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WorksheetsCAF-ECO-3
Total questions: 100
Worksheet time: 3hrs 30mins
In economics, production refers primarily to:
Creation of matter
Addition of utility to resources
Activities done without market exchange
Transformation without value addition
A key characteristic of land as a factor of production is:
It is produced through human effort
Its total supply is fixed
It depreciates over time
It is mobile geographically
Human capital differs from physical capital because it:
Exists independently of education
Cannot enhance productivity
Represents skills acquired through investment
Cannot earn income
Managerial preference for balanced growth rather than pure profit maximisation is linked to:
Shareholder dominance
Desire for status, power and security
Government regulation
A legal requirement
Opportunity cost represents:
Actual monetary payment
Value of the next-best alternative forgone
Historical expenditure
Sunk cost only
A firm earns zero economic profit when:
Accounting profit is zero
Total revenue covers explicit and implicit costs
Implicit costs exceed explicit costs
Total revenue exceeds explicit cost only
A cost that cannot be recovered once incurred is called:
Incremental cost
Sunk cost
Outlay cost
Replacement cost
Short-run total cost is equal to:
Variable cost only
Fixed cost only
Fixed cost plus variable cost
Marginal cost times output
Average fixed cost curve:
Rises with output
Remains constant
Falls continuously as output increases
Is U-shaped
The marginal cost curve intersects the average total cost curve at:
ATC maximum
ATC minimum
Output zero
AFC minimum
Economic cost includes:
Explicit cost only
Implicit cost only
Both explicit and implicit costs
Only historical cost
Semi-variable costs consist of:
Only fixed cost
Only variable cost
A fixed component and a variable component
A stepped variable pattern only
In long-run plant selection, a firm chooses the plant where:
Fixed cost is minimum
Variable cost is minimum
Unit cost for that output is minimum
Output is maximized
Long-run average cost is U-shaped mainly because of:
Short-run diminishing returns
Returns to scale
Rising fixed costs
Government policy changes
External economies of scale arise when:
A firm expands internally
Industry expansion lowers cost for all firms
Management becomes more efficient
Advertising is increased
Technical economies occur when:
Workers reduce productivity
The firm uses more specialized machinery
The firm downsizes operations
External infrastructure deteriorates
The long-run average cost curve is known as the planning curve because it:
Shows revenue patterns
Indicates profit-maximising output
Helps choose plant size for future output
Determines tax liability
If marginal cost is below average variable cost:
AVC rises
AVC falls
AVC is at minimum
AVC is irrelevant
An example of an external diseconomy is:
Inefficient managers in a firm
Industry-wide labour shortage raising wages
A firm buying new machinery
A firm outsourcing production
The “envelope” property of the long-run average cost curve means it:
Lies above all SAC curves
Is tangent to short-run average cost curves
Intersects all SAC curves
Matches marginal cost at every point
Total variable cost equals zero when output is:
Maximum
Minimum positive
Zero
Negative
Stair-step costs occur when:
Cost changes smoothly
Costs jump when new capacity is added
Fixed cost increases continuously
Variable cost is zero
Replacement cost refers to:
Past purchase price
Current cost of replacing an asset
Depreciated book value
Implicit cost of capital
An example of an implicit cost is:
Wages paid to workers
Electricity bill
Owner’s forgone salary
Payment to suppliers
Incremental cost refers to:
Total cost incurred
Additional cost from a decision
Past sunk expenditure
Long-run fixed cost only
Diminishing marginal returns imply:
Marginal cost eventually rises
Marginal cost falls indefinitely
Fixed costs increase
Average variable cost remains constant
External economies do NOT include:
Better industry training facilities
Improved public infrastructure
A firm’s internal improvements
Shared supplier networks
Outlay cost refers to:
Implicit cost
Non-cash cost
Actual monetary expenditure
Future expected cost
