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CH 3 & 4
CA Foundation (NSET) - Paper - 4 Business Economics

1. If the marginal product of labour is below the average product of labour, it must be true that: [1]

a) the marginal product of labour is zero. b) the marginal product of labour is negative.

c) the average product of labour is negative. d) the average product of labour is falling.
2. Marginal cost changes due to changes in ________. [1]

a) Quantity of output b) Average cost

c) Total cost d) Variable cost

3. Which of the following is not a determinant of the firm's cost function? [1]

a) The price of the firm's output. b) Taxes.

c) The production function. d) The price of labour.

4. Which one of the following is also known as planning curve? [1]

a) Average total cost curve. b) Average variable cost curve.

c) Long run average cost curve. d) Short run average cost curve.
5. The efficient scale of production is the quantity of output that minimizes [1]

a) average fixed cost. b) average total cost.

c) average variable cost. d) marginal cost.

6. Which of the following is a variable cost in the short run? [1]

a) wages paid to the factory labour. b) payment on the lease for factory equipment.

c) interest payments on borrowed financial d) rent of the factory.

capital.
7. Which of the following is an example of explicit cost? [1]

a) The normal profit earned by a firm. b) The payment of wages by the firm.

c) The income that could have been earned in d) The wages a proprietor could have made by
alternative uses by the resources owned by working as an employee of a large firm.
the firm.
8. Which of the following statements is true? [1]
a. Accumulation of capital depends solely on income of individuals.
b. Savings can be influenced by government policies.
c. External economies go with size and internal economies with location.
d. The supply curve of labour is an upward slopping curve.

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 a) Statement (c) is true. b) Statement (b) is true.

c) Statement (d) is true. d) Statement (a) is true.

9. Average product is defined as [1]

a) total product divided by marginal product. b) marginal product divided by the number of
units of variable input.

c) total product divided by the total cost. d) total product divided by the number of units
of variable input.
10. When marginal costs are below average total costs, [1]

a) average total costs are minimized. b) average fixed costs are rising.

c) average total costs are falling. d) average total costs are rising.
11. The positively sloped (i.e. rising) part of the long run average total cost curve is due to which of the following? [1]

a) The firm being able to take advantage of b) Diseconomies of scale.

large-scale production techniques as it
expands its output.

c) Increasing returns. d) The increase in productivity that results

from specialization.
12. Use the following data to answer questions [1]

Output (O) 0 1 2 3 4 5 6

Total Cost (TC) ₹ 240 ₹ 330 ₹ 410 ₹ 482 ₹ 540 ₹ 610 ₹ 690

Diminishing marginal returns start to occur between units:

a) 5 and 6 b) 3 and 4

c) 2 and 3 d) 4 and 5
13. Which of the following statements is true of the relationship among the average cost functions? [1]

a) AFC = ATC + AVC b) ATC = AFC - AVC

c) AVC = AFC + ATC d) AFC = ATC - AVC

14. The law of diminishing returns applies to: [1]

a) both the short run and the long run. b) the short run, but not the long run.

c) the long run, but not the short run. d) neither the short run nor the long run.
15. Which of the following statements concerning the long-run average cost curve is false? [1]

a) It represents the least-cost input b) It is derived from a series of short-run

combination for producing each level of average cost curves.
output.

c) The short-run cost curve at the minimum d) As output increases, the amount of capital
point of the long-run average cost curve employed by the firm increases along the
represents the least-cost plant size for all curve.
levels of output.

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16. An iso quant shows [1]

a) All the alternative combinations of two b) Both All the alternative combinations of
products among which a producer is two products among which a producer is
indifferent because they yield the same indifferent because they yield the same
profit. profit and All the alternative combinations
of two inputs that yield the same total
product.

c) All the alternative combinations of two d) All the alternative combinations of two
inputs that yield the same total product. inputs that can be produced by using a given
set of output fully and in the best possible
way.
17. In the third of the three stages of production: [1]

a) the marginal product curve lies completely b) the marginal product curve has a positive
below the average product curve. slope.

c) marginal product is positive. d) total product increases.

