Economic analysis examines cost behaviour over different timescales. These include: Short run, Long run, Very long run. Here on MCQs.club we have prepared Multiple Choice Questions (MCQs) on Costs, revenues and firms that fully cover MCQs on cost behavior, production costs, Laws of costs (or Laws of returns). These MCQs are useful for Competitive exams, Professional accountancy exams and Business management exams.

The overall costs incurred for producing a good or a service is called the cost of production.

1. True
2. False

The production costs are divided into:

1. Fixed costs
2. Variable costs.
3. Semi-variable costs
4. All of the above

Implicit costs of production –

1. are the costs that have already incurred but are not separately shown as an expense while calculating the total cost of production.
2. are the costs that have been incurred and have also been booked as an expense.
3. the expenses that are paid out costs and involve cash outflows from the business.
4. All of the above

Explicit costs of production –

1. are the costs that have already incurred but are not separately shown as an expense while calculating the total cost of production.
2. are the costs that have been incurred and have also been booked as an expense.
3. the expenses that are paid out costs and involve cash outflows from the business.
4. Option B&C only

Economic analysis examines cost behaviour over different timescales. These include:

1. Short run
2. Long run
3. Very long run
4. All of the above

Which of the following is true for “Short run” cost behavior?

1. That period of time during which at least one factor of production must remain fixed.
2. That period of time in which it is possible to vary output by varying all factors of production within the given state of technology.
3. That period during which factors outside the firms’ control can vary.
4. All of the above

Which of the following is true for “long run” cost behavior?

1. That period of time during which at least one factor of production must remain fixed.
2. That period of time in which it is possible to vary output by varying all factors of production within the given state of technology.
3. That period during which factors outside the firms’ control can vary.
4. All of the above

Which of the following is true for “very long run” cost behavior?

1. That period of time during which at least one factor of production must remain fixed.
2. That period of time in which it is possible to vary output by varying all factors of production within the given state of technology.
3. That period during which factors outside the firms’ control can vary.
4. All of the above

Which of the following is correct for Fixed cost?

1. Costs that do not vary with the level of output.
2. The fixed costs of a business are known as the overheads.
3. As the quantity of output increases, the average fixed cost decreases
4. All of the above

Which of the following is correct for Variable cost?

1. Costs that vary as the level of output varies.
2. Costs to the firm will increase with every extra unit of output.
3. Variable costs are more or less constant up to a certain level of output after which they increase.
4. All of the above

Which of the following is correct for Total cost?

1. Bringing the two costs (fixed and variable) together.
2. The all of the expense to produce each level of output.
3. Both A&B
4. None

Which of the following is correct for Average Total cost?

1. All of the expense to produce each level of output, divided by the total number of units
2. The short-run average cost curve is U shaped
3. The average cost is made up of an average fixed cost per unit plus an average variable cost per unit.
4. All of the above

Which of the following is correct for Average Marginal cost?

1. The addition to total costs resulting from increasing output by one Unit. i.e. the variable costs of the last Unit produced
2. The marginal cost will change at various levels of production.
3. Once the total costs have been established, it is relatively simple to then calculate the marginal cost between each output level.
4. All of the above

All of the following are correct Except:

1. 1. The marginal cost is key to understanding how much a firm will want to produce, and therefore supply to the market.
  2. The average variable cost curve also begins by decreasing, finds a minimum spot, and then increases afterwards.
  3. The average fixed cost curve is always downward sloping, because the fixed costs remain constant, and are then spread out more thinly with each additional unit of output.
  4. The average total cost curve is the sum of the AVC and AFC curves, so it has a flat shape.

1. (I) and (IV) only
2. (IV) only
3. All of the above
4. None

Laws of costs (or Laws of returns) include:

1. Law of decreasing cost (Law of increasing returns)
2. Law of constant cost (Law of constant returns)
3. Law of increasing cost (Law of decreasing returns)
4. All of the above

If the variable factors of production show increasing returns, then MC is set to be falling. However, as these factors ultimately exhibit diminishing returns of productivity, the Marginal cost curve will always eventually increase.

1. The above statement is correct
2. The above statement is incorrect

Law of variable proportion – As the quantity of one factor is increased, with others remaining fixed, the marginal product of that factor will decline.