The curve that starts at the origin is:
TFC
TVC
AFC
ATC
An L-shaped long-run average cost curve implies:
Immediate diseconomies
Costs fall then flatten across high output levels
Costs rise continuously
U-shape only
Normal profit is treated as:
Part of implicit costs
Supernormal revenue
Accounting profit
ATC continues to fall even when AVC rises because:
AFC rises faster
AFC falls faster than the rise in AVC
MC is always below AVC
AVC is irrelevant
The law of variable proportions applies when:
All inputs vary
At least one input is fixed
All inputs are fixed
Technology changes continuously
Cost functions depend on:
Demand curve
Prices of inputs and technology
Advertising expenditure
Sales level
A training institute shared by many firms is an example of:
Internal economy
External economy
Diseconomy
Variable input
Marginal cost is unaffected by fixed cost because:
Fixed cost changes with output
MC depends on variable cost only
Variable cost is irrelevant
MC includes fixed cost always
When the firm chooses a plant where LRAC is tangent to SRAC, it:
Minimises long-run cost for that output
Maximises ATC
Must operate at minimum SRAC
Must produce at full capacity
Historical cost is:
Future cost
Recorded past expenditure
Replacement cost
Implicit cost
Marginal cost reaches minimum when:
Total cost is zero
Total cost curve has an inflection point
Fixed cost decreases
Variable cost is zero
Long-run L-shaped cost curves occur because:
Diseconomies dominate
Economies persist across large output ranges
Technology worsens
Fixed cost becomes variable
Social cost includes:
Only private expenditure
Private cost plus external cost
Only implicit cost
Only sunk cost
A common managerial objective other than profit maximization is:
Inflation reduction
Sales maximization
Polluting less
Minimizing output
Average total cost equals:
AFC – AVC
AVC + AFC
MC x Q
TFC only
The vertical distance between TC and TVC equals:
MC
AFC
TFC
AVC
Circulating capital includes:
Buildings
Raw materials
Machinery
Land
When LRAC is falling, it is tangent to SRAC on the:
Rising portion
Falling portion
Minimum point
Horizontal portion
Hiring an extra supervisor when capacity is exceeded creates:
Semi-variable cost
Sunk cost
Step cost
Implicit cost
Which is NOT an objective category of firms?
Organic
Human
National
Geometric
ATC will fall if:
AVC rises faster than AFC falls
AFC falls faster than AVC rises
Both rise
Both fall equally
Internal diseconomies arise due to:
Improved coordination
Better infrastructure
Managerial inefficiency
Shared industry resources
Marginal cost of nth unit is:
TCn / n
TCn – TCn-1
TC / MC
AVC + AFC
Labour supply may bend backward because workers:
Always demand more work
Prefer leisure at higher wages
Cannot choose hours
Have fixed productivity
A production function shows the relationship between:
Revenue and cost
Inputs and maximum output
Output and prices
Wages and consumption
Short run is defined as a period when:
All factors vary
At least one factor is fixed
No factor can vary
Output cannot change
AFC never becomes zero because:
TFC is always positive
TFC rises
TFC falls with output
AFC becomes negative
Opportunity cost matters because:
It affects accounting entries
It reflects value of foregone alternatives
It is always zero
It is a sunk cost
When MC < AC, AC will:
Rise
Fall
Stay constant
Become undefined
Marketing economies may be:
Internal
External
Both internal and external depending on source
Never economies
Ignoring past advertising expenditure in new decisions is correct because such expenditure is:
Variable cost
Opportunity cost
Sunk cost
Incremental cost
Tangency of LRAC and SRAC means:
The chosen plant minimizes long-run cost
Costs are maximum
Output is at minimum SRAC
Output must increase
Cost functions are influenced by:
Fashion trends
Input prices and technology
Population density
Climate
Long-run plant selection involves studying:
Only VC curves
All short-run average cost curves
Only long-run fixed cost
Marginal revenue
Increasing returns to scale lead to:
Rising average cost
Falling average cost
Constant average cost
Negative marginal product
Composite technology means:
Combining production stages to reduce cost
Outsourcing production
Using only labour
Making machinery obsolete
Replacement cost exceeds historical cost when:
