Module 3.
1 — Production, Productivity,
and Diminishing Returns (13 Qs)
1. A farm has 10 acres (fixed) and hires identical workers. When 1 worker is hired output =
20; 2 → 36; 3 → 48; 4 → 56. Which statement is true?
A. MPL is increasing for all hires.
B. MPL is decreasing for all hires.
C. MPL increases initially then decreases.
D. Average product is constant.
E. Total product is decreasing after 3 workers.
2. Suppose total product (TP) with 0–4 workers is {0, 18, 34, 48, 60}. Which is MPL for the
3rd worker?
A. 12
B. 14
C. 16
D. 18
E. 34
3. Holding capital fixed, which change would shift the MPL curve upward?
A. A sudden, permanent increase in the wage rate.
B. A technological improvement that raises labor productivity.
C. A per-unit tax on output.
D. An increase in unemployment in the region.
E. A decrease in farm size (land).
4. If each additional worker has a smaller share of fixed capital, which core concept explains
falling MPL?
A. Returns to scale
B. Diminishing returns to an input
C. Law of comparative advantage
D. Increasing returns to specialization
E. Constant marginal product
5. Which graphically equals the slope of the total product curve?
A. Average product of labor
B. Marginal product of labor
C. Marginal cost
D. Average fixed cost
E. Total revenue
6. A production function exhibits increasing MPL at low labor, then decreasing MPL later.
Which is possible?
A. MPL always negative at some point.
B. TP is first convex then concave.
C. TP is linear.
D. Average product must be falling throughout.
E. MPL cannot rise then fall.
7. Mia and Liam double all inputs and get output exactly double. This describes:
A. Diminishing returns to an input.
B. Increasing returns to scale.
C. Constant returns to scale.
D. Decreasing returns to scale.
E. Diminishing marginal returns.
8. A production function gives Q = 5L^(1/2)K^(1/2). If K is fixed, doubling L will:
A. More than double Q.
B. Exactly double Q.
C. Less than double Q.
D. Leave Q unchanged.
E. Make Q four times larger.
9. A firm’s marginal product of labor becomes negative. Which must be true?
A. Total product is still rising.
B. Marginal cost must be falling.
C. Total product is falling.
D. Average product is necessarily negative.
E. The firm faces economies of scale.
10. For a given fixed capital, which change could reverse diminishing MPL?
A. reduce wage rate
B. increase training/skill of workers
C. lower fixed capital further
D. reduce price of output
E. impose a unit tax on labor
11. Which statement is correct about diminishing returns and returns to scale?
A. Diminishing returns is a long-run concept; returns to scale is short-run.
B. Diminishing returns means MPL rises as more labor is hired.
C. Returns to scale concerns changing all inputs; diminishing returns holds some fixed.
D. They are the same concept under different names.
E. Returns to scale cannot produce economies of scale.
12. The MPL curve is negative and the TP curve is decreasing. Which is true about slope
signs?
A. TP slope positive; MPL negative
B. TP slope negative; MPL negative
C. TP slope zero; MPL negative
D. MPL equals slope of TP, so both negative
E. Impossible — MPL cannot be negative
13. Data: With 0–3 workers: Q = {0, 25, 47, 66}. Which of the following is true?
A. MPL3 = 19
B. MPL2 = 22, MPL3 = 19 — diminishing returns present
C. Average product with 3 workers = 22
D. MPL2 > MPL1
E. Total product shows constant returns
Module 3.2 — Short-Run Costs, MC, and
ATC (13 Qs)
14. If FC = $400, wage per worker = $200, and output per worker from 0→4 workers is {0,
19, 36, 52, 64}, what is total cost (TC) when 3 workers are hired?
A. $600
B. $1,000
C. $1,200
D. $1,400
E. $1,600
15. Using the same data as Q14, marginal cost of the 3rd worker (over output from 2→3
workers) equals:
