Firms and Production: Costs, Revenue, Profit, Productivity, Economies and Diseconomies of Scale

1. Productivity means

A total revenue earned by a firm
B output per unit of input
C total profit after costs
D price charged per product

2. Labour productivity is calculated as

A total output / number of workers
B total cost / total output
C total revenue / total profit
D fixed cost / variable cost

3. A factory produces 2000 units using 40 workers. What is labour productivity?

A 20 units per worker
B 40 units per worker
C 50 units per worker
D 80 units per worker

4. A firm produces 900 units with 30 workers. After training, it produces 1200 units with the same workers. What happens to labour productivity?

A falls from 40 to 30
B rises from 30 to 40
C rises from 30 to 1200
D stays unchanged

5. Which is most likely to increase labour productivity?

A less training
B poorer machinery
C better education and training
D more absenteeism

6. Which is most likely to reduce productivity?

A improved technology
B better management
C worker motivation
D outdated machinery

7. Total cost is equal to

A fixed cost + variable cost
B total revenue – profit
C price × quantity sold only
D average cost – marginal cost

8. Fixed costs are costs that

A change directly with output in the short run
B do not change with output in the short run
C are always zero when output is zero
D only exist in perfectly competitive markets

9. Which is most likely to be a fixed cost?

A raw materials
B electricity used directly in production
C factory rent
D packaging per unit

10. Which is most likely to be a variable cost?

A rent of factory building
B insurance premium paid monthly
C raw materials used in production
D salary of permanent senior manager

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. If fixed cost is $500 and variable cost is $1200, total cost is

A $700
B $1200
C $1700
D $600000

12. If total cost is $3000 and fixed cost is $800, variable cost is

A $800
B $2200
C $3000
D $3800

13. Average cost is calculated as

A total cost / output
B total revenue / output
C total cost × output
D fixed cost – variable cost

14. If total cost is $5000 and output is 250 units, average cost is

A $5
B $20
C $250
D $4750

15. If output rises and fixed cost stays the same, average fixed cost usually

A rises
B falls
C stays always zero
D becomes total variable cost

16. Marginal cost means

A total cost of all units produced
B cost of producing one extra unit
C fixed cost per unit
D total revenue per unit

17. If total cost rises from $1000 to $1080 when output rises from 50 to 51 units, marginal cost is

A $1
B $50
C $80
D $1080

18. Revenue means

A the money received from selling goods and services
B the money spent on raw materials only
C total cost of production
D profit after tax only

19. Total revenue is calculated as

A price × quantity sold
B total cost / output
C profit + average cost
D fixed cost + variable cost

20. A firm sells 400 units at $6 each. Total revenue is

A $406
B $2400
C $400
D $66

21. Profit is calculated as

A total cost – total revenue
B total revenue – total cost
C price – fixed cost only
D output – input

22. A firm has total revenue of $10000 and total cost of $7500. Profit is

A $2500
B $7500
C $10000
D $17500

23. A firm has total revenue of $8000 and total cost of $9500. What has it made?

A profit of $1500
B loss of $1500
C profit of $17500
D break-even exactly

24. Break-even occurs when

A total revenue equals total cost
B total cost is greater than total revenue
C output is zero
D variable cost is zero

25. If total revenue is $12000 and total cost is $12000, the firm

A makes profit of $12000
B makes loss of $12000
C breaks even
D must close immediately

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Which is most likely to increase a firm’s profit?

A total revenue rises more than total cost
B total cost rises more than total revenue
C output falls and revenue falls more than cost
D fixed costs rise while revenue stays unchanged

27. Which is most likely to reduce profit?

A productivity improves and costs fall
B demand rises and sales increase
C raw material costs rise while price remains unchanged
D technology reduces average cost

28. Economies of scale occur when

A average cost falls as output increases
B total cost falls to zero
C marginal revenue is always negative
D output falls and average cost falls

29. Diseconomies of scale occur when

A average cost rises as output increases
B fixed cost disappears
C productivity always rises with size
D a firm becomes smaller and costs rise

30. Which is an internal economy of scale?

A better transport network built by government
B growth of supplier firms in the industry
C bulk buying by a large firm
D lower national interest rates

31. Which is an external economy of scale?

A a large firm buying raw materials cheaply in bulk
B a firm using specialist managers after expanding
C specialist suppliers developing near an expanding industry
D one firm spreading advertising cost over more units

32. Bulk buying reduces average cost because

A large firms may receive discounts for buying inputs in large quantities
B workers become less skilled
C demand always falls when firms grow
D total fixed cost rises faster than output

33. Technical economies of scale are most likely caused by

A using larger and more efficient machinery
B worse communication between managers
C higher average cost due to confusion
D a fall in total output

