Question 1

If marginal cost is increasing and is below marginal revenue, a profit- maximising firm should:

Accepted Answer

When marginal cost is increasing but still below marginal revenue, the firm can increase output to maximize profit, as producing more will add more to revenue than to cost.

Question 2

The law of diminishing returns:

Accepted Answer

The law of diminishing returns applies only in the short run when at least one input is fixed, and it does not imply that output decreases, but rather that the additional output from each additional unit of input eventually decreases.

Question 3

Advances in logistics allow firms to decrease costs by:

Accepted Answer

The answer of Advances in logistics allow firms to decrease...

Question 4

The law of diminishing returns applies when:

Accepted Answer

The law of diminishing returns applies when one or more factors of production are held fixed while inputs of one factor are increased, leading to a point where the additional output from the increased input begins to decrease.

Question 5

Which of the following is not a potential source of economies of scale?

Accepted Answer

Reduced input requirements do not inherently lead to economies of scale, as economies of scale are typically achieved through increased production efficiency and cost advantages from larger scale operations, not merely using fewer inputs.

Question 6

Which statement is FALSE?

Accepted Answer

Fixed costs are incurred even if the firm is producing nothing, as they do not vary with the level of output.

Question 7

If the average revenue curve facing a firm is downward sloping to the right, the price elasticity of demand will be different at different prices. Marginal revenue (MR) will be zero at the price where price elasticity of demand is:

Accepted Answer

When the price elasticity of demand is equal to 1, the marginal revenue is zero because total revenue is maximized at this point, indicating unitary elasticity.

Question 8

If a firm sells each unit of its output at the same price, then:

Accepted Answer

In a perfectly competitive market, price equals both average revenue and marginal revenue because each additional unit sold adds the same amount to total revenue as the price.

Question 9

A firm that is a price taker:

Accepted Answer

A price taker is a firm that must accept the market price for its product and cannot influence it. Therefore, it can sell as much output as it wants at the market-determined price but cannot increase its price to increase revenue.

Question 10

The marginal cost curve intersects the average variable cost curve at:

Accepted Answer

The marginal cost curve intersects the average variable cost curve at its minimum point because when marginal cost is less than average variable cost, the average variable cost is decreasing, and when marginal cost is greater than average variable cost, the average variable cost is increasing.

Question 11

In the long run, a firm will shut down when:

Accepted Answer

In the long run, a firm will shut down if it cannot cover its average total costs, meaning average total costs exceed average total revenues, leading to losses.

Question 12

Suppose Bill's Bike Works experiences economies of scale up to a certain output and diseconomies of scale beyond that output. Its long- run average cost curve is likely to:

Accepted Answer

The long-run average cost curve is U-shaped because it initially slopes downward due to economies of scale and then slopes upward due to diseconomies of scale.

Question 13

A firm which earns normal profit:

Accepted Answer

Normal profit occurs when a firm's total revenue is equal to the sum of its explicit and implicit costs, meaning it covers all its costs, including opportunity costs.

Question 14

Moving along a straight line demand curve, where demand is__________ , marginal revenue is__________ .

Accepted Answer

When demand is inelastic, a decrease in price leads to a smaller percentage increase in quantity demanded, resulting in a decrease in total revenue, making marginal revenue negative.

Question 15

When the price of a product decreases and marginal revenue is negative, demand must be:

Accepted Answer

When marginal revenue is negative, it indicates that total revenue decreases as more units are sold, which occurs when demand is inelastic.

Question 16

A firm that is making normal profits in the long run will have an incentive to:

Accepted Answer

A firm making normal profits in the long run is covering all its costs, including opportunity costs, and thus has no incentive to exit or change its current operations.

Question 17

If a firm wishes to increase output in the short run, it can do so:

Accepted Answer

In the short run, a firm can only adjust variable inputs, such as labor or raw materials, to increase output, as fixed inputs like capital or machinery cannot be changed.

Question 18

Economies of scale exist when:

Accepted Answer

Economies of scale occur when increasing the scale of production results in a lower cost per unit of output, which is described in option A.

Question 19

External economies of scale occur because:

Accepted Answer

External economies of scale occur when the cost per unit of output decreases as the size of the entire industry grows, benefiting all firms within the industry, not just a single firm.

Question 20

Where jobs are broken down into simple tasks this is called:

Accepted Answer

Specialisation and division of labour involve breaking down jobs into simple tasks, allowing workers to focus on specific tasks to increase efficiency and productivity.

Quiz 4: Background to Supply