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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 61
Which of the following is most likely to be the FIXED factor in the short run for a manufacturing firm?
Select an option first.
Correct answer: A — The factory building and heavy machinery
Explanation: Plant and buildings cannot be altered quickly, whereas materials, casual labour and power can be varied with output almost at once. The presence of that immovable factor is precisely what defines the short run and what gives rise to diminishing returns.
Question 62
The distinctive function of the entrepreneur is:
Select an option first.
Correct answer: C — Bearing UNINSURABLE risk and taking the ultimate decisions of the enterprise
Explanation: Insurable risks such as fire can be transferred for a premium; the risk of the market itself cannot, and bearing it is what earns profit. The entrepreneur also innovates, organises the other factors and takes the residual reward - which may be negative.
Question 63
Replacement cost differs from historical cost in that replacement cost is:
Select an option first.
Correct answer: D — The cost of acquiring an equivalent asset TODAY
Explanation: For economic decisions the relevant figure is usually the replacement cost, since that is what continuing to use the asset really sacrifices. Historical cost is objective and verifiable, which is why accounts are kept on that basis - but it can badly understate cost when prices have risen.
Question 64
Implicit costs are:
Select an option first.
Correct answer: C — The value of the entrepreneur's OWN resources used in the business
Explanation: If the owner works in his own firm and uses his own premises, the salary and rent he forgoes are real costs even though no money changes hands. Including them converts accounting profit into ECONOMIC profit, and it is why a business showing a book profit may still be destroying value.
Question 65
Incremental cost is:
Select an option first.
Correct answer: D — The total change in cost resulting from a particular DECISION, such as adding a product line
Explanation: Marginal cost concerns a single unit; incremental cost concerns a whole decision, which may involve a batch of output, a new shift or an entire product. Incremental cost is the broader and more practically useful concept in managerial decision-making.
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Question 66
Economies of scale arising from the growth of the FIRM itself are called:
Select an option first.
Correct answer: D — Internal economies
Explanation: Internal economies arise within the firm as it expands - technical, managerial, marketing, financial and risk-bearing. They accrue to that firm alone and are the reason its long-run average cost falls. Beyond a point, managerial difficulties produce internal DISECONOMIES and the curve turns upward.
Question 67
An isoquant shows:
Select an option first.
Correct answer: C — All combinations of two INPUTS that yield the same level of OUTPUT
Explanation: The isoquant is the producer's counterpart of the consumer's indifference curve: it is convex to the origin, slopes downward, and higher isoquants represent greater output. Distractor A describes the indifference curve itself - the analogy between the two is close but they measure different things.
Question 68
The law of variable proportions operates in:
Select an option first.
Correct answer: A — The short run, when at least one factor is fixed
Explanation: The law describes what happens when successive units of a VARIABLE factor are applied to a FIXED one, so it presupposes a short run in which at least one input cannot be altered. When every factor can be varied, the relevant concept is returns to SCALE instead. The distinction between the two turns entirely on whether a fixed factor exists.
Question 69
A recognised drawback of division of labour is that it:
Select an option first.
Correct answer: D — Makes work monotonous, narrows the worker's skill and increases the risk of unemployment on a change of technique
Explanation: The gain in productivity is bought at the cost of variety in work and of versatility in the worker, who may find his narrow skill obsolete. Greater interdependence also means a stoppage at one point can halt the whole process.
Question 70
In the long run a firm can reduce its average cost by:
Select an option first.
Correct answer: B — Choosing a plant size appropriate to the intended level of output
Explanation: The long run offers a choice among plants, so the firm is not confined to a single short-run cost curve. Producing a large output in a small plant, or a small output in a large one, both raise average cost above what the correctly chosen scale would give.
Question 71
The marginal cost curve cuts the average cost curve at:
Select an option first.
Correct answer: C — The minimum point of the average cost curve
Explanation: While marginal cost lies below average cost, the average is being pulled down; once it rises above, the average is pulled up. The average must therefore be at its lowest exactly where the two are equal. The same logic makes marginal cost cut average VARIABLE cost at its minimum, and it is simply the arithmetic of averages.
Question 72
The marginal cost curve intersects the average variable cost curve at:
Select an option first.
Correct answer: B — The minimum point of average variable cost
Explanation: The same logic of averages applies as with average total cost: while marginal is below average it pulls the average down, and above it pulls the average up, so the crossing must occur at the lowest point. That intersection is also the shut-down point of the firm.
Question 73
Marginal product is:
Select an option first.
Correct answer: A — The ADDITION to total product from employing one more unit of the variable factor
Explanation: Marginal product is a difference, average product a quotient - which is the distinction distractor B blurs. Marginal product can be positive, zero or negative, whereas average product is always positive so long as any output is produced at all.
Question 74
The slope of an isoquant measures the:
Select an option first.
Correct answer: C — Marginal rate of technical substitution between the two inputs
Explanation: It shows how much of one input can be given up for one more unit of the other while holding output constant, and it DIMINISHES along the curve - which is why the isoquant is convex. At the least-cost combination it equals the ratio of the two factor prices.
Question 75
A firm uses a building it already owns. The economic cost of doing so is:
Select an option first.
Correct answer: C — The rent that could have been earned by letting it out
Explanation: Using the building for one purpose forgoes the rent obtainable from another - an implicit cost that is real even though no payment is made. Treating it as free, as distractor A does, would understate cost and overstate the true profitability of the operation.
Question 76
The output at which long-run average cost is at its minimum is called the:
Select an option first.
