Module M03 Quiz: Production and Costs
25 questions ยท Introductory ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 ยท Costs
Marginal product of labour (MPL) is defined as:
Type: Multiple Choice
- A) Total output divided by number of workers
- B) The change in total output from hiring one more worker
- C) The wage paid to the last worker hired
- D) Average output per worker
Show Answer
Answer: B) The change in total output from hiring one more worker
MPL = ฮTP/ฮL โ the additional output from one more unit of labour, holding other inputs fixed.
Question 2
Lesson L01 ยท Costs
When marginal product is above average product, average product is:
Type: Multiple Choice
- A) Falling
- B) Rising โ the marginal unit pulls the average up
- C) Constant
- D) Zero
Show Answer
Answer: B) Rising โ the marginal unit pulls the average up
When MPL > APL, each new worker contributes more than the current average, pulling the average up โ same logic as batting averages.
Question 3
Lesson L01 ยท Costs
A wheat farm employs 3 workers producing 90 tonnes. A 4th worker raises output to 112 tonnes. Calculate MPL for the 4th worker.
Type: Calculation
Show Answer
Answer: 22 tonnes
MPL = ฮTP/ฮL = (112-90)/(4-3) = 22 tonnes.
Question 4
Lesson L01 ยท Costs
Explain the difference between the short run and long run in production theory.
Type: Short Answer
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Answer: In the short run at least one input (usually capital) is fixed and cannot be changed. In the long run all inputs are variable โ the firm can adjust capital, labour, and other factors.
The short/long run distinction is about the flexibility of inputs, not a fixed calendar period.
Question 5
Lesson L01 ยท Costs
Average product of labour (APL) is maximised when:
Type: Multiple Choice
- A) Total product is maximised
- B) MPL = APL (marginal product equals average product)
- C) MPL is maximised
- D) Total product begins to fall
Show Answer
Answer: B) MPL = APL (marginal product equals average product)
APL is maximised at the point where the MPL curve crosses the APL curve from above.
Question 6
Lesson L02 ยท Costs
The law of diminishing marginal returns states that as more of a variable input is added to a fixed input:
Type: Multiple Choice
- A) Total output eventually falls to zero
- B) Marginal product of the variable input eventually falls
- C) Average product always rises
- D) Fixed costs increase
Show Answer
Answer: B) Marginal product of the variable input eventually falls
Eventually each additional unit of the variable input adds less to total output โ diminishing marginal returns.
Question 7
Lesson L02 ยท Costs
Diminishing marginal returns occurs in the:
Type: Multiple Choice
- A) Long run when all inputs can vary
- B) Short run when at least one input is fixed
- C) Only in agriculture
- D) Only when workers are unskilled
Show Answer
Answer: B) Short run when at least one input is fixed
Diminishing marginal returns is a short-run concept โ it arises because additional variable inputs are combined with a fixed factor.
Question 8
Lesson L02 ยท Costs
A Pilbara mine has fixed machinery. Workers 1-3 each produce 100 tonnes/day. Worker 4 produces 80, worker 5 produces 50. From which worker do diminishing returns set in?
Type: Calculation
Show Answer
Answer: Worker 4
MPL falls from 100 to 80 at worker 4 โ diminishing marginal returns begin with the 4th worker.
Question 9
Lesson L02 ยท Costs
Explain why diminishing marginal returns eventually occur in any production process.
Type: Short Answer
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Answer: As more of a variable input is added to a fixed input, the fixed input becomes a bottleneck. Each additional worker has less of the fixed input (e.g. machinery, land) to work with, so their marginal contribution eventually declines.
The fixed factor becomes increasingly scarce relative to the variable factor.
Question 10
Lesson L02 ยท Costs
Which scenario violates the law of diminishing marginal returns?
Type: Multiple Choice
- A) A farm where each additional worker after the 5th adds less output
- B) A factory where the 10th worker adds less than the 9th
- C) A mine where every additional worker permanently adds more output than the last
- D) A restaurant where cramming more chefs reduces output per chef
Show Answer
Answer: C) A mine where every additional worker permanently adds more output than the last
Permanently increasing marginal returns would violate the law โ in a short-run setting with fixed capital this cannot persist indefinitely.
Question 11
Lesson L03 ยท Costs
Average fixed cost (AFC) always:
Type: Multiple Choice
- A) Rises as output increases
- B) Falls as output increases โ fixed costs are spread over more units
- C) Equals marginal cost
- D) Is U-shaped
Show Answer
Answer: B) Falls as output increases โ fixed costs are spread over more units
AFC = TFC/Q. As Q rises, fixed costs are spread over more units so AFC continuously declines.
Question 12
Lesson L03 ยท Costs
The marginal cost curve intersects the average total cost curve at:
Type: Multiple Choice
- A) The maximum point of ATC
- B) The minimum point of ATC
- C) Any arbitrary point
- D) The point where AFC = AVC
Show Answer
Answer: B) The minimum point of ATC
MC intersects ATC at ATC's minimum. When MC < ATC, ATC falls; when MC > ATC, ATC rises.
Question 13
Lesson L03 ยท Costs
A Sydney cafรฉ has TFC=\(800/day. Variable costs: TC(10)=\)1,100, TC(11)=$1,210. Calculate MC of the 11th coffee and ATC at Q=11.