Prices fall
Inflation raises asset prices
Depreciation is zero
Output falls
AVC at zero output is:
Undefined
Zero
Constant
Maximum
Semi-variable cost includes:
Pure variable element
Pure fixed element
A fixed part plus a variable part
Negative cost
External diseconomies occur when:
Industry expansion raises input costs
Firms improve internally
Government subsidizes production
Labour becomes more efficient
AVC is U-shaped because of:
AFC fluctuations
Law of variable proportions
Constant marginal returns
Zero fixed cost
Social cost includes:
Pollution costs imposed on society
Only firm’s private costs
Pure implicit cost only
Sunk costs only
Intangible capital includes:
Machines
Patents and goodwill
Buildings
Raw materials
MC reaches minimum at:
Maximum TC
Inflection point of TC curve
Zero AVC
Minimum AFC
Historical cost understates asset value when:
Prices fall
Prices rise
Output rises
Marginal cost falls
Fixed costs remain unchanged:
Only when output rises
Within capacity, regardless of output
Only in long run
Only at maximum output
Profit arises mainly as reward for:
Labour
Capital
Bearing uninsurable uncertainty
Government regulation
LRAC tangent on rising SRAC means:
Increasing returns
Decreasing returns
Constant returns
Infinite returns
Opportunity cost is crucial when:
Many alternatives don’t exist
Choices involve sacrificing other uses of resources
Only fixed cost changes
No scarcity exists
Establishing a common industry R&D centre is:
Internal economy
External economy
Diseconomy
Sunk benefit
AVC is minimum when:
MC > AVC
MC = AVC
MC < AVC
MC = ATC
Some fixed costs are discretionary because:
They cannot be avoided
Management decides whether to incur them
They vary with output
They become variable in long run
Composite technology reduces cost by:
Increasing outsourcing
Integrating production stages
Eliminating labour
Expanding only fixed cost
Diminishing marginal product implies:
Rising marginal cost
Falling marginal cost
Constant marginal product
Output stops increasing
LRAC envelops SRAC because it:
Lies above SRAC
Represents lowest attainable cost for each output
Is irrelevant to firms
Has random shape
Sharp rise in MC at high output indicates:
Strong diminishing returns
Rising fixed cost
Better capacity utilization
Reduction in TVC
Sunk costs act as:
Entry barrier
Output enhancer
Variable cost
Marginal cost
Innovation function of entrepreneur refers to:
Copying competitors
Introducing new products, processes, markets
Reducing workers
Increasing debt
Opportunity cost of education includes:
Only tuition fee
Wages forgone plus other sacrificed alternatives
Sunk cost
Pure variable cost
A boat-shaped long-run cost curve implies:
Costs always rise
Cost falls then rises
Cost is constant
Cost falls indefinitely
Producing at minimum LRAC implies:
Plant size is optimal
Firm must operate at minimum SRAC
Fixed cost is zero
Output cannot change
Raw materials are:
Fixed capital
Circulating capital
Intangible capital
Social capital
AFC falls because:
TFC decreases
TFC spreads over larger output
AVC rises
MC falls
Technology affects cost because it:
Alters input productivity
Only affects revenue
Has no role in cost curves
Reduces fixed cost always
When a firm pollutes the environment, the cost imposed on society is:
Private cost
External cost
Implicit cost
Variable cost
A firm may operate below capacity in long run because:
The chosen plant minimises cost at that output even if not at SRAC minimum
Capacity cannot exceed output
Fixed cost must rise
Diseconomies disappear
AC falls when:
MC > AC
MC < AC
MC = AC
MC is constant
A firm emitting pollution without paying for cleanup creates:
Social cost
Fixed cost
Sunk cost
Private cost only
Managerial utility may include:
Salary, power, staff size
Only profits
Zero risk
Only sales
Decrease in input prices industry-wide will:
Increase LRAC
Reduce LRAC
Make no change
Raise fixed cost
Incremental cost is used when evaluating:
Past decisions
Additional cost generated by a new decision
Total historical cost
Depreciation schedules
The link between production and cost is that:
Production determines technology, and cost depends on input prices
Cost determines production function
Production is independent of cost
Inputs have no effect on costs
