Production, Cost and Theory of the Firm MCQs 2026

Average product (AP) is

1. A change in TP ✓
2. B price times quantity ✓
3. C MC at minimum ✓
4. D total product divided by units of the variable input ✓

MP intersects AP at

1. A the minimum of AP ✓
2. B the maximum of the AP curve ✓
3. C zero output ✓
4. D infinite AP ✓

If MR < MC, the firm should

1. A expand output ✓
2. B reduce output ✓
3. C ignore costs ✓
4. D set Q to infinity ✓

In perfect competition, MR equals

1. A AC always ✓
2. B price (AR) ✓
3. C AFC ✓
4. D zero always ✓

Cobb–Douglas production Q = A L^a K^b has returns to scale determined by

1. A only A ✓
2. B only L ✓
3. C only prices ✓
4. D a + b ✓

A production function shows

1. A only market demand ✓
2. B only money costs ✓
3. C maximum output obtainable from given inputs ✓
4. D only consumer utility ✓

In the short run

1. A all inputs are variable ✓
2. B at least one input is fixed ✓
3. C no production is possible ✓
4. D MC is always zero ✓

In the long run

1. A capital is always fixed ✓
2. B labour cannot change ✓
3. C costs are only sunk ✓
4. D all inputs are variable ✓

The law of variable proportions (diminishing returns) states that

1. A MP always rises forever ✓
2. B returns to scale always diminish in short run ✓
3. C AC is always falling ✓
4. D as more of a variable factor is added to a fixed factor, MP eventually falls ✓

Total product (TP) is

1. A extra output from one more unit ✓
2. B total output from a given amount of the variable input ✓
3. C output per worker only ✓
4. D revenue minus cost ✓

Marginal product (MP) is

1. A TP divided by price ✓
2. B the change in total product from one more unit of input ✓
3. C AC minus AVC ✓
4. D fixed cost ✓

Stage II of production (rational stage) is where

1. A MP is negative ✓
2. B AP is rising and MP > AP ✓
3. C AP is falling but MP is still positive ✓
4. D TP is falling ✓

An isoquant shows

1. A input combinations that yield the same output ✓
2. B same cost ✓
3. C same utility for consumers ✓
4. D same price ✓

Isoquants are typically

1. A upward sloping ✓
2. B horizontal always ✓
3. C circular ✓
4. D downward sloping and convex to the origin ✓

The marginal rate of technical substitution (MRTS) is

1. A the slope of the isocost only ✓
2. B MC/AC ✓
3. C the rate at which one input can replace another keeping output constant ✓
4. D price elasticity ✓

An isocost line shows

1. A input combinations that cost the same total outlay ✓
2. B same output levels ✓
3. C same utility ✓
4. D same MP ✓

Cost-minimizing input choice occurs where

1. A isoquant is tangent to isocost (MRTS = w/r) ✓
2. B MP is zero ✓
3. C isoquant crosses isocost twice always ✓
4. D price equals AR ✓

Returns to scale refer to

1. A only short-run MP ✓
2. B output response when all inputs change proportionately ✓
3. C only fixed costs ✓
4. D only demand elasticity ✓

Increasing returns to scale mean

1. A output rises less than inputs ✓
2. B output unchanged ✓
3. C output rises more than proportionately to inputs ✓
4. D MP negative ✓

Constant returns to scale mean

1. A output doubles when inputs rise 10% ✓
2. B MP is zero ✓
3. C AC rises always ✓
4. D output rises in the same proportion as inputs ✓

Decreasing returns to scale mean

1. A output rises more than inputs ✓
2. B output rises less than proportionately to inputs ✓
3. C no fixed factors exist ✓
4. D MC is below AVC always ✓

Total fixed cost (TFC)

1. A is zero at all outputs ✓
2. B does not vary with output in the short run ✓
3. C equals MC ✓
4. D rises then falls with Q ✓

Total variable cost (TVC)

1. A varies with the level of output ✓
2. B is constant at all Q ✓
3. C equals TFC always ✓
4. D is sunk forever ✓

Total cost (TC) equals

1. A TFC + TVC ✓
2. B TFC − TVC ✓
3. C MC × AC ✓
4. D only AFC ✓

Average fixed cost (AFC)

1. A rises continuously ✓
2. B is U-shaped like MC ✓
3. C equals MC at minimum ✓
4. D falls continuously as output rises ✓

Average variable cost (AVC) is

1. A TVC divided by output ✓
2. B TFC/Q ✓
3. C MC − AC ✓
4. D price − MR ✓

Average total cost (ATC or AC) is

1. A TC/Q or AFC + AVC ✓
2. B only MC ✓
3. C only TFC ✓
4. D MR − MC ✓

Marginal cost (MC) is

1. A TFC/Q ✓
2. B price elasticity ✓
3. C the addition to total cost from producing one more unit ✓
4. D average product ✓

The MC curve intersects the AC curve at

1. A AC's maximum ✓
2. B AFC's maximum ✓
3. C AC's minimum point ✓
4. D zero output only ✓

MC also intersects AVC at

1. A AVC's minimum ✓
2. B AVC's maximum ✓
3. C TFC ✓
4. D AFC min ✓

The short-run AC curve is typically

1. A always downward sloping forever ✓
2. B horizontal always ✓
3. C upward from origin linearly only ✓
4. D U-shaped ✓

The long-run average cost (LRAC) is

1. A an envelope of short-run AC curves ✓
2. B always above all SRAC ✓
3. C identical to MC always ✓
4. D equal to AFC ✓

Economies of scale cause

1. A LRAC to rise ✓
2. B LRAC to fall as output expands ✓
3. C MC to equal price always ✓
4. D fixed costs to vanish in short run ✓