1. The above statement is correct
2. The above statement is incorrect

Assumptions underlying the Law of variable proportion include:

1. Constant state of technology: if technology improved, then the marginal product could increase also.
2. Fixed number of other factors: they must stay constant to be able to test it.
3. Possibility to combine factors: the factors must be able to combine to make a product.
4. All of the above

Which of the following is true for Economies of scale?

1. Cost reducing benefits to large scale production.
2. Factors which lead to the overall decrease in unit cost, as output increases.
3. Both A&B
4. None

Which of the following is true for Diseconomies of scale?

1. Cost increasing disadvantages of large-scale production.
2. Factors which lead to the overall increase in unit cost, as output increases.
3. Both A&B
4. None

Which of the following is correct for Revenue under perfect competition?

1. Demand curve is completely horizontal.
2. It is not a downward sloping demand curve.
3. From a firm’s perspective, because price remains constant, the average revenue remains constant too.
4. All of the above

Which of the following is correct for Revenue under imperfect competition?

1. The demand curve faced by firms is downward sloping.
2. The demand curve, and therefore AR curve, is downward sloping and to the right.
3. The marginal revenue is always less than the price due to the arithmetic of averages and marginals.
4. All of the above

The firm operating in conditions of perfect competition will face a number of features particular to its market. Identify such features:

1. 1. Large numbers of buyers and sellers
  2. Homogenous product
  3. Free entry and exit
  4. Perfect knowledge of prices
  5. Transport costs are negligible
  6. Firms are price takers

1. All of the above
2. (I) and (IV) only
3. (II) (IV) and (V) only
4. None

Under Perfect competition Short Run Equilibrium with Supernormal Profits:

1. The revenue derived from supplying the market exceeds the opportunity cost of the factors used.
2. The firm is producing to the right of (i.e. above) the quantity corresponding to its lowest AC.
3. Firm is enduring rising unit costs in order to supply the present quantity.
4. All of the above

Under Perfect competition Short Run Equilibrium with Subnormal Profits:

1. The revenue derived from supplying the market is less than the opportunity cost of the factors used.
2. The firm will be producing to the left of (i.e. below) the quantity corresponding to its lowest AC (which is unsustainable).
3. A firm will exit the market if its average revenue/ price is below the average variable cost.
4. All of the above

Shutdown condition –

1. The market price that forces a firm to exit the market.
2. This occurs when P<AVC.
3. Both A&B
4. None

In the long-run the supernormal profits will be eroded by:

1. Higher price will attract more firms into the market
2. The increased supply will lower the price
3. Both A&B
4. None

Which of the following is true for Firms under Imperfect competition?

1. This arises when only a few firms are able to supply a certain good at the given market price.
2. This becomes problematic mainly from a public policy perspective.
3. If a few firms hold a lot of power in a marketplace, then they are more likely to increase the price for their own profit, at the expense of consumer welfare.
4. All of the above

Monopoly –

1. A market structure where there is just one firm supplying to the whole market.
2. The extreme case of imperfect competition.
3. There is absence of competition.
4. All of the above

Features of a monopoly include:

1. 1. Sole supplier of good or commodity
  2. Profit maximising firm
  3. Price maker
  4. Earn super normal profit
  5. Very high barriers to entry

1. All of the above
2. (I) and (III) only
3. (I) (III) and (IV) only
4. None

Under the Long run equilibrium of a monopolist the firm faces a downward sloping demand curve because:

1. the average revenue increase as output decreases.
2. the average revenue decreases as output increases.
3. the average revenue remains constant as output increases.
4. None

Advantages of a monopoly include:

1. Benefit from economies of scale
2. Dominant domestically allows for international competitiveness
3. Supernormal profits
4. Able to take a long-term approach
5. All of the above

Disadvantages of a monopoly include:

1. Output is restricted in the market
2. Price is higher than in a competitive market
3. Less choice for consumers
4. Less consumer sovereignty
5. All of the above

Which of the following is true for Price discrimination?