Type: Calculation
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Answer: MC=\(110; ATC=\)110
MC=ฮTC/ฮQ=(1210-1100)/1=\(110. ATC=TC/Q=1210/11=\)110.
Question 14
Lesson L03 ยท Costs
Why is the ATC curve U-shaped?
Type: Short Answer
Show Answer
Answer: At low output, high AFC pulls ATC up (fixed costs dominate). As output rises AFC falls rapidly, pulling ATC down. Eventually diminishing returns raise AVC faster than AFC falls, causing ATC to rise again โ creating the U-shape.
The U-shape reflects the tension between falling AFC and rising AVC.
Question 15
Lesson L03 ยท Costs
A firm's TVC at Q=50 is $500 and TFC is $200. Calculate AVC and ATC.
Type: Calculation
Show Answer
Answer: AVC=\(10; ATC=\)14
AVC=TVC/Q=500/50=\(10. ATC=(TVC+TFC)/Q=700/50=\)14.
Question 16
Lesson L04 ยท Costs
Economies of scale means:
Type: Multiple Choice
- A) Long-run average cost rises as output expands
- B) Long-run average cost falls as output expands
- C) Short-run marginal cost falls
- D) Fixed costs increase with scale
Show Answer
Answer: B) Long-run average cost falls as output expands
Economies of scale: LRATC falls as output increases โ often due to specialisation, efficient capital, and technology.
Question 17
Lesson L04 ยท Costs
Diseconomies of scale occur when a firm grows too large because of:
Type: Multiple Choice
- A) Increasing returns to the variable factor
- B) Coordination and management problems that raise per-unit costs
- C) Government regulation
- D) Too much competition
Show Answer
Answer: B) Coordination and management problems that raise per-unit costs
Very large firms face coordination failures, communication breakdowns, and bureaucratic inefficiency that raise LRATC.
Question 18
Lesson L04 ยท Costs
Qantas moves from 50 aircraft to 100 aircraft. LRATC falls from $180/seat to $160/seat. What type of returns does this represent?
Type: Calculation
Show Answer
Answer: Economies of scale
LRATC fell as output doubled โ economies of scale. The percentage fall in LRATC (11%) accompanies a 100% increase in scale.
Question 19
Lesson L04 ยท Costs
What is the minimum efficient scale (MES)?
Type: Short Answer
Show Answer
Answer: The MES is the smallest output level at which a firm's long-run average total cost is minimised. Firms operating below MES have higher per-unit costs than larger rivals.
MES determines the natural size of firms in an industry and influences market structure.
Question 20
Lesson L04 ยท Costs
An industry where MES is very large relative to market demand will tend toward:
Type: Multiple Choice
- A) Perfect competition with many small firms
- B) Natural monopoly or oligopoly โ only a few firms can operate at efficient scale
- C) Monopolistic competition
- D) Government ownership always
Show Answer
Answer: B) Natural monopoly or oligopoly โ only a few firms can operate at efficient scale
When MES is large relative to demand, only a few firms can reach efficient scale โ the industry tends toward concentrated market structures.
Question 21
Lesson L05 ยท Costs
Allocative efficiency requires:
Type: Multiple Choice
- A) P = minimum ATC
- B) P = MC (price equals marginal cost)
- C) MR = 0
- D) Zero economic profit
Show Answer
Answer: B) P = MC (price equals marginal cost)
Allocative efficiency: resources are allocated optimally when P=MC โ the value placed on the last unit equals its production cost.
Question 22
Lesson L05 ยท Costs
BHP's Pilbara iron ore operations benefit from economies of scale. If LRATC at 200m tonnes/year is $35/tonne and at 100m tonnes is $50/tonne, calculate the cost saving from doubling output.
Type: Calculation
Show Answer
Answer: $15/tonne or $3bn total
Saving per tonne = \(50-\)35=$15. At 200m tonnes: total saving vs 100m tonne cost base = \(15ร200m=\)3bn.
Question 23
Lesson L05 ยท Costs
Productive efficiency requires:
Type: Multiple Choice
- A) P = MC
- B) Production at minimum LRATC
- C) MR = MC
- D) Zero fixed costs
Show Answer
Answer: B) Production at minimum LRATC
Productive efficiency: the good is produced at the lowest possible per-unit cost (minimum LRATC).
Question 24
Lesson L05 ยท Costs
Explain the relationship MC = PL/MPL.
Type: Short Answer
Show Answer
Answer: The marginal cost of producing one more unit equals the wage rate (PL) divided by the marginal product of labour. If workers are more productive (higher MPL) each unit costs less to produce; if wages rise, MC rises.
This connects the labour market to the firm's cost structure.
Question 25
Lesson L05 ยท Costs
Coles operates 800+ supermarkets. Grams per $1 of generic product vs premium: identical quality. The cost advantage comes from:
Type: Multiple Choice
- A) Monopoly pricing power
- B) Economies of scale in procurement, distribution, and private label production
- C) Government subsidies
- D) Lower quality inputs
Show Answer
Answer: B) Economies of scale in procurement, distribution, and private label production
Large retailers achieve lower unit costs through bulk purchasing power, efficient distribution networks, and scale in own-brand manufacturing.