Firms and Production: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Mr Lee owns a restaurant and employs a chef. In economics, Mr Lee provides ___ and the chef provides ___.

   A

   labour ... entrepreneurship

   B

   entrepreneurship ... labour

   C

   capital ... labour

   D

   entrepreneurship ... capital

2. Question 2Multiple choice · 1 mark

   With a fixed number of machines, the total product with 1, 2, 3 and 4 workers is 10, 24, 33 and 38 units. Diminishing marginal returns set in when the

   A

   2nd worker is employed.

   B

   3rd worker is employed.

   C

   4th worker is employed.

   D

   1st worker is employed.

3. Question 3Multiple choice · 1 mark

   Many electronic product shops are located close together in Mong Kok, which attracts more shoppers to the district. Each shop enjoys

   A

   internal economies of scale.

   B

   internal diseconomies of scale.

   C

   external economies of scale.

   D

   diminishing marginal returns.

4. Question 4Multiple choice · 1 mark

   Compared with a shareholder, a debenture holder of a company

   A

   is an owner of the company.

   B

   has voting rights at general meetings.

   C

   receives a return that depends on the directors' decision.

   D

   is repaid before shareholders if the company is wound up.

5. Question 54 marks

   A café with a fixed number of coffee machines has the following total product:

   Workers	1	2	3	4	5
   Cups per hour	12	28	40	48	52

   State the law of diminishing marginal returns and explain whether the data illustrate the law.

   Show worked solution

   The law states that, holding technology constant, when more and more units of a variable factor are added to a given quantity of fixed factors, the marginal product of the variable factor will eventually diminish. (2)

   MP of labour = 12, 16, 12, 8, 4 cups. (1)

   Yes. With the coffee machines fixed, MP falls from 16 to 12 cups when the 3rd worker is employed and keeps falling after that. (1)

6. Question 64 marks

   After opening ten more branches, a restaurant chain found that its average cost of production fell. Explain TWO possible reasons.

   Show worked solution

   Any TWO (2 marks each; only the first two points are marked):

   • Marketing economies: it buys food ingredients in bulk at a discount, lowering the cost per meal.
   • Managerial economies: specialist managers (e.g. for purchasing and marketing) can be hired, and their cost is spread over more output.
   • Financial economies: a larger firm is seen as less risky and can borrow at a lower interest rate.
   • Technical economies: a central kitchen can use large machines fully.