1. The action of selling the same product to different groups of buyers at different prices in order to maximise profits.
2. One of the characteristics of a monopolist is the ability to engage in price discrimination.
3. Both A&B
4. None

Conditions required for price discrimination include:

1. Monopoly power – Firm must have the ability to set prices.
2. Elasticity of demand – Each group of buyers must have a different elasticity of demand in order to extract consumer surplus.
3. Separation of market – Firm must be able to split up the groups of buyers, and prevent goods from being resold between them.
4. All of the above

Oligopoly –

1. An industry dominated by a few large suppliers.
2. There are 2 or more but not more than 20 suppliers.
3. Oligopolies might be collusive (i.e. member firms work together in making pricing and output decisions) or non-collusive.
4. All of the above

Features of oligopoly include:

1. 1. Interdependence of firms
  2. Few seller’s markets
  3. Inside competition – Outside agreement
  4. Lack of uniformity in size of the firms
  5. Barriers to entry (Entry is difficult but not impossible)
  6. Homogenous or differentiated goods

1. All of the above
2. (II) and (V) only
3. (II) (V) and (VI) only
4. None

Since under oligopoly the exact behaviour pattern of a producer cannot be ascertained with certainty, the “demand curve” cannot be drawn accurately and with definiteness.

1. True
2. False

Which of the following is correct for “Collusive oligopolies”?

1. Collusive oligopolies are rare in practice.
2. Oligopolists collude (agree on an approach) in oligopolistic markets are known as a cartel.
3. Cartel members might be tempted to break the agreement in the pursuit of increasing their share of the industry profit.
4. All of the above

Which of the following conditions apply for a possible Collusion?

1. 1. Only very few firms are operating which are all well known to each other.
  2. They are open with each other regarding costs and production methods.
  3. Production techniques and costs of all the firms are similar.
  4. They produce similar products.
  5. There is a dominant firm.
  6. There are significant barriers on entry of new firms.
  7. The market is stable (that is no price war and price rivalry).
  8. Non – intervention by the Government to hinder Collusions.

1. All of the above
2. (I) (III) and (IV) only
3. (III) (VI) and (VIII) only
4. None

Assumptions of kinked demand curve include:

1. There is an established or prevailing market price for the product of the oligopolistic industry.
2. Each seller’s attitude depends on the attitude of his rivals.
3. Any attempt by one seller to increase sales by reducing price of his product will trigger other firms will also follow his move and thereby starting Price War.
4. If one seller raises price of his product other firms may not follow his price rise policy.
5. All of the above

Advantages of oligopoly include:

1. 1. Members of an oligopoly might be able to set prices.
  2. Oligopolists are able to make large profits as there are few players in the market.
  3. Barriers to entry allow an oligopolist to maintain profits in the long term.
  4. Customers are easily able to make price comparisons among the few players existing in the market and this may lead to competitive pricing.
  5. Stable prices in the market make planning easier for both the supplier and the customer.

1. All of the above
2. (II) and (IV) only
3. (I) and (V) only
4. None

Disadvantages of Oligopoly include:

1. Price setting in an oligopoly might prove disadvantageous to customers.
2. Innovation of small players in the industry is stifled.
3. An oligopolist is able to make good profits on an ongoing basis so there may be no incentive for product improvement.
4. Oligopolistic industries can suffer from price wars.
5. All of the above

Monopolistic competition –

1. A market structure where many sellers produce similar, but not identical, goods.
2. Each producer in monopolistic competition can set price and quantity without affecting the marketplace as a whole.
3. Both A&B
4. None

Identify the features of monopolistic competition.

1. 1. Many producers and many consumers
  2. Knowledge is widespread, but not perfect
  3. Non-homogenous products
  4. Producers have some control over price (“price makers”)
  5. Barriers to entry and exit do exist, but are low
  6. Brand loyalty exists, making demand less sensitive to price
  7. Firms also engage in some form of marketing
  8. Ability to make some supernormal profit

1. (I) (IV) and (VII) only
2. (II) (V) and (VIII) only
3. All of the above
4. None

Identify the advantages of monopolistic competition.

1. No significant barriers to entry.
2. Differentiation increases consumer choice.
3. More efficient than monopoly.
4. All of the above

Disadvantages of monopolistic competition include:

1. Differentiation can be unnecessary
2. Price is higher than MC
3. Both A&B
4. None

—More to come soon—

Shivva Pandeyyy says:

August 31, 2022 at 7:21 pm

It’s good for us

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1. says:
  
  October 2, 2022 at 12:33 pm
  
  Thanks! Stay tune for more.
  
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Costs, revenues and firms MCQs | Cost and Profit

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Costs, revenues and firms economics MCQs

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