Question

1. The law of diminishing marginal product is a statement

A. that concerns changes in variable input and changes in output

B. that concerns the long run

C. that concerns changes in profits

D. that relates to plant size

2. What does it mean to say that health care may be subject to diminishing returns?

A. Health care costs are expensive

B. New technology has improved lives, but not by much

C. Eventually, higher individual spending on healthcare won’t improve life quality very much

D. Government has failed to eliminate health care scarcity

3. Which of the following statements about production functions is FALSE?

A. Included in the firm's short-run production function are both fixed and variable inputs

B. Higher amounts of inputs will allow a firm to produce more output

C. The production function shows the technical relationship between a firm's inputs and outputs

D. The relationship between inputs and outputs changes if capital becomes variable in the long run

4. Suppose a firm doubles its output in the long run. At the same time, the average cost of production remains unchanged. We can conclude that the firm is

A. exploiting the economies of scale available to it

B. facing constant returns to scale

C. facing diseconomies of scale

D. not using the available technology efficiently

5. If, as an entrepreneur, I am earning accounting profits of $50,000 per year and the opportunity cost of my time is $40,000,

A. I am earning economic profits of $10,000

B. I am earning economic profits of $50,000

C. I should close my business

D. I am in a long-run equilibrium position

Answer 1

Ans. 1- (A) The law of diminishing returns states that as one input variable is increased, there is a point at which the marginal product begins to decrease, ceteris paribus. Ans.2- (C) Ans.3- (D) The relationship between inputs and outputs doesn't change in the long run. Ans.4- (B) Constant returns to scale occurs when inputs and outputs both increase by the same proportion. Ans. 5- (A) Economic profits = 50000-40000 = 10000