Producer Supply Theory Practice Quiz (10 questions)

All questions and answers

1. What is a company's primary economic objective?

To maximise the quantity sold without considering its selling price
To maximise profit by taking the difference between total revenue and total cost
To minimise total cost regardless of the revenue generated
To maximise total revenue without considering the costs of production

To maximise profit by taking the difference between total revenue and total cost

Explanation

A company's objective is to maximise profit, which is total revenue minus total cost. Maximising revenue alone does not account for the costs incurred.

2. A firm operates in a competitive market where individual firms do not determine the market price. How does this differ from a monopolist's pricing position?

Each competitive firm chooses its selling price, while a monopolist accepts the market price
The competitive market determines the selling price, while a monopolist can choose its price
A competitive firm's selling price is set by its costs, while a monopolist chooses its output price
Both the competitive market and the monopolist have their selling prices set by the market

The competitive market determines the selling price, while a monopolist can choose its price

Explanation

In a competitive market, the market determines the selling price, whereas a monopolist can choose its price. The tempting alternative that makes competitive firms price-setters reverses the distinction.

3. In the short run, which description correctly identifies the variable production factor and the conditions for capital and technology?

Labour and capital vary, while technology remains unchanged
Capital varies, while labour is fixed and technology does not change
Labour varies and capital is fixed, while technology can change
Labour varies, while the capital stock is fixed and technology does not change

Labour varies, while the capital stock is fixed and technology does not change

Explanation

In the short run, labour is the only variable production factor; capital is fixed and technology does not change. The option allowing technology to change conflicts with this short-run assumption.

4. A company is planning production over a long enough horizon to adjust every production factor. Which assumption applies?

All production factors are variable, giving the company greater flexibility than in the short run
Capital is variable, while labour remains fixed to preserve production levels
All production factors remain fixed, but the company gains flexibility by changing output
Labour is variable, while capital remains fixed as it does in the short run

All production factors are variable, giving the company greater flexibility than in the short run

Explanation

In the long run, all production factors are assumed to be variable, so production is more flexible than in the short run. The claim that capital remains fixed instead describes the short-run constraint.

5. What does average productivity measure?

Total output divided by the number of firms in a market
The production factor's cost per unit of output
Output produced per unit of a production factor employed
The change in output caused by a change in a production factor

Output produced per unit of a production factor employed

Explanation

Average productivity is the quantity produced per unit of a production factor employed. Marginal productivity, a plausible alternative, measures the change in output resulting from a change in the amount of a factor used.

6. At what point does a worker’s marginal product equal average product?

When marginal product reaches its maximum
When average product reaches its maximum
When marginal product becomes negative
When total output stops increasing

When marginal product reaches its maximum

Explanation

Average and marginal product are equal when marginal product reaches its maximum. Average product reaching its own maximum is a related but distinct condition; the material does not identify it as the point of equality.

7. What role does fixed cost play in a firm’s short-run total cost?

It represents expenditure that does not vary with production volume.
It measures total expenditure divided by the quantity produced.
It represents expenditure that rises in proportion to production volume.
It measures the additional cost of producing one more unit.

It represents expenditure that does not vary with production volume.

Explanation

Fixed cost contributes to total cost while remaining independent of production volume; total cost combines fixed and variable costs. Variable cost is the component that increases with production volume.

8. At a perfectly competitive producer’s profit-maximising output, how are price and marginal cost related?

Price equals average productivity at that output.
Price equals marginal cost at that output.
Price equals average cost at that output.
Price equals total cost at that output.

Price equals marginal cost at that output.

Explanation

At the graphical optimum for a perfectly competitive producer, profit is maximised where price equals marginal cost. Equality with average cost concerns a different cost measure and does not state the specified optimum condition.

9. How does total revenue differ from profit for a company?

Total revenue is price multiplied by quantity sold, while profit subtracts total cost from total revenue.
Total revenue subtracts total cost from sales, while profit is price multiplied by quantity sold.
Total revenue is production cost divided by quantity sold, while profit adds cost to sales.
Total revenue is the market price set by the firm, while profit is the quantity it sells.

Total revenue is price multiplied by quantity sold, while profit subtracts total cost from total revenue.

Explanation

Total revenue measures sales proceeds as selling price multiplied by quantity sold, whereas profit accounts for costs by subtracting total cost from total revenue. The second choice reverses these two relationships.

10. If a firm extends its planning horizon from the short run to the long run, what change in production flexibility follows?

It can adjust capital while labour remains its sole variable factor.
It can vary all production factors rather than adjusting labour alone.
It must keep all production factors fixed as output changes.
It can alter its technology while keeping capital and labour fixed.

It can vary all production factors rather than adjusting labour alone.

Explanation

In the long run, all production factors are assumed to be variable, giving the firm more flexibility than in the short run. The short-run restriction is that labour varies while capital is fixed; technology is also held unchanged.

Study with flashcards

Lock in the answers with 10 flashcards on Producer Supply Theory.

What is a company's purpose?

To maximise profit.

How is a company's profit calculated?

π=RT−CT\pi = RT - CT, where RTRT is total revenue and CTCT is total cost.

Which production factor varies in the short run?

Labour.

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