Diseconomies of scale cause

1. A LRAC to fall forever ✓
2. B LRAC to rise at high output levels ✓
3. C MP to rise forever ✓
4. D AFC to rise ✓

Sunk costs are

1. A always equal to MC ✓
2. B variable in the short run always ✓
3. C costs that cannot be recovered once incurred ✓
4. D the same as opportunity costs of all decisions ahead ✓

Opportunity cost of a resource to the firm is

1. A only the historical purchase price ✓
2. B always zero for owned capital ✓
3. C only explicit wages ✓
4. D the value in its best alternative use ✓

Accounting profit ignores

1. A implicit (opportunity) costs that economists include ✓
2. B all explicit costs ✓
3. C revenue ✓
4. D taxes always ✓

Normal profit is

1. A the minimum return needed to keep the entrepreneur in the industry (zero economic profit) ✓
2. B maximum monopoly profit ✓
3. C always negative ✓
4. D equal to TFC only ✓

A firm maximizes profit where

1. A MR = MC (and MC is rising) ✓
2. B AC is maximum ✓
3. C AFC is maximum ✓
4. D TR is minimum ✓

If MR > MC, a competitive firm should

1. A decrease output ✓
2. B shut down always ✓
3. C set P = AC always ✓
4. D increase output ✓

The shutdown rule in the short run is

1. A produce only if P ≥ ATC always ✓
2. B shut down if P > MC ✓
3. C produce if P ≥ AVC; shut down if P < AVC ✓
4. D produce if TR < TVC ✓

In the long run, a competitive firm produces if

1. A P < AVC ✓
2. B MC is below AVC ✓
3. C price covers average total cost (including normal profit) ✓
4. D fixed costs are ignored forever ✓

The firm's short-run supply curve (competition) is

1. A the AC curve below AVC ✓
2. B the AFC curve ✓
3. C the demand curve ✓
4. D the MC curve above AVC ✓

Profit is maximized in terms of TR and TC where

1. A TR is maximized regardless of TC ✓
2. B the gap TR − TC is greatest (slopes equal: MR = MC) ✓
3. C TC is maximized ✓
4. D AC equals AFC ✓

Average revenue (AR) is

1. A MC ✓
2. B TFC ✓
3. C MP ✓
4. D TR divided by quantity (price for a single price) ✓

Diminishing returns are a

1. A long-run returns to scale only ✓
2. B demand-side only ✓
3. C monetary phenomenon only ✓
4. D short-run phenomenon with a fixed factor ✓

The ridge lines on an isoquant map

1. A show isocosts only ✓
2. B equal AC and MC ✓
3. C bound the economic region of production where MPs are non-negative ✓
4. D trace demand ✓

Homogeneous production function of degree one exhibits

1. A increasing returns only ✓
2. B decreasing returns only ✓
3. C constant returns to scale ✓
4. D zero MP ✓

Explicit costs are

1. A only implicit rents ✓
2. B out-of-pocket payments to outsiders ✓
3. C sunk forever by definition ✓
4. D equal to consumer surplus ✓

Implicit costs include

1. A only cash wages to workers ✓
2. B forgone earnings on owner-supplied resources ✓
3. C only tax remittances ✓
4. D only depreciation by law always ✓

The relationship MC = w / MPL (for labour) shows

1. A price equals wage always ✓
2. B AC equals wage ✓
3. C MRTS equals one ✓
4. D marginal cost linked to wage and marginal product ✓

When MP is rising, MC is

1. A falling ✓
2. B rising ✓
3. C constant at TFC ✓
4. D equal to AFC ✓

When MP is falling, MC is

1. A rising ✓
2. B falling ✓
3. C zero ✓
4. D equal to price always ✓

Break-even output is where

1. A P = AVC only ✓
2. B MR = 0 ✓
3. C TR equals TC (or P = AC) ✓
4. D MC = AFC ✓

Capacity output in cost theory often refers to

1. A output at minimum AC ✓
2. B zero output ✓
3. C infinite output ✓
4. D where AFC is max ✓

X-inefficiency refers to

1. A perfect cost minimization ✓
2. B failure to minimize costs due to lack of competitive pressure ✓
3. C only external economies ✓
4. D only diminishing returns ✓

External economies of scale arise from

1. A only one firm's internal reorganization ✓
2. B higher input prices only ✓
3. C industry-wide advantages as the industry grows ✓
4. D tax increases ✓

The planning curve is another name for

1. A the demand curve ✓
2. B the short-run MC only ✓
3. C the long-run average cost curve ✓
4. D the PPF ✓

Fixed factors in the short run create

1. A zero opportunity cost ✓
2. B perfectly elastic supply always ✓
3. C fixed costs and the basis for diminishing returns ✓
4. D constant MP forever ✓

Profit maximization is equivalent to loss minimization when

1. A TR is always maximized alone ✓
2. B AC is maximized ✓
3. C price is zero ✓
4. D the firm produces where MR = MC even if economic profit is negative (but covering AVC) ✓