Cost theory: short-run and long-run curves - Question Bank

1. What is the relationship between SRATC and LRATC at the minimum efficient scale?
A) Multiple SRATC curves touch LRATC at its minimum.
B) Only one SRATC curve touches LRATC at its minimum.
C) No SRATC curve touches LRATC at its minimum.
D) SRATC is always above LRATC at this point.
2. The 'envelope curve' refers to the:
A) Short-run average cost curve
B) Long-run average cost curve
C) Short-run marginal cost curve
D) Total cost curve
3. Which of the following is a short-run cost?
A) Cost of building a new factory
B) Cost of purchasing new machinery
C) Cost of raw materials for production
D) Cost of long-term debt financing
4. In the long run, a firm can adjust:
A) Only its variable inputs
B) Only its fixed inputs
C) All its inputs
D) Its output level but not its inputs
5. The point where MC = AC in the short run indicates:
A) The minimum point of the AC curve
B) The maximum point of the AC curve
C) The start of increasing costs
D) The end of fixed costs
6. Which factor is NOT a source of economies of scale?
A) Technical economies
B) Managerial economies
C) Marketing economies
D) Diseconomies of management
7. The shape of the LRAC curve is often described as:
A) A saucer
B) A bell
C) A parabola
D) A hyperbola
8. The relationship where LRAC is rising is associated with:
A) Increasing returns to scale
B) Decreasing returns to scale
C) Constant returns to scale
D) Economies of scale
9. The relationship where LRAC is falling is associated with:
A) Increasing returns to scale
B) Decreasing returns to scale
C) Constant returns to scale
D) Diminishing marginal returns
10. If a firm produces zero output, which cost is still incurred?
A) Total Variable Cost
B) Total Fixed Cost
C) Marginal Cost
D) Average Variable Cost
11. What is the relationship between the slope of the TVC curve and the MC curve?
A) MC is the inverse of the TVC slope.
B) MC is equal to the slope of the TVC curve.
C) MC is independent of the TVC slope.
D) MC is the slope of the TFC curve.
12. The law of diminishing marginal returns explains the shape of which short-run cost curves?
A) AFC and TFC
B) AVC, ATC, and MC
C) TVC and TC
D) Only MC
13. Which cost is considered a 'sunk cost' in short-run decision making?
A) Labor cost
B) Raw material cost
C) Rent on a building
D) Energy cost
14. When a firm changes its plant size to produce a different level of output in the long run, it moves:
A) Along a SRAC curve
B) From one SRAC curve to another, tracing the LRAC
C) Vertically on the cost graph
D) Horizontally on the cost graph
15. When a firm expands output in the short run, it moves along:
A) The LRAC curve
B) A specific SRAC curve
C) The TVC curve
D) The TFC curve
16. The concept of 'planning horizon' is most relevant to which cost curve?
A) Short-run Average Fixed Cost
B) Short-run Average Variable Cost
C) Long-run Average Cost
D) Marginal Cost
17. Which of the following statements about short-run and long-run cost curves is FALSE?
A) Short-run cost curves are derived from a fixed plant size.
B) Long-run cost curves consider all possible plant sizes.
C) The long-run average cost curve is always below the short-run average cost curves.
D) Short-run average cost curves can be tangent to the long-run average cost curve.
18. In the long run, the LRMC curve intersects the LRAC curve at:
A) The maximum point of LRAC
B) The minimum point of LRAC
C) Any point on the LRAC curve
D) The point where LRAC is upward sloping
19. The long-run marginal cost (LRMC) curve is derived from:
A) The short-run marginal cost curves
B) The rate of change of total cost in the long run
C) The tangent points of various short-run marginal cost curves
D) The minimum points of the LRAC curve
20. What is a common reason for diseconomies of scale?
A) Specialization of labor and management
B) Bulk buying of inputs
C) Communication and coordination problems
D) Technological advancements
21. The horizontal portion of the LRAC curve, if it exists, represents:
A) Economies of scale
B) Diseconomies of scale
C) Constant returns to scale
D) Diminishing marginal returns
22. Diseconomies of scale occur when:
A) Long-run average costs decrease as output increases.
B) Long-run average costs increase as output increases.
C) Long-run average costs remain constant as output increases.
D) Marginal cost increases as output increases.
23. The minimum point of the LRAC curve signifies:
A) The point of maximum economies of scale
B) The point of minimum efficient scale
C) The point where economies and diseconomies of scale balance
D) All of the above
24. Economies of scale occur when:
A) Long-run average costs increase as output increases.
B) Long-run average costs decrease as output increases.
C) Long-run average costs remain constant as output increases.
D) Marginal cost decreases as output increases.