Correct answer: C — Optimum or most efficient scale of output
Explanation: At this scale the firm produces at the lowest possible cost per unit, having exhausted economies of scale before diseconomies set in. Under perfect competition long-run equilibrium forces every firm to this output, which is a large part of why that market form is treated as the efficiency benchmark.
Question 77
The least-cost combination of inputs occurs where:
Select an option first.
Correct answer: B — The isoquant is TANGENT to the isocost line
Explanation: At the point of tangency the marginal rate of technical substitution equals the ratio of factor prices, so no reallocation between the inputs can produce the same output more cheaply. An INTERSECTION would mean a cheaper combination is available along the same isoquant, so it cannot be the optimum.
Question 78
A rational producer will operate in which stage of the law of variable proportions?
Select an option first.
Correct answer: D — Stage II, where total product rises at a diminishing rate
Explanation: Stage I is irrational because the fixed factor is under-utilised and average product is still rising, so more of the variable factor should be added. Stage III is worse still, since marginal product is negative and output actually falls. Only Stage II can contain the optimum, though exactly where depends on factor prices.
Question 79
At any level of output, average total cost equals:
Select an option first.
Correct answer: D — Average fixed cost PLUS average variable cost
Explanation: Since total cost is fixed plus variable cost, dividing throughout by output gives ATC = AFC + AVC. The vertical distance between the ATC and AVC curves is therefore average fixed cost - which narrows continuously as output rises, because fixed cost is being spread ever more thinly.
Question 80
Total product is at its maximum when marginal product is:
Select an option first.
Correct answer: B — Zero
Explanation: Marginal product is the addition to total product from one more unit of the variable factor. So long as it is positive, total product keeps rising; once it turns negative, total product falls. Total product therefore peaks exactly where marginal product crosses zero - the boundary between Stage II and Stage III of production.
Question 81
If all inputs are doubled and output MORE than doubles, the firm is experiencing:
Select an option first.
Correct answer: A — Increasing returns to scale
Explanation: Increasing returns to scale arise from indivisibilities, specialisation and greater scope for division of labour as the firm expands. Note that this is a LONG RUN concept in which every factor changes together, unlike the law of variable proportions where one factor is held fixed - distractor D confuses the two.
Question 82
Risk-bearing economies of scale arise because a large firm can:
Select an option first.
Correct answer: D — DIVERSIFY across products and markets, so a setback in one is offset elsewhere
Explanation: Spreading output across several products, regions or customers reduces the impact of any single adverse event. The firm does not eliminate risk - distractor A overstates it - but it reduces the variability of its overall returns, which is itself a genuine cost advantage.
Question 83
The average variable cost curve is U-shaped because of:
Select an option first.
Correct answer: C — The law of variable proportions
Explanation: In the short run the fixed factor is better utilised at first, so average variable cost falls; beyond the optimum, diminishing returns set in and it rises. Distractor A explains the U-shape of the LONG-RUN average cost curve, where all factors vary - matching each explanation to the right run is the point being tested.
Question 84
The long-run average cost curve is U-shaped because of:
Select an option first.
Correct answer: B — Economies of scale followed by diseconomies of scale
Explanation: As the firm expands, internal and external economies pull average cost down; beyond the optimum scale, managerial and coordination difficulties push it back up. Because every factor is variable in the long run there are no fixed costs and no diminishing returns to a fixed factor - so distractor A cannot be the explanation.
Question 85
The marginal cost curve is typically U-shaped because of:
Select an option first.
Correct answer: C — Increasing and then diminishing marginal RETURNS to the variable factor
Explanation: Marginal cost is the mirror image of marginal product: while marginal product rises, marginal cost falls, and once diminishing returns set in marginal cost rises. Fixed costs do not enter marginal cost at all, since they do not change with output - which disposes of distractor A.
Question 86
The long-run average cost curve is related to the short-run curves in that it:
Select an option first.
Correct answer: B — Is TANGENT to each short-run curve and never lies above any of them
Explanation: In the long run the firm can choose the plant best suited to each output, so it can never do worse than the best short-run alternative. This is why the long-run curve envelopes the family of short-run curves from below, touching each at one output.
Question 87
The slope of an isocost line is given by:
Select an option first.
Correct answer: D — The ratio of the PRICES of the two inputs
Explanation: Since the outlay is fixed, giving up one input frees funds to buy the other in proportion to their prices, which fixes the slope. At the least-cost combination this ratio equals the marginal rate of technical substitution, which is the ratio of the marginal PRODUCTS - distractor A confuses the two.
Question 88
Stage I of the law of variable proportions ends where:
Select an option first.
Correct answer: B — AVERAGE product reaches its maximum
Explanation: Stage I runs from the origin to the point of maximum average product, where average and marginal product are equal. Stage II runs from there to where marginal product reaches zero, and Stage III lies beyond, where marginal product is negative.
Question 89
In Stage III of the law of variable proportions:
Select an option first.
Correct answer: C — Marginal product is NEGATIVE and total product is falling
Explanation: So many units of the variable factor are crowded onto the fixed factor that they obstruct one another and output actually falls. No rational producer operates here, since the same output could be had with fewer workers and therefore at lower cost.
Question 90
A sunk cost is one which:
Select an option first.
Correct answer: B — Has already been incurred and cannot be recovered
Explanation: Because it cannot be recovered whatever is decided next, a sunk cost is IRRELEVANT to future decisions - only costs that differ between the alternatives matter. Not every fixed cost is sunk: rent under a cancellable lease is fixed but avoidable, so distractor D overstates the identity.
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