# Free Producer Behaviour 02 Practice Test - 11th Grade - Commerce

The law of diminishing returns

A.

is reflected in the negatively sloped portion of the marginal product curve

B.

is the result of specialization and division of labor

C.

is related to increasing coordination problems

D.

None of the above are correct

#### SOLUTION

Solution : A and C

The law of diminishing returns is reflected in the negatively sloped portion of the marginal product curve

The marginal revenue product of labor for a firm

A.

will increase if the price of the firm's output increases

B.

is the firm's demand curve for labor

C.

will decrease if the firm hires more labor

D.

All of the above are correct

#### SOLUTION

Solution : D

All the options are correct.

An isoquant that is

A.

further from the origin represents greater output

B.

flatter represents the trade-offs between inputs that are poor substitutes

C.

negatively sloped represents input combinations associated with Stage I of production

D.

All of the above are correct

#### SOLUTION

Solution : A

An isoquant that is further from the origin represents greater output.

The combination of inputs is optimal

A.

at points of tangency between isoquants and isocosts

B.

if the marginal revenue product is equal to the marginal resource cost for all inputs

C.

if the marginal rate of technical substitution between every pair of inputs is equal to the ratio of the prices of those inputs

D.

All of the above are correct.

#### SOLUTION

Solution : D

All options are correct.

If isoquants are plotted on a graph with capital measured on the vertical axis and labor on the horizontal axis, then an increase in the wage rate will cause the isocost line

A.

to become steeper and the optimal quantity of labor will decrease

B.

to become steeper and the optimal quantity of labor will increase

C.

to become flatter and the optimal quantity of labor will decrease

D.

to become flatter and the optimal quantity of labor will increase

#### SOLUTION

Solution : A

If isoquants are plotted on a graph with capital measured on the vertical axis and labor on the horizontal axis, then an increase in the wage rate will cause the isocost line to become steeper and the optimal quantity of labor will decrease.

A line that connects all points where the marginal rate of technical substitution is equal to the ratio of input prices is called the

A.

input demand curve

B.

total product curve

C.

expansion path

D.

isocost line

#### SOLUTION

Solution : C

A line that connects all points where the marginal rate of technical substitution is equal to the ratio of input prices is called the expansion path.

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is INR 3, the rental price of capital is INR 6, and the price of output is INR 1.50, then the firm should

A.

Increase output by hiring more labor, more capital, or both

B.

Hold output constant, but hire more labor and less capital

C.

Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both

D.

None of the above is correct

#### SOLUTION

Solution : D

Cost of hiring one additional unit of labour = Rs 3
Revenue from hiring an additional unit of labour
= MP of labour x price = Rs 3

Cost of renting one additional unit of capital = Rs 6
Revenue from renting an additional unit of capital
= MP of capital x price = Rs 6

Hence, there is no benefit in increasing labour or capital.

A country that has an abundance of cheap labor will tend to

A.

import goods that are produced using a lot of labor

B.

C.

export goods that are produced using a lot of labor

D.

export goods that are produced using little labor

#### SOLUTION

Solution : C

A country that has an abundance of cheap labor will tend to export goods that are produced using a lot of labor.

Labour is hirable but you cannot hire:

A.

Capital

B.

Land

C.

Manager

D.

Entrepreneur

#### SOLUTION

Solution : D

All factors except enterpreneur can be hired.

Output of food grain in India at one stage was less than its domestic demand. Now it is not. Does it mean that the law of diminishing returns has failed in Indian agriculture?

A.

No

B.

Yes

#### SOLUTION

Solution : A

No. Rise in output of food grain in India is owing to the use of new technology (related to HYV seeds). When there is an improvement in technology, the occurence of the law of diminishing returns is deferred for some time. It does not mean that the law of diminishing returns has failed. It only postponement of law. The law is bound to set-in again once the effect of new technology is exhausted.