Production and Costs Practice Questions

8 representative multiple-choice questions on production and costs for AP Microeconomics, drawn from our 15-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

1. 1. The law of diminishing marginal returns states that as a firm adds more of a variable input to a fixed input:

   • A. Total output will eventually decrease
   • B. Marginal product of the variable input will eventually decline
   • C. Total cost will decrease
   • D. Average fixed cost will increase
   Show answer

   Correct answer: B. Marginal product of the variable input will eventually decline

   Each additional worker still adds to output -- just less than the previous one did. Total product keeps climbing, it just climbs more slowly. Option A mixes up diminishing returns with negative returns, which is the more extreme case where MP actually drops below zero. Option C has the direction wrong since total cost rises as you produce more. Option D is backward because AFC always falls -- a fixed dollar amount divided by more units can only get smaller.

2. 2. Marginal cost (MC) crosses average total cost (ATC) at which point?

   • A. Where ATC is at its maximum
   • B. Where ATC is at its minimum
   • C. Where ATC equals AFC
   • D. Where MC is at its minimum
   Show answer

   Correct answer: B. Where ATC is at its minimum

   When MC is below ATC, each new unit is cheaper than the current average, so ATC falls. Once MC rises above ATC, each new unit costs more than average, pushing ATC up. The crossover happens right at ATC's minimum -- same logic as your GPA being pulled up or down by this semester's grades. Option A doesn't really apply to a U-shaped curve in any meaningful way. Option C occurs only at zero variable cost, which isn't a useful production point. Option D confuses where MC bottoms out with where MC crosses ATC; MC reaches its minimum at a lower quantity and then climbs up to eventually pass through ATC's minimum.

3. 3. As output increases, average fixed cost (AFC):

   • A. Increases because fixed costs rise
   • B. Remains constant at all output levels
   • C. Decreases continuously because fixed costs are spread over more units
   • D. First decreases, then increases
   Show answer

   Correct answer: C. Decreases continuously because fixed costs are spread over more units

   AFC = TFC / Q. Take a constant $1,000 and divide it by 10 units -- that's $100 per unit. Divide it by 100 units and AFC drops to $10. It never stops falling; it just approaches zero without ever reaching it. Option A would require fixed costs themselves to increase, which contradicts the definition of fixed. Option B confuses total fixed cost (which is constant) with average fixed cost (which declines as output rises). Option D describes a U-shaped curve like ATC or AVC, but AFC doesn't have that shape.

4. 4. When marginal product is increasing, what is happening to marginal cost?

   • A. Marginal cost is increasing
   • B. Marginal cost is constant
   • C. Marginal cost is decreasing
   • D. Marginal cost is zero
   Show answer

   Correct answer: C. Marginal cost is decreasing

   MP and MC move in opposite directions. If worker 5 produces 20 units and worker 6 produces 25, each wage dollar is yielding more output -- so the cost per additional unit of output is falling. Option A flips the relationship backward. Option B would require each successive worker to add exactly the same output, which doesn't match increasing MP. Option D would mean additional units are free, which doesn't happen in any real production setting.

5. 5. In a perfectly competitive market, a firm's short-run supply curve is:

   • A. The entire MC curve
   • B. The ATC curve above the MC curve
   • C. The MC curve above the minimum AVC
   • D. The AVC curve above the MC curve
   Show answer

   Correct answer: C. The MC curve above the minimum AVC

   A competitive firm sets output where P = MC, but it only produces when price covers variable costs. Below minimum AVC the firm shuts down entirely. Above it, the firm traces along its MC curve. So the supply curve is the portion of MC at or above minimum AVC. Option A includes the region below AVC where the firm wouldn't operate -- that's the most common wrong answer on this type of question. Options B and D reference the wrong curves altogether.

6. 6. A large automobile manufacturer finds that doubling its factory size, workforce, and all other inputs causes output to more than double. This firm is experiencing:

   • A. Diminishing marginal returns
   • B. Diseconomies of scale
   • C. Economies of scale
   • D. Constant returns to scale
   Show answer

   Correct answer: C. Economies of scale

   All inputs doubled and output more than doubled, which means LRATC is falling. That's economies of scale -- bulk purchasing, deeper specialization, and spreading large upfront investments across more units. Diminishing marginal returns is a short-run concept about adding one variable input to fixed inputs; here all inputs changed proportionally. Diseconomies of scale would mean output less than doubles. Constant returns would mean output exactly doubles.

7. 7. A bakery hires workers and observes the following: Worker 3 produces 15 additional loaves, Worker 4 produces 12 additional loaves, and Worker 5 produces 8 additional loaves. If each worker is paid $80/day, the marginal cost of a loaf produced by the 5th worker is:

   • A. $5.33
   • B. $6.67
   • C. $10.00
   • D. $16.00
   Show answer

   Correct answer: C. $10.00

   MC = wage / MP. Worker 5 costs $80 and produces 8 loaves, so $80 / 8 = $10.00 per loaf. Notice the pattern as diminishing returns set in: worker 3's MC = $80/15 = $5.33, worker 4's MC = $80/12 = $6.67. MC rises as MP falls. Option A is worker 3's MC. Option B is worker 4's MC. Option D would imply only 5 loaves from that worker, which contradicts the given data.

8. 8. A firm has total fixed costs of $200 and the following variable costs: Q=1, TVC=$50; Q=2, TVC=$90; Q=3, TVC=$140; Q=4, TVC=$200; Q=5, TVC=$280. What is the total cost of producing 4 units?

   • A. $200
   • B. $400
   • C. $450
   • D. $480
   Show answer

   Correct answer: B. $400

   TC = TFC + TVC. At Q = 4, that's $200 + $200 = $400. Option A counts only fixed costs as if the firm produced nothing at all. Option C likely results from using the wrong quantity's TVC or an incorrect TFC value. Option D uses TVC at Q = 5 ($280) plus TFC ($200), which gives $480 -- the total cost of 5 units, not 4.