34. Managerial economies of scale occur when

A a firm hires specialist managers to improve efficiency
B a firm loses control as it grows
C workers become bored due to repetition
D suppliers move away from an industry

35. Financial economies of scale occur when large firms

A borrow at lower interest rates because lenders see them as less risky
B pay higher interest rates because they are larger
C cannot access bank loans
D stop using capital

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Marketing economies of scale occur when

A advertising cost is spread over more units of output
B advertising always becomes unnecessary
C firms stop selling products
D output falls while advertising rises

37. Risk-bearing economies of scale occur when

A a large firm diversifies products or markets to reduce risk
B a firm produces only one product for one market
C workers become less motivated
D average cost rises due to communication failure

38. Which is most likely to cause diseconomies of scale?

A better division of labour
B improved machinery
C communication problems in a very large firm
D bulk-buying discounts

39. Which is most likely to be a diseconomy of scale?

A workers feel ignored and motivation falls in a large firm
B a firm receives supplier discounts
C a firm uses specialist machinery
D a firm spreads research cost over more output

40. Why can coordination become harder in a very large firm?

A fewer departments exist
B all workers know every decision instantly
C more layers of management slow decision-making
D output always falls to zero

41. Which statement is correct?

A Economies of scale reduce average cost.
B Economies of scale increase average cost.
C Diseconomies of scale reduce average cost.
D Diseconomies of scale remove all fixed costs.

42. A firm doubles output and total cost rises by less than double. What has happened to average cost?

A it has risen
B it has fallen
C it is unchanged
D it has become zero

43. A firm doubles output and total cost more than doubles. What has happened to average cost?

A it has fallen
B it has risen
C it is unchanged
D it must equal marginal cost

44. Which firm is most likely to experience purchasing economies of scale?

A a small shop buying 10 units from a supplier
B a large supermarket chain buying 1 million units from a supplier
C a sole trader buying one machine
D a household buying groceries

45. A business expands from one shop to 200 branches and uses specialist accountants, HR managers and marketing managers. This is mainly

A managerial economy of scale
B external diseconomy of scale
C public good provision
D market failure

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. A car manufacturer spreads the cost of research and development over 500000 cars instead of 5000 cars. This is mainly

A technical/marketing economy of scale
B financial diseconomy
C external cost
D contraction in supply

47. A large firm becomes so complex that managers lose control and workers receive unclear instructions. This is

A internal diseconomy of scale
B external economy of scale
C financial economy of scale
D productivity growth only

48. Which is most likely to happen when productivity rises, other things equal?

A average cost may fall
B total cost per unit must rise
C output per worker falls
D revenue becomes zero

49. A firm’s output rises from 100 units to 150 units while workers remain 10. What happens to labour productivity?

A rises from 10 to 15 units per worker
B falls from 15 to 10 units per worker
C stays at 10 units per worker
D becomes 1500 units per worker

50. Which chain is most accurate?

A improved training → higher labour productivity → lower average cost → higher competitiveness
B improved training → lower productivity → higher average cost → lower prices automatically
C diseconomies of scale → lower average cost → higher profit always
D higher fixed cost → lower total cost always → higher revenue

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: productivity is not total revenue.
B correct: productivity means output per unit of input.
C wrong: profit is total revenue minus total cost.
D wrong: price is revenue per unit sold, not productivity.

2. Answer: A

A correct: labour productivity = total output / number of workers.
B wrong: this calculates average cost.
C wrong: this does not measure output per worker.
D wrong: fixed cost / variable cost is not labour productivity.

3. Answer: C

A wrong: 20 units per worker is too low.
B wrong: 40 is the number of workers.
C correct: 2000 / 40 = 50 units per worker.
D wrong: 80 is not supported by the data.

4. Answer: B

A wrong: original productivity is 900 / 30 = 30, not 40.
B correct: productivity rises from 900 / 30 = 30 to 1200 / 30 = 40.
C wrong: 1200 is total output, not productivity.
D wrong: output per worker increases.

5. Answer: C

A wrong: less training usually reduces productivity.
B wrong: poorer machinery reduces output per worker.
C correct: better education and training improve skills and output per worker.
D wrong: absenteeism reduces effective labour input.

6. Answer: D

A wrong: improved technology usually increases productivity.
B wrong: better management usually increases productivity.
C wrong: worker motivation usually increases productivity.
D correct: outdated machinery can reduce output per input.

7. Answer: A

A correct: total cost = fixed cost + variable cost.
B wrong: total revenue – profit can give total cost, but it is not the basic cost composition formula.
C wrong: price × quantity sold is total revenue.
D wrong: average cost – marginal cost is not total cost.

8. Answer: B

A wrong: variable costs change with output.
B correct: fixed costs do not change with output in the short run.
C wrong: fixed costs can exist even when output is zero.
D wrong: fixed costs exist in many market structures.