A. $25 per unit
B. $50 per unit
C. $100 per unit
D. $200 per unit
E. $400 per unit
16. If AVC is rising, then:
A. MC must be below AVC.
B. MC must be above AVC.
C. ATC must be falling.
D. AFC must be rising.
E. MC equals ATC.
17. Which is true about AFC, AVC, and ATC as Q increases?
A. AFC increases; AVC falls; ATC rises.
B. AFC falls; AVC may fall then rise; ATC is U-shaped.
C. AFC is constant; AVC is U-shaped; ATC equals AFC.
D. AFC and AVC both increase always.
E. ATC falls forever.
18. Selena’s data: TC at Q=3 is $216; TC at Q=4 is $300. MC from 3→4 = ?
A. $21
B. $36
C. $84
D. $108
E. $300
19. Which best explains why MC eventually rises?
A. Fixed costs fall with output.
B. Diminishing marginal product of variable input.
C. Wages fall as output increases.
D. Average fixed cost rises.
E. Technology deteriorates by producing more.
20. The MC curve crosses ATC at:
A. ATC maximum.
B. ATC minimum.
C. AVC maximum.
D. AFC minimum.
E. ATC inflection point.
21. A per-unit increase in input price (e.g., bottles cost +$40 per case) will:
A. Shift AFC up by $40.
B. Shift MC and AVC up by $40.
C. Shift LRATC down by $40.
D. Leave all cost curves unchanged.
E. Only change FC.
22. Given VC rises more than proportionally with output due to diminishing returns, which
shape will MC most likely have starting from very low output?
A. Strictly upward sloping from Q=0.
B. Swoosh-shaped (down then up).
C. Horizontal.
D. Strictly downward sloping.
E. Vertical.
23. Table: Q: 0 1 2 3 4; TC: 40, 60, 90, 130, 180. What is MC at Q=3?
A. 20
B. 30
C. 40
D. 50
E. 90
24. The spreading effect explains:
A. Why MC rises eventually.
B. Why AVC falls forever.
C. Why AFC falls as Q increases.
D. Why MPL increases with more workers.
E. Why fixed cost increases with output.
25. If MC < ATC at current Q, what happens to ATC when output increases by one unit?
A. ATC increases.
B. ATC decreases.
C. ATC remains unchanged.
D. ATC becomes negative.
E. Cannot say without AFC.
Module 3.3 — Long-Run Costs, Returns
to Scale (12 Qs)
26. Long-run average total cost (LRATC) is defined as:
A. ATC when fixed cost is zero.
B. ATC when firm chooses fixed inputs to minimize ATC for each Q.
C. ATC in the short run with fixed capital.
D. Total cost per unit excluding variable cost.
E. Marginal cost in the long run.
27. If doubling all inputs more than doubles output, the firm experiences:
A. Diseconomies of scale.
B. Constant returns to scale.
C. Increasing returns to scale (increasing returns).
D. Diminishing marginal returns.
E. Negative marginal product.
28. The minimum efficient scale (MES) is:
A. Q where LRATC is at maximum.
B. Smallest Q at which LRATC is minimized.
C. Output where MC = AFC.
D. Output where ATC slope = MC slope.
E. Unrelated to market structure.
29. Which would tend to cause diseconomies of scale?
A. Better specialization of labor.
B. Centralized decision-making efficiency improvements.
C. Communication and coordination problems in very large firms.
D. Bulk buying discounts.
E. Automation that increases productivity.
30. A firm faces three short-run ATC curves (different fixed costs). The LRATC is:
A. The highest of these curves at each Q.
B. The envelope (lower bound) of these short-run ATC curves.
C. The average of them.
D. Identical to any one short-run curve.
E. The sum of the curves.
31. A firm currently on a short-run ATC that touches LRATC at Q=6. If it expects to produce
6 permanently, it should:
A. Do nothing; current fixed inputs minimize ATC at 6.
B. Reduce fixed inputs immediately.
C. Increase fixed inputs immediately.
D. Shut down.
E. Raise prices.
32. Which relationship is true?
A. If LRATC is decreasing over some range, the firm necessarily has decreasing returns to
scale.
B. If LRATC decreases as Q increases, firm experiences economies of scale.
C. LRATC always equals the lowest possible AVC.
D. LRATC is irrelevant to long-run decisions.
E. LRATC increases only when variable costs rise.
33. What is the likely market structure if MES is large relative to market demand for the
product?
A. Perfect competition with many small firms.
B. Monopoly or oligopoly due to few firms able to achieve MES.
C. Monopsony.
D. Contestable market with zero entry costs.
E. Pure public good provision.
34. Suppose three choices: (FC, AVC) = (8000, $1.00), (12000, $0.75), (24000, $0.25). For
Q = 30,000 which choice gives lowest ATC?
