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Quiz: Supply and Production

Test your understanding of how producers make decisions about production with these review questions.

1. According to the Law of Supply, what happens when the price of a good increases, all else being equal?

  1. Quantity supplied increases
  2. Quantity supplied decreases
  3. Demand increases
  4. Production costs rise
Show Answer

The correct answer is A. The Law of Supply states that as the price of a good rises, the quantity supplied also rises. Higher prices make production more profitable, motivating existing producers to make more and attracting new producers to enter the market. This positive relationship between price and quantity supplied is why the supply curve slopes upward.

Concept Tested: Law of Supply

2. A pizza shop has 3 workers making 65 pizzas per day. Adding a 4th worker increases output to 80 pizzas. What is the marginal product of the 4th worker?

  1. 80 pizzas
  2. 15 pizzas
  3. 65 pizzas
  4. 20 pizzas
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The correct answer is B. Marginal product is the additional output produced by adding one more unit of input. With 3 workers, output is 65 pizzas. With 4 workers, output is 80 pizzas. The marginal product of the 4th worker is 80 - 65 = 15 pizzas. This tells the business owner whether hiring that extra worker is worth the cost.

Concept Tested: Marginal Product

3. Which of the following is an example of a fixed cost for a pizza restaurant?

  1. Flour and cheese ingredients
  2. Hourly wages for delivery drivers
  3. Monthly rent for the building
  4. Electricity used to run the ovens
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The correct answer is C. Fixed costs do not change regardless of how much is produced. Monthly rent remains the same whether the restaurant makes 10 pizzas or 1,000. Ingredients (A) and hourly wages (B) are variable costs that increase with output. Electricity (D) also varies with production levels, making it a variable cost.

Concept Tested: Fixed Costs

4. What does the Law of Diminishing Returns predict will happen as you keep adding workers to a pizza shop that has only one oven?

  1. Each additional worker will produce more than the previous one
  2. Total output will decrease immediately
  3. Fixed costs will increase
  4. Each additional worker will eventually add less output than the previous one
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The correct answer is D. The Law of Diminishing Returns states that as you add more of one input (workers) while holding another input constant (one oven), each additional unit of input eventually produces less additional output. Workers begin crowding each other, waiting for the oven, and getting in the way. The problem is the mismatch between inputs, not worker quality.

Concept Tested: Diminishing Returns

5. A firm maximizes profit by producing at the point where which two values are equal?

  1. Total revenue and total cost
  2. Fixed costs and variable costs
  3. Marginal revenue and marginal cost
  4. Average total cost and price
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The correct answer is C. Profit maximization occurs where marginal revenue equals marginal cost (MR = MC). If producing one more unit adds more to revenue than to cost, the firm should produce it. If the next unit costs more than it earns, the firm should stop. This is marginal analysis applied to business decisions.

Concept Tested: Profit Maximization

6. Which of the following would cause the supply curve for corn to shift to the right?

  1. An increase in the price of corn
  2. New farming technology that increases crop yields
  3. A drought that destroys crops
  4. An increase in the cost of fertilizer
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The correct answer is B. A change in technology is a determinant of supply that shifts the entire curve. Better farming technology reduces production costs, allowing producers to supply more at every price (shift right). An increase in corn price (A) causes movement along the curve, not a shift. A drought (C) and higher fertilizer costs (D) would shift supply left.

Concept Tested: Determinants of Supply

7. Consumer surplus is best described as the difference between what?

  1. The price a seller charges and their production cost
  2. What consumers are willing to pay and what they actually pay
  3. The supply price and the demand price
  4. Total revenue and total cost
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The correct answer is B. Consumer surplus is the extra value buyers receive when they pay less than the maximum they were willing to pay. If you would pay $50 for concert tickets but only pay $30, your consumer surplus is $20. It measures the benefit consumers gain from participating in a market beyond what they actually spend.

Concept Tested: Consumer Surplus

8. Why does the average total cost curve typically fall at first and then rise as output increases?

  1. Because wages always increase with production levels
  2. Because government regulations become stricter at higher output
  3. Because fixed costs are spread over more units at first, but diminishing returns eventually push costs up
  4. Because variable costs remain constant while fixed costs increase
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The correct answer is C. Initially, as production increases, fixed costs are spread over more units, causing average total cost to decline. However, as output continues to increase, diminishing returns cause variable costs per unit to rise, eventually outweighing the benefit of spreading fixed costs. This creates the characteristic U-shaped ATC curve.

Concept Tested: Average Total Cost

9. What is deadweight loss?

  1. The total cost of production for a firm
  2. The difference between exports and imports
  3. A loss of economic efficiency when the market does not reach equilibrium
  4. The profit a monopolist earns above normal returns
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The correct answer is C. Deadweight loss represents the reduction in total surplus (consumer surplus plus producer surplus) that occurs when a market does not operate at equilibrium. It can be caused by taxes, price controls, monopoly power, or other distortions. Deadweight loss represents transactions that would have benefited both buyers and sellers but no longer occur.

Concept Tested: Deadweight Loss

10. A large car manufacturer can produce vehicles at a lower per-unit cost than a small manufacturer. This advantage is called what?

  1. Diminishing returns
  2. Marginal cost pricing
  3. Variable cost advantage
  4. Economies of scale
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The correct answer is D. Economies of scale occur when increasing the scale of production leads to lower average costs per unit. Large manufacturers can spread fixed costs over more vehicles, negotiate better prices for materials, and use specialized equipment more efficiently. This explains why many industries are dominated by large firms that can produce more cheaply.

Concept Tested: Economies of Scale