9. Answer: C

A wrong: raw materials usually vary with output.
B wrong: production electricity often varies with output.
C correct: factory rent is usually fixed in the short run.
D wrong: packaging per unit varies with output.

10. Answer: C

A wrong: rent is usually fixed.
B wrong: monthly insurance is usually fixed.
C correct: raw materials rise as output rises, so they are variable costs.
D wrong: senior manager salary is usually fixed in the short run.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: C

A wrong: $700 subtracts variable cost from fixed cost incorrectly.
B wrong: $1200 is only variable cost.
C correct: total cost = $500 + $1200 = $1700.
D wrong: $600000 multiplies figures incorrectly.

12. Answer: B

A wrong: $800 is fixed cost.
B correct: variable cost = total cost – fixed cost = $3000 – $800 = $2200.
C wrong: $3000 is total cost.
D wrong: $3800 adds fixed cost instead of subtracting.

13. Answer: A

A correct: average cost = total cost / output.
B wrong: total revenue / output gives average revenue/price.
C wrong: multiplying total cost by output is incorrect.
D wrong: fixed cost – variable cost does not give average cost.

14. Answer: B

A wrong: $5 is too low.
B correct: average cost = $5000 / 250 = $20.
C wrong: $250 is output, not average cost.
D wrong: $4750 subtracts output from cost incorrectly.

15. Answer: B

A wrong: fixed cost spread over more units usually lowers average fixed cost.
B correct: average fixed cost = fixed cost / output, so it falls as output rises.
C wrong: average fixed cost is not always zero.
D wrong: average fixed cost does not become total variable cost.

16. Answer: B

A wrong: this describes total cost.
B correct: marginal cost is the cost of producing one extra unit.
C wrong: fixed cost per unit is average fixed cost.
D wrong: total revenue per unit is average revenue.

17. Answer: C

A wrong: output rises by 1, but cost rises by $80.
B wrong: 50 is original output.
C correct: marginal cost = $1080 – $1000 = $80.
D wrong: $1080 is new total cost.

18. Answer: A

A correct: revenue is money received from sales.
B wrong: raw material spending is a cost.
C wrong: total cost is production spending.
D wrong: profit after tax is not revenue.

19. Answer: A

A correct: total revenue = price × quantity sold.
B wrong: total cost / output is average cost.
C wrong: profit + average cost is not total revenue.
D wrong: fixed cost + variable cost is total cost.

20. Answer: B

A wrong: $406 adds price and units incorrectly.
B correct: total revenue = 400 × $6 = $2400.
C wrong: $400 is quantity, not revenue.
D wrong: $66 is not a valid calculation.

21. Answer: B

A wrong: total cost – total revenue gives loss if positive, not profit.
B correct: profit = total revenue – total cost.
C wrong: price – fixed cost only ignores quantity and variable costs.
D wrong: output – input relates to productivity, not profit.

22. Answer: A

A correct: profit = $10000 – $7500 = $2500.
B wrong: $7500 is total cost.
C wrong: $10000 is total revenue.
D wrong: $17500 adds revenue and cost.

23. Answer: B

A wrong: cost is greater than revenue, so not profit.
B correct: loss = $9500 – $8000 = $1500.
C wrong: $17500 adds revenue and cost.
D wrong: break-even occurs when revenue equals cost.

24. Answer: A

A correct: break-even occurs when total revenue equals total cost.
B wrong: this means loss.
C wrong: output being zero does not necessarily mean break-even.
D wrong: variable cost being zero does not guarantee break-even.

25. Answer: C

A wrong: profit is zero, not $12000.
B wrong: loss is zero, not $12000.
C correct: total revenue equals total cost, so the firm breaks even.
D wrong: breaking even does not mean the firm must close immediately.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: profit rises if revenue increases by more than cost.
B wrong: if cost rises more than revenue, profit falls.
C wrong: if revenue falls more than cost, profit falls.
D wrong: higher fixed costs with unchanged revenue reduce profit.

27. Answer: C

A wrong: lower costs can increase profit.
B wrong: higher demand and sales can increase revenue and profit.
C correct: higher raw material costs raise total cost; if price is unchanged, profit falls.
D wrong: lower average cost can increase profit.

28. Answer: A

A correct: economies of scale occur when average cost falls as output rises.
B wrong: total cost does not have to become zero.
C wrong: marginal revenue is not the definition.
D wrong: economies of scale occur with expansion, not falling output.

29. Answer: A

A correct: diseconomies of scale occur when average cost rises as output increases.
B wrong: fixed cost does not disappear.
C wrong: productivity may fall due to inefficiency.
D wrong: diseconomies are linked to becoming too large, not smaller.