18. In figure below, possible reason why the average variable cost curve approaches the average total cost curve as [1]
output rises is:

a) Marginal costs are above average variable b) Total costs are rising and average costs are
costs as output rises. also rising.

c) Fixed costs are falling while total costs are d) Average fixed costs are falling as output
rising at rising output. rises.
19. The marginal cost for a firm of producing the 9th unit of output is ₹ 20. Average cost at the same level of output [1]
is ₹15. Which of the following must be true?

a) marginal cost and average cost are both b) it is impossible to tell if either of the curves
rising. are rising or falling.

c) marginal cost is rising and average cost is d) marginal cost and average cost are both
falling. falling.
20. Use the following diagram to answer the question given below it [1]

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 The marginal physical product of the third unit of labour is ________, the MP of the ________ labour is
Negative

a) Six; fourth b) Six; third

c) Six; fifth d) Six; sixth

21. A firm producing 7 units of output has an average total cost of ₹ 150 and has to pay ₹ 350 to its fixed factors of [1]
production whether it produces or not. How much of the average total cost is made up of variable costs?

a) ₹ 200 b) ₹ 300

c) ₹ 100 d) ₹ 50
22. Which of the following statements is correct? [1]
a. When the average cost is rising, the marginal cost must also be rising.
b. When the average cost is rising, the marginal cost must be falling.
c. When the average cost is rising, the marginal cost is above the average cost.
d. When the average cost is falling, the marginal cost must be rising.

a) Statement (b) is correct. b) Statement (a) is correct.

c) Statement (c) is correct. d) Statement (d) is correct.

23. Which of the following cost curves is never U shaped? [1]

a) Average variable cost curve b) Average cost curve

c) Marginal cost curve d) Average fixed cost curve

24. In the production of wheat, all of the following are variable factors that are used by the farmer except: [1]

a) the tractor used by the farmer in planting b) the field that has been cleared of trees and in
and cultivating not only wheat but also corn which the crop is planted.
and barley.

c) the seed and fertilizer used when the crop is d) the number of hours that the farmer spends
planted. in cultivating the wheat fields.
25. Total cost in the short run is classified into fixed costs and variable costs. Which one of the following is a [1]
variable cost?

a) Cost of equipment. b) Payment of rent on building.

c) Cost of raw materials. d) Interest payment on past borrowings.

26. In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially [1]
experience

a) diseconomies of scale. b) constant returns to scale.

c) an increase in pollution level. d) economies of scale.

27. Which of the following is an example of an implicit cost? [1]

a) Interest that could have been earned on b) The payment of rent by the firm for the
retained earnings used by the firm to finance building in which it is housed.
expansion.

c) The payment of wages by the firm. d) The interest payment made by the firm for

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 funds borrowed from a bank.
28. Which of the following statements is true? [1]
a. After the inflection point of the production function, a greater use of the variable input induces a reduction in
the marginal product.
b. Before reaching the inevitable point of decreasing marginal returns, the quantity of output obtained can
increase at an increasing rate.
c. The first stage corresponds to the range in which the AP is increasing as a result of utilizing increasing
quantities of variable inputs.
d. All of these.

a) Statement (a) is true. b) Statement (b) is true.

c) Statement (d) is true. d) Statement (c) is true.

29. What is a production function? [1]

a) Relationship between a factor of production b) Technical relationship between physical

and the utility created by it. inputs and physical output.

c) Relationship between quantity of output d) Relationship between fixed factors of

produced and time taken to produce the production and variable factors of
output. production.
30. Implicit cost can be defined as [1]

a) Money payments which the self-owned and b) Money payments made to the non-owners
employed resources could have earned in of the firm for the self-owned factors
their next best alternative employment and employed in the business and therefore not
therefore entered into books of accounts. entered into books of accounts.

c) Money not paid out to the owners of the d) Money payments which the self-owned and
firm for the self-owned factors employed in employed resources earn in their best use
a business and therefore not entered into and therefore entered into book of accounts.
books of accounts.
31. Which of the following statements is incorrect? [1]
a. Under monopoly there is no difference between a firm and an industry.
b. A monopolist may restrict the output and raise the price.
c. Commodities offered for sale under a perfect competition will be heterogeneous.
d. Product differentiation is peculiar to monopolistic competition.

a) Statement a is incorrect. b) Statement c is incorrect.

c) Statement d is incorrect. d) Statement b is incorrect.

