CA Foundation · Paper 4 · Business Economics

Chapter 3 · Unit 1 · Theory of Production

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Question 01

Factors of production refer to:

finished goods only inputs used in the production process only labour and capital goods sold to final consumers

Factors of production are the resources or inputs used to produce goods and services.

Question 02

Which of the following are the four main factors of production?

land, tax, money and labour land, machines, labour and profit capital, demand, labour and money land, labour, capital and entrepreneurial ability

ICAI lists land, labour, capital and entrepreneurial ability as the main factors of production.

Question 03

In economics, land means:

all free gifts of nature soil only agricultural land only real estate only

Economics uses land in a broad sense to include natural resources like water, air, fertility and sunlight.

Question 04

Which characteristic correctly relates to land?

it is produced by man its total supply can be increased quickly its total supply is fixed from the point of view of the economy it is an active factor

From the economy’s viewpoint, total land supply is fixed and perfectly inelastic.

Question 05

Which of the following is a feature of labour?

labour can be stored like a commodity labour is perishable labour is inseparable from machines labour is always homogeneous

A day’s labour lost cannot be stored or recovered fully later, so labour is perishable.

Question 06

Labour is called an active factor because:

it has fixed supply it is free gift of nature it earns interest without labour, land and capital may not produce anything

Labour activates other factors and is therefore treated as an active factor.

Question 07

Capital is best defined as:

produced means of production all wealth in existence money only free gift of nature used in production

Capital means man-made goods used for further production, such as machines and tools.

Question 08

Which of the following is circulating capital?

factory building machine tool raw material dam

Circulating capital is used up in a single production process, like seeds, fuel and raw materials.

Question 09

Human capital refers to:

money invested in shares human skill and ability labour union strength social roads and bridges

Human capital means skills, education and abilities embodied in people.

Question 10

Capital formation means:

increase in consumer spending only increase in money supply government borrowing only sustained increase in stock of real capital

Capital formation or investment increases the stock of real productive assets.

Question 11

Which is the correct first stage of capital formation?

savings mobilisation of savings investment depreciation

Capital formation begins with savings, then mobilisation of savings, and then investment.

Question 12

The production function expresses the relationship between:

cost and revenue income and consumption inputs and output price and demand

Production function states the technological relationship between inputs used and output produced.

Question 13

In the production function Q = f(a, b, c, d...n), Q stands for:

quantity of money rate of output quality of labour quota of production

Q is the output variable in the production function.

Question 14

Short run in production means a period in which:

all factors are variable all factors are fixed output cannot change some factors are fixed and some are variable

In the short run, at least one factor remains fixed while others may vary.

Question 15

Long run in production means a period in which:

all factors are variable all factors are fixed demand is constant price is fixed by market

In the long run, firms can vary all inputs including plant size.

Question 16

Total product (TP) refers to:

output per unit of variable factor extra output from one more unit of input total output produced by all units of a variable factor average output from fixed factors

Total product is the total output generated by the employed quantity of variable input.

Question 17

Average product (AP) is calculated as:

TP × variable input TP ÷ units of variable input change in TP ÷ change in input MP ÷ TP

Average product is output per unit of variable factor.

Question 18

Marginal product (MP) is calculated as:

change in TP divided by change in variable input TP divided by total factor cost TP minus AP AP plus TP

Marginal product is the addition to total product from one extra unit of variable factor.

Question 19

The law of variable proportions operates in the:

very long run only market period only long run when all factors vary short run when one factor is variable and others are fixed

This law explains output behaviour when more of one variable factor is combined with fixed factors.

Question 20

Which stage of production is considered rational for a producer?

Stage I only Stage II only Stage III only Stage I and III

A rational producer operates in Stage II, where both AP and MP are positive and diminishing.

Question 21

Stage I of the law of variable proportions ends where:

MP becomes zero TP is maximum AP is maximum and MP equals AP MP becomes negative

Stage I ends where average product reaches its maximum and marginal product equals average product.

Question 22

Stage II ends where:

MP becomes zero and TP is maximum AP is maximum TP begins fixed cost becomes zero

At the end of Stage II, marginal product becomes zero and total product is at its maximum.

Question 23

If marginal product is negative, the producer is operating in:

Stage I Stage II equilibrium stage Stage III

Negative marginal product means total product is falling, which is Stage III.

Question 24

Returns to scale relate to change in output when:

one input changes and others are fixed all inputs change in the same proportion price changes only technology is constant and no input changes

Returns to scale is a long-run concept where all factors are varied together.

Question 25

If output doubles when all inputs are doubled, the firm is experiencing:

increasing returns to scale decreasing returns to scale constant returns to scale negative returns

Equal proportionate increase in output and inputs means constant returns to scale.

Question 26

Isoquant is a curve showing:

different combinations of two inputs producing the same output different combinations of two goods giving same utility different prices for same output different outputs at same total cost

Isoquant is the producer-side counterpart of indifference curve.

Question 27

An isocost line shows:

same utility level same total output same marginal product different combinations of two inputs that cost the same total amount

Isocost line represents input combinations available to the producer for a given total outlay.

Question 28

Producer’s equilibrium using isoquant-isocost analysis occurs where:

two isoquants intersect an isoquant is tangent to an isocost line total cost is zero marginal product is negative

At equilibrium, the producer chooses the least-cost combination for a given output where isoquant touches isocost.

Question 29

When marginal product is greater than average product, average product will:

remain constant increase decrease be zero

When MP > AP, marginal pulls average up → AP increases. Standard ICAI concept.

Question 30

If AP is rising, then MP is:

greater than AP less than AP zero negative

Marginal product pulls average product. So when AP rises, MP must be above AP.

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