30. Answer: C

A wrong: government transport improvements are external economies.
B wrong: supplier growth in the industry is external.
C correct: bulk buying is an internal economy because it comes from the firm’s own growth.
D wrong: lower national interest rates are external to one firm.

31. Answer: C

A wrong: bulk buying by one firm is internal.
B wrong: specialist managers within one firm are internal.
C correct: specialist suppliers near an expanding industry benefit firms externally.
D wrong: spreading advertising cost is internal.

32. Answer: A

A correct: large purchases may give firms bulk discounts, lowering unit cost.
B wrong: worker skill is unrelated.
C wrong: demand does not always fall when firms grow.
D wrong: if fixed cost rises faster than output, average cost may rise.

33. Answer: A

A correct: larger efficient machinery can reduce average cost.
B wrong: poor communication causes diseconomies.
C wrong: higher average cost is diseconomy.
D wrong: falling output is not technical economy.

34. Answer: A

A correct: specialist managers improve efficiency in large firms.
B wrong: loss of control causes diseconomies.
C wrong: boredom may reduce productivity.
D wrong: suppliers moving away is not managerial economy.

35. Answer: A

A correct: large firms may be trusted more and borrow at lower interest rates.
B wrong: higher rates would be a disadvantage, not economy.
C wrong: large firms often access loans more easily.
D wrong: firms do not stop using capital.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Answer: A

A correct: advertising cost spread over more units reduces average marketing cost.
B wrong: advertising may still be needed.
C wrong: firms still sell products.
D wrong: output falling does not create marketing economies.

37. Answer: A

A correct: diversification reduces risk because the firm is not dependent on one product/market.
B wrong: producing one product for one market increases risk.
C wrong: worker motivation is not risk-bearing economy.
D wrong: rising average cost from communication failure is diseconomy.

38. Answer: C

A wrong: better division of labour can create economies of scale.
B wrong: improved machinery can create technical economies.
C correct: communication problems in large firms raise average cost.
D wrong: bulk buying creates purchasing economies.

39. Answer: A

A correct: falling motivation in a large firm can reduce productivity and raise average cost.
B wrong: supplier discounts are economies of scale.
C wrong: specialist machinery is technical economy.
D wrong: spreading research cost reduces average cost.

40. Answer: C

A wrong: large firms often have more departments.
B wrong: information does not reach all workers instantly.
C correct: more management layers can slow communication and decisions.
D wrong: output does not automatically fall to zero.

41. Answer: A

A correct: economies of scale reduce average cost.
B wrong: increasing average cost is diseconomies of scale.
C wrong: diseconomies increase average cost.
D wrong: diseconomies do not remove fixed costs.

42. Answer: B

A wrong: if total cost rises by less than output, average cost falls.
B correct: output doubles but total cost less than doubles, so cost per unit falls.
C wrong: average cost would be unchanged only if total cost also doubled exactly.
D wrong: average cost does not become zero.

43. Answer: B

A wrong: average cost falls when total cost rises less than output.
B correct: output doubles but total cost more than doubles, so cost per unit rises.
C wrong: average cost unchanged if total cost exactly doubles.
D wrong: average cost does not have to equal marginal cost.

44. Answer: B

A wrong: small purchases are less likely to gain big discounts.
B correct: a large supermarket chain has strong bulk-buying power.
C wrong: buying one machine is not purchasing economy of scale.
D wrong: households are consumers, not firms experiencing economies of scale.

45. Answer: A

A correct: specialist managers are a managerial economy of scale.
B wrong: it is internal, not external.
C wrong: branches and managers do not make it public good provision.
D wrong: this is not market failure.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. Answer: A

A correct: spreading R&D over far more cars reduces average cost; this is closest to a technical economy of scale from large-scale production/research.
B wrong: financial diseconomy would increase borrowing costs.
C wrong: external cost affects third parties.
D wrong: contraction in supply is caused by a fall in price.

47. Answer: A

A correct: loss of control and unclear instructions inside a large firm are internal diseconomies of scale.
B wrong: external economies come from industry growth outside the firm.
C wrong: financial economies reduce borrowing costs.
D wrong: productivity may actually fall here.

48. Answer: A

A correct: higher productivity means more output from the same inputs, so average cost may fall.
B wrong: cost per unit is likely to fall, not must rise.
C wrong: output per worker rises.
D wrong: revenue does not become zero.

49. Answer: A

A correct: original productivity = 100 / 10 = 10; new productivity = 150 / 10 = 15.
B wrong: productivity rises, not falls.
C wrong: output per worker changes.
D wrong: 1500 multiplies output by workers incorrectly.

50. Answer: A

A correct: training raises worker efficiency, which can lower unit costs and improve competitiveness.
B wrong: training normally raises, not lowers, productivity.
C wrong: diseconomies raise average cost.
D wrong: higher fixed cost does not always lower total cost.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.