25. The downward-sloping portion of the LRAC curve is attributed to:
A) Diseconomies of scale
B) Diminishing marginal returns
C) Economies of scale
D) Increasing marginal costs
26. The long-run average cost curve is typically:
A) Upward sloping
B) Downward sloping
C) U-shaped
D) A straight line with positive slope
27. The LRAC curve represents the:
A) Lowest cost per unit of output for a given scale of plant
B) Highest cost per unit of output for a given scale of plant
C) Average cost when all inputs are fixed
D) Marginal cost when all inputs are variable
28. The long-run average cost (LRAC) curve is derived from:
A) The short-run fixed cost curves
B) The minimum points of the short-run average total cost curves
C) The tangent points of various short-run average total cost curves
D) The maximum points of the short-run marginal cost curves
29. The long-run cost curve is often referred to as the:
A) Short-run average cost curve
B) Envelope curve
C) Marginal cost curve
D) Total cost curve
30. In the long run, what is the defining characteristic of all factors of production?
A) They are all fixed.
B) At least one factor is fixed.
C) They are all variable.
D) The firm is constrained by capacity.
31. The short-run cost curves (AFC, AVC, ATC, MC) are typically U-shaped due to:
A) The law of increasing returns
B) The law of diminishing returns
C) Economies of scale
D) Diseconomies of scale
32. When MC is above AVC, what happens to AVC?
A) AVC decreases
B) AVC increases
C) AVC remains constant
D) AVC becomes negative
33. When MC is below AVC, what happens to AVC?
A) AVC increases
B) AVC decreases
C) AVC remains constant
D) AVC becomes zero
34. The Marginal Cost (MC) curve typically intersects the AVC and ATC curves at:
A) Their maximum points
B) Their minimum points
C) Points where they are horizontal
D) Points where they are parallel
35. Marginal Cost can be calculated as:
A) Change in TC / Change in Output
B) Change in FC / Change in Output
C) Change in AVC / Change in Output
D) TC / Output
36. The Marginal Cost (MC) is the change in total cost resulting from:
A) A one-unit increase in output
B) A one-unit increase in fixed input
C) A one-unit increase in variable input
D) A proportional increase in all inputs
37. The ATC curve reaches its minimum point when:
A) Marginal Cost (MC) is at its minimum
B) Marginal Cost (MC) equals Average Total Cost (ATC)
C) Marginal Cost (MC) is greater than ATC
D) Average Variable Cost (AVC) is at its maximum
38. The Average Total Cost (ATC) curve is:
A) Downward sloping
B) Upward sloping
C) U-shaped
D) Horizontal
39. Average Total Cost (ATC) is the sum of which two averages?
A) AFC and AVC
B) AFC and MC
C) AVC and MC
D) AFC and TVC
40. When does the AVC curve reach its minimum point?
A) When MC is at its maximum
B) When MC equals AVC
C) When MC is falling
D) When AVC equals AFC
41. The Average Variable Cost (AVC) curve is typically:
A) Downward sloping
B) U-shaped
C) Upward sloping
D) A straight line
42. Average Variable Cost (AVC) is calculated as:
A) Total Cost / Output
B) Total Variable Cost / Output
C) Total Fixed Cost / Output
D) Marginal Cost / Output
43. The Average Fixed Cost (AFC) curve is:
A) U-shaped
B) Downward sloping and approaches zero
C) Upward sloping
D) Horizontal
44. What is the definition of Average Fixed Cost (AFC)?
A) Total Fixed Cost divided by the change in output
B) Total Fixed Cost divided by the level of output
C) Total Variable Cost divided by the level of output
D) Total Cost divided by the level of output
45. The shape of the Total Variable Cost (TVC) curve in the short run is generally:
A) Upward sloping and linear
B) Downward sloping and convex
C) Upward sloping and initially concave, then convex
D) Upward sloping and initially convex, then concave
46. The Total Variable Cost (TVC) curve typically starts from the origin because:
A) Fixed costs are zero at zero output.
B) Variable costs are zero at zero output.
C) Marginal cost is zero at zero output.
D) Average cost is zero at zero output.
47. Which of the following costs does NOT change with the level of output in the short run?
A) Total Variable Cost
B) Average Variable Cost
C) Total Fixed Cost
D) Marginal Cost
48. In the short run, total cost (TC) is the sum of which two components?
A) Fixed Cost (FC) and Marginal Cost (MC)
B) Variable Cost (VC) and Marginal Cost (MC)
C) Fixed Cost (FC) and Variable Cost (VC)
D) Average Cost (AC) and Marginal Cost (MC)
49. What is the primary characteristic of the short run in cost theory?
A) All factors of production are variable.
B) At least one factor of production is fixed.
C) The firm can easily enter or exit the market.
D) The firm can adjust its scale of operations.
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