1) Which of the following cost functions indicates that the law of diminishing returns takes effect as soon as production begins? A) 1000 2.5Q .05Q2 B) 1000 2.5Q C) 1000 2.5Q – 1.2Q2 .03Q3 D) Not enough information to determine this. 2) Which of the following relationships is correct? A) When marginal product starts to decrease marginal cost starts to decrease. B) When marginal cost starts to increase average cost starts to increase. C) When marginal cost starts to increase average variable cost starts to increase. D) When marginal product starts to decrease marginal cost starts to increase. 3) The law of diminishing returns begins first to affect a firm’s short-run cost structure when A) average variable cost begins to increase. B) marginal cost begins to increase. C) average cost begins to increase. D) average fixed cost begins to decrease. 4) Which of the following statements best represents a difference between short-run and long-run cost? A) Less than one year is considered the short run; more than one year the long run. B) There are no fixed costs in the long run. C) In the short-run labor must always be considered the variable input and capital the fixed input. D) All of the above are true. 5) The relationship between MC and AC can best be described as follows: A) when AC increases MC starts to increase. B) when MC increases AC starts to increase. C) when MC decreases AC decreases. D) when MC exceeds AC AC starts to increase. 6) Average fixed cost is A) AC minus AVC. B) TC divided by Q. C) AVC minus MC. D) TC minus TVC. 7) Which of the following cost relationships is not true? A) AFC = AC – MC B) TVC = TC – TFC C) The change in TVC/the change in Q = MC. D) The change in TC/ the change in Q = MC. 8) Economists consider which of the following costs to be irrelevant to a short-run business decision? A) opportunity cost B) out-of-pocket cost C) historical cost D) replacement cost 9) Which of the following is a relevant cost? A) replacement cost B) sunk cost C) historical cost D) fixed cost E) All of the above are relevant. 10) Which of the following is a reason for economies of scale? A) Fixed costs are spread out as volume increases. B) The law of diminishing returns does not take effect. C) Input productivity increases as a result of greater specialization. D) There is greater savings in transportation costs.