32. If firms in the toothpaste industry have the following market shares, which market structure would best describe [1]
the industry?

Market share (% of market)

Toothpaste 18.7

Dentipaste 14.3

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 Shinibright 11.6

I can't believe its not toothpaste 9.4

Brighter than white 8.8

Pasty stuff 7.4

Others 29.8

a) Perfect competition. b) Oligopoly

c) Monopolistic competition. d) Monopoly

33. Which of the following is not a characteristic of a price-taker? [1]

a) AR = Price b) TR = P × Q

c) Marginal Revenue = Price d) Negatively - sloped demand curve

34. Example of a commodity said to have an International Market. [1]

a) Perishable Goods. b) Bulky Articles.

c) High Value and Small Bulk Commodities. d) Product whose trading is restricted by
government.
35. Which of the following statements is incorrect? [1]
a. Even a monopolistic firm can have losses.
b. Firms in a perfectly competitive market are price takers.
c. It is always beneficial for a firm in a perfectly competitive market to discriminate prices.
d. Kinked demand curve is related to an oligopolistic market.

a) Statement (c) is incorrect. b) Statement (d) is incorrect.

c) Statement (b) is incorrect. d) Statement (a) is incorrect.

36. If the average cost is higher than the average revenue then the firm incurs ________. [1]

a) Abnormal profit b) Normal profit

c) No profit, no loss d) Loss

37. Which of the following is the distinguishing characteristic of oligopolies? [1]

a) Downward-sloping demand curves faced by b) A standardized product.

firms.

c) The interdependence among firms. d) The goal of profit maximization.

38. Assume that when price is ₹ 20, the quantity demanded is 9 units, and when price is ₹ 19, the quantity demanded [1]
is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9
units to 10 units.

a) ₹ 20 b) ₹ 19

c) ₹ 10 d) ₹ 1
39. Discriminating monopoly implies that the monopolist charges different prices for his commodity: [1]

a) for different uses b) all of these

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 c) from different groups of consumers d) at different places
40. Conditions for equilibrium of a firm are: [1]

a) MR = MC and MC should have a positive b) MR = MC

slope.

c) MR = AR and MC should cut MR from d) MC should cut MR from below.

below.
41. When ________, we know that the firms are earning just normal profits. [1]

a) MC = MR b) AC = AR

c) AR = MR d) MC = AC
42. What is the shape of the demand curve faced by a firm under perfect competition? [1]

a) Vertical b) Horizontal

c) Negatively sloped d) Positively sloped

43. When e > 1 then MR is [1]

a) one b) zero

c) positive d) negative
44. Which of the following is not a characteristic of monopolistic competition? [1]

a) Ease of entry into the industry. b) A relatively large number of sellers.

c) A homogeneous product. d) Product differentiation.

45. Under perfect competition a firm is the ________. [1]

a) either price-maker nor price-taker b) price-taker and not price-maker

c) price-maker and not price-taker d) neither price-maker nor price-taker

46. Assume that when Price is ₹ 10, the quantity demanded is 5 units and when Price is ₹ 12 the quantity demanded [1]
is 4 units. Based on this information, what is the Marginal Revenue resulting from increase in output from 4
units to 5 units.

a) ₹ 5 b) ₹ 4

c) ₹ 3 d) ₹ 2
47. Agricultural goods markets depict characteristics close to [1]

a) perfect competition b) monopoly

c) monopolistic competition d) oligopoly

48. Price discrimination is related to [1]

a) size of the purchase b) all of these

c) income d) time
49. Under ________ the monopolist will fix a price which will take away the entire consumers surplus. [1]

a) third degree of price discrimination b) fourth degree of price discrimination

c) second degree of price discrimination d) first degree of price discrimination

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50. The long-run equilibrium outcomes in monopolistic competition and perfect competition are similar, because in [1]
both market structures

a) firms will be producing at minimum average b) firms will only earn a normal profit.
cost.

c) firms realise all economies of scale. d) the efficient output level will be produced in
the long run.

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