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Cost Theory

Description: This quiz covers the fundamental concepts and theories related to cost theory in economics.
Number of Questions: 15
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Tags: cost theory economics production cost functions
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Which of the following is NOT a type of cost in cost theory?

  1. Fixed Cost

  2. Variable Cost

  3. Total Cost

  4. Opportunity Cost

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Correct Option: D
Explanation:

Opportunity cost is an economic concept that refers to the value of the next best alternative that is foregone when a decision is made. It is not a type of cost in cost theory, which focuses on the costs incurred in the production of goods and services.

The total cost of production is the sum of which two types of costs?

  1. Fixed Cost and Variable Cost

  2. Fixed Cost and Total Cost

  3. Variable Cost and Total Cost

  4. Fixed Cost and Opportunity Cost

Show answer
Correct Option: A
Explanation:

Total cost of production is the sum of fixed costs and variable costs. Fixed costs are those costs that do not change with the level of output, while variable costs are those costs that change with the level of output.

The average cost of production is calculated by dividing the total cost by:

  1. The number of units produced

  2. The number of workers employed

  3. The amount of capital invested

  4. The price of the product

Show answer
Correct Option: A
Explanation:

Average cost of production is calculated by dividing the total cost by the number of units produced. It represents the cost per unit of output.

The marginal cost of production is the:

  1. Change in total cost divided by the change in output

  2. Change in fixed cost divided by the change in output

  3. Change in variable cost divided by the change in output

  4. Change in average cost divided by the change in output

Show answer
Correct Option: A
Explanation:

Marginal cost of production is the change in total cost divided by the change in output. It represents the additional cost incurred in producing one more unit of output.

The law of diminishing returns states that as more of one input is used, while holding other inputs constant, the:

  1. Marginal product of the input will increase

  2. Marginal product of the input will decrease

  3. Marginal product of the input will remain constant

  4. Total product of the input will increase

Show answer
Correct Option: B
Explanation:

The law of diminishing returns states that as more of one input is used, while holding other inputs constant, the marginal product of the input will decrease. This means that each additional unit of the input yields a smaller increase in output.

The short-run cost curve is:

  1. A curve that shows the relationship between total cost and output in the short run

  2. A curve that shows the relationship between fixed cost and output in the short run

  3. A curve that shows the relationship between variable cost and output in the short run

  4. A curve that shows the relationship between average cost and output in the short run

Show answer
Correct Option: A
Explanation:

The short-run cost curve is a curve that shows the relationship between total cost and output in the short run, where at least one input is fixed.

The long-run cost curve is:

  1. A curve that shows the relationship between total cost and output in the long run

  2. A curve that shows the relationship between fixed cost and output in the long run

  3. A curve that shows the relationship between variable cost and output in the long run

  4. A curve that shows the relationship between average cost and output in the long run

Show answer
Correct Option: A
Explanation:

The long-run cost curve is a curve that shows the relationship between total cost and output in the long run, where all inputs are variable.

Economies of scale occur when:

  1. Long-run average cost decreases as output increases

  2. Long-run average cost increases as output increases

  3. Long-run average cost remains constant as output increases

  4. Short-run average cost decreases as output increases

Show answer
Correct Option: A
Explanation:

Economies of scale occur when long-run average cost decreases as output increases. This means that the average cost of production decreases as the scale of production increases.

Diseconomies of scale occur when:

  1. Long-run average cost increases as output increases

  2. Long-run average cost decreases as output increases

  3. Long-run average cost remains constant as output increases

  4. Short-run average cost increases as output increases

Show answer
Correct Option: A
Explanation:

Diseconomies of scale occur when long-run average cost increases as output increases. This means that the average cost of production increases as the scale of production increases.

The optimal level of output for a firm is where:

  1. Marginal cost equals marginal revenue

  2. Marginal cost is greater than marginal revenue

  3. Marginal cost is less than marginal revenue

  4. Average cost is minimized

Show answer
Correct Option: A
Explanation:

The optimal level of output for a firm is where marginal cost equals marginal revenue. This is because at this point, the firm is maximizing its profit or minimizing its loss.

The concept of sunk cost refers to:

  1. Costs that have already been incurred and cannot be recovered

  2. Costs that will be incurred in the future

  3. Costs that are variable with respect to output

  4. Costs that are fixed with respect to output

Show answer
Correct Option: A
Explanation:

Sunk cost refers to costs that have already been incurred and cannot be recovered. These costs are irrelevant in decision-making because they cannot be changed.

The concept of opportunity cost refers to:

  1. The value of the next best alternative that is foregone when a decision is made

  2. The cost of the resources used in production

  3. The cost of the labor used in production

  4. The cost of the capital used in production

Show answer
Correct Option: A
Explanation:

Opportunity cost refers to the value of the next best alternative that is foregone when a decision is made. It is the cost of the choice that is not taken.

The concept of fixed cost refers to:

  1. Costs that do not change with the level of output

  2. Costs that change with the level of output

  3. Costs that are incurred in the short run

  4. Costs that are incurred in the long run

Show answer
Correct Option: A
Explanation:

Fixed costs are costs that do not change with the level of output. These costs are incurred even if no output is produced.

The concept of variable cost refers to:

  1. Costs that change with the level of output

  2. Costs that do not change with the level of output

  3. Costs that are incurred in the short run

  4. Costs that are incurred in the long run

Show answer
Correct Option: A
Explanation:

Variable costs are costs that change with the level of output. These costs are incurred only when output is produced.

The concept of total cost refers to:

  1. The sum of fixed and variable costs

  2. The sum of fixed and opportunity costs

  3. The sum of variable and opportunity costs

  4. The sum of fixed, variable, and opportunity costs

Show answer
Correct Option: A
Explanation:

Total cost is the sum of fixed and variable costs. It represents the total cost of producing a given level of output.

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