CHAPTER 5a PRODUCTION THEORY

In a business class, Arjun is discussing the role of firms in the economy. He states, "Of the following statements about firms, which is NOT TRUE?"

• Firms will determine the types of goods and services that will be produced.

• Firms will determine the most efficient combinations of production inputs.

• Firms will try to minimize profit.

• Firms will try to maximize production.

Answer explanation

The statement "Firms will try to minimize profit" is NOT TRUE. Firms aim to maximize profit, not minimize it, as profit is a key indicator of their success and sustainability in the economy.

Grace is running a small bakery. Which of the following statements about time period concepts is TRUE in the context of her business?

• In the short run, there are only fixed costs.

• In the long run, all inputs are considered to be variable inputs.

• In the short run, variable costs are higher than fixed costs.

• In the short run, all inputs are considered to be variable inputs.

Answer explanation

In the long run, all inputs can be adjusted, making them variable. This contrasts with the short run, where some costs are fixed. Therefore, the correct statement is that in the long run, all inputs are considered to be variable inputs.

Mason is planning to start a new manufacturing business. He is considering various inputs for his factory. Which of the following is NOT considered to be fixed input?

• Factory Buildings

• Offices

• Raw Materials

• Land

Answer explanation

Raw materials are variable inputs that change with production levels, unlike factory buildings, offices, and land, which are fixed inputs that do not vary with output.

In a bakery, the production function shows the relationship between ___________________.

• Inputs and cost.

• Output and cost.

• Product and cost.

• Inputs and outputs.

Answer explanation

The production function in a bakery illustrates how various inputs, like flour and labor, are transformed into outputs, such as bread and pastries. Therefore, the correct relationship is between inputs and outputs.

In the concept of production, industries refer to ____________________.

• A group of firms that produce the same type of goods.

• Large firms.

• Firms with a large capital.

• A group of firms competing with each other.

Answer explanation

In the concept of production, industries are defined as a group of firms that produce the same type of goods, distinguishing them from other options that focus on size or competition.

In a manufacturing company, the long run refers to a time period in which:

• All input cannot be increased.

• All inputs can be increased.

• There is at least one variable input.

• There is at least one fixed input.

Answer explanation

In the long run, all inputs can be adjusted, allowing for full flexibility in production. This distinguishes it from the short run, where at least one input is fixed and cannot be changed.

In a small bakery, Mia is experimenting with her ingredients. She finds that when she combines her fixed factors, like the oven and the kitchen space, with variable factors, like flour and sugar, the amount of bread she can produce increases. However, after adding too much flour, she notices that the additional bread produced starts to decrease. This situation illustrates the law of decreasing returns. What does this law state?

• When fixed factors and variable factors are combined in equal ratio, marginal production will initially increase, but after a certain point, marginal production begins to decrease.

• When fixed factors and variable factors are combined, total production will initially increase, but after a certain point, total production begins to decrease.

• When fixed factors and variable factors are combined in different ratios, marginal production will initially increase, but after a certain point, marginal production begins to decrease.

• When variable factors are incrementally added to fixed factors, total production will initially increase, but after a certain point, total production begins to decrease.

Answer explanation

The law of decreasing returns states that when variable factors, like flour, are added to fixed factors, total production initially increases but eventually decreases after a certain point, as seen in Mia's baking experiment.

When Benjamin decides to hire one more worker at his bakery, the increase in Total Production due to this additional unit of variable input is known as _______.

• Marginal Production.

• Marginal Cost.

• Average Cost.

• Average Production.

Answer explanation

The increase in Total Production from hiring one more worker is referred to as Marginal Production. This term specifically measures the additional output generated by adding one unit of a variable input.

In a small bakery, Kai notices that as he adds more flour to his dough, the amount of bread produced increases. However, he realizes that after a certain point, adding more flour results in less additional bread. The law of decreasing returns begins when the marginal production curve _____________.

• reaches maximum point.

• rises.

• falls.

• intersects the X-axis.

Answer explanation

The law of decreasing returns begins when the marginal production curve reaches its maximum point, indicating that additional flour yields less and less extra bread.

Among the following statements, which one is NOT TRUE when Average Production is greater than positive Marginal Production?

• Average Production is decreasing.

• Total Production is increasing.

• Marginal Production is 0.

• Marginal Production is decreasing.

Answer explanation

When Average Production is greater than positive Marginal Production, it indicates that Average Production is decreasing. However, Marginal Production cannot be 0; it must be positive but less than Average Production.