A. Choice 1
B. Choice 2
C. Choice 3
D. All equal
E. Need more info
35. Short-run ATC intersects LRATC at:
A. Every quantity.
B. The minimum of LRATC only.
C. Points where that short-run fixed choice minimizes ATC for that Q.
D. Only when LRATC is flat.
E. Never.
36. If Selena doubles all inputs and output triples, what happens to LRATC?
A. LRATC increases.
B. LRATC decreases.
C. LRATC stays constant.
D. LRATC undefined.
E. LRATC equals AFC.
Module 3.4 — Profit, Costs, and
Economic vs Accounting Profit (12 Qs)
37. Which is an implicit cost?
A. Wages paid to an employee.
B. Rent paid on a building.
C. Forgone salary of owner who works in the business.
D. Payment for raw materials.
E. Sales tax on purchases.
38. Accounting profit differs from economic profit because accounting profit:
A. Subtracts implicit costs only.
B. Subtracts explicit costs only.
C. Includes opportunity costs of capital and time.
D. Is always negative if economic profit is zero.
E. Equals total revenue.
39. If accounting profit = $25,000, implicit cost of capital = $2,000 and opportunity cost of
owner’s time = $23,000, economic profit = ?
A. $0
B. $2,000
C. $25,000
D. -$2,000
E. $0 only if accounting profit excludes depreciation
40. A firm with zero economic profit is:
A. Failing because profit must be positive.
B. Earning a normal profit and covering all opportunity costs.
C. Earning negative accounting profit.
D. Not covering explicit costs.
E. Always making positive accounting profit of zero.
41. Which best describes “normal profit”?
A. Accounting profit minus implicit cost.
B. Economic profit > 0.
C. Zero economic profit — the minimum needed to keep resources in current use.
D. Accounting profit = 0.
E. Profit after taxes only.
42. Karma and Don run a home business. Which is explicit vs implicit? (Basement space
rent forgone; supplies; job forgone wages) — which combination is correct?
A. Basement forgone rent — explicit; supplies — implicit; forgone job wages — explicit.
B. Basement forgone rent — implicit; supplies — explicit; forgone job wages — implicit.
C. All three are explicit.
D. All three are implicit.
E. Basement forgone rent — explicit; others implicit.
43. You sell T-shirts: cost per shirt $5, price $10, sell 100 shirts in 2 hours. Opportunity wage
foregone = $12/hr. Accounting profit and economic profit per game? (Choose the correct
pair)
A. Accounting $500; Economic $500
B. Accounting $1,000; Economic $500
C. Accounting $500; Economic $1,000
D. Accounting $1,000; Economic $1,000
E. Accounting $476; Economic $476
44. Opportunity costs include:
A. Only explicit costs.
B. Only implicit costs.
C. Both explicit and implicit costs.
D. Only depreciation.
E. Only accounting profit.
45. Which of the following would reduce accounting profit but not economic profit?
A. Increase in wage paid to owner.
B. Increase in implicit rent (opportunity cost).
C. Increase in depreciation expense accounted under GAAP.
D. A decrease in explicit material costs.
E. A per-unit subsidy.
46. A firm earns positive economic profit. Which is likely in the long run?
A. Entry of new firms, profit erodes in perfect competition.
B. Exit of existing firms.
C. No change in market.
D. Government must intervene.
E. Accounting profit becomes negative.
47. A firm faces explicit costs = $50,000, implicit costs = $30,000, total revenue = $100,000.
Accounting profit = ?, Economic profit = ?
A. $20,000; -$10,000
B. $50,000; $20,000
C. $20,000; $20,000
D. $50,000; -$30,000
E. $100,000; $20,000
48. Which is true: If economic profit < 0 (negative), firm:
A. Is covering both explicit and implicit costs fully.
B. Earning more than owners' next best alternative.
C. Could be better off reallocating resources elsewhere in long run.
D. Must immediately shut down in short run.
E. Is necessarily making an accounting loss.
49. A business owner has accounting profit = $40,000. If implicit costs = $40,000, what can
be said?
A. Economic profit = $0; owner is earning normal profit.
B. Economic profit = $40,000.
C. Accounting profit must be negative.
D. Owner should close immediately.
E. Implicit costs are irrelevant.
50. Which of these decisions uses economic profit concept most directly?
A. Choosing between two bank accounts for a safe deposit.
B. Deciding whether to keep own capital invested in current business vs rent it out.
C. Hiring a part-time cashier based solely on break-even accounting.
D. Filing monthly tax returns.
E. Choosing accounting software.