output variation among producers
c. A relation that connects input costs with output prices
d. A technical relation that connects inputs and outputs
19. Which of the following is FALSE in Stage-I of production?
a. Average variable cost increases
b. Marginal product increases, and then decreases
c. Total product increases
d. Marginal cost decreases, and then increases
20. Which would be an implicit cost for the firm:
a. The cost of workers’ wages and salaries for the firm
b. The cost of wages forgone by the owner of the firm
c. The cost paid for renting a building for the firm
d. The cost paid for raw materials for the firm
21. Given that AVC is birr 20 at Q = 10 and TFC is birr 200 at Q = 10, what is the Total Cost
at Q = 10?
A. 2200 B. 400 C. 200 D. 220
22. The total cost of producing zero output in short run is equal to:
a. Total variable cost
c. Zero
b. Average variable
d. Total fixed cost
cost
23. The short run is a time period in which:
a. The production period is less c. The size of the production plant is
than one year variable
b. The level of output is fixed d. Some resources are fixed

24. Average variable cost and average cost get closer as output increases because:
a. Marginal cost decreases
C. Diminishing marginal return starts
b. Average fixed cost falls
D. Economics of scale becomes apparent
25. Which of the following statements
is FALSE?
A. The AVC curve reaches its minimum point after AC reaches its minimum point
B. The difference between TC and TVC remains constant as output increase
C. The change in total cost is equal to the change in total variable cost in short run.
D. The MC curve passes through the minimum points of both AC and AVC
26. The law of diminishing marginal returns only applies in cases where:
a. There is scarcity of factors of production
b. The price of extra units of a factor increases

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 c. There is at least one fixed factor of production
d. Capital is a variable input
27. Let MPL be the marginal productivity of labor, APL be the average productivity of
labor and TP is total product, then which one of the following is TRUE?

a. When APL is maximum, MPL = APL

b. When MPL is maximum, MC is also maximum
c. When APL is rising, MPL < APL
d. When APL is falling, AVC is falling
28. If the marginal cost of producing one more unit of a good is less than the average cost,
then:
a. Marginal cost will increase c. Average cost will decrease
b. Marginal cost will decrease d. Marginal cost will increase

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Name: I NO: Section:

Part I 1. 2. 3. 4. 5.

Part II 6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

16. 17. 18. 19. 20.

21. 22. 23. 24. 25.