Introduction to Economics MCQs | ECO401 MCQs | Set 6
Introduction to Economics MCQs | ECO401 MCQs | Set 6
MCQs (Multiple Choice Questions)
1) The concept of a risk premium applies to a person that is:
a) Risk averse
b) Risk neutral
c) Risk loving
d) All of the given options
Correct Answer:
The correct answer is 'a'.
Explanation:
A risk premium is the additional return or compensation an investor requires for taking on riskier investments compared to those with lower risk. Risk-averse individuals, who prefer lower risk, would demand a higher risk premium to be willing to engage in riskier investments.
______________________________
2) Economics is different from other social sciences because it is primarily concerned with the study of ________, it is similar to other social sciences because they are all concerned with the study of ________.
a) Limited resources, market behavior.
b) Scarcity, human behavior.
c) Social behavior, limited resources
d) Biological behavior, scarcity
Correct Answer:
The correct answer is 'b'.
Explanation:
______________________________
3) An individual whose attitude towards risk is known as:
b) Risk neutral
c) Risk averse
d) None of the given options
Correct Answer:
The correct answer is 'c'.
Explanation:
An individual who is risk averse tends to prefer options with lower risk, showing a reluctance to take on higher risk even if it might offer a higher return. They prioritize minimizing potential losses over maximizing potential gains.
______________________________
4) Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:
a) P = MR
b) P = AVC
c) AR = MR
d) P = MC
Correct Answer:
The correct answer is 'd'.
Explanation:
The profit maximization condition for a perfectly competitive firm is P = MC, where P is the market price and MC is the marginal cost. This is because a perfectly competitive firm is a price taker, meaning that it has no control over the market price of its product. As a result, the firm can only maximize its profits by producing at the level of output where its marginal cost is equal to the market price.
______________________________
5) A welfare loss occurs in monopoly where:
a) The price is greater than the marginal cost.
b) The price is greater than the marginal benefit.
c) The price is greater than the average revenue.
d) The price is greater than the marginal revenue.
Correct Answer:
The correct answer is 'a'.
Explanation:
In a monopoly, the price is set higher than the marginal cost of production, leading to a reduction in overall welfare or societal benefit. This situation results in a deadweight loss or inefficiency because the quantity produced is lower and the price is higher than what would occur under a more competitive market structure, leading to a misallocation of resources.
______________________________
6) The "perfect information" assumption of perfect competition includes all of the following EXCEPT:
a) Consumers know their preferences.
b) Consumers know their income levels.
c) Consumers know the prices available.
d) Consumers can anticipate price changes.
Correct Answer:
The correct answer is 'd'.
Explanation:
The assumption of perfect information in perfect competition means that all buyers and sellers have complete and instantaneous knowledge of all market prices, their own utility, and their own cost functions. This means that they can make perfectly informed decisions about what to buy, sell, and how much to buy and sell.
______________________________
7)
In figure given above, the marginal utility of income is:
a) Increasing as income increases.
b) Constant for all levels of income.
c) Diminishes as income increases.
d) None of the given options.
Correct Answer:
The correct answer is 'c'.
Explanation:
In the given figure where utility is represented on the y-axis and income on the x-axis with the marginal utility of income shown moving above on the y-axis, if the pattern depicts the marginal utility of income, it typically shows a decrease as income increases. Therefore, the correct answer is: c) Diminishes as income increases.
This is reflective of the law of diminishing marginal utility, which suggests that as income (or any resource) increases, the additional utility gained from each additional unit of that resource diminishes.
______________________________
8) A consultant for Mattel (the producer of Barbie) reports that their long run average cost curve is decreasing. In other words, he is saying that:
a) The firm has increasing returns to scale and the law of diminishing marginal productivity does not apply to this firm.
b) The firm has decreasing returns to scale and the law of diminishing marginal productivity does not apply to this firm.
c) The firm has increasing returns to scale but the law of diminishing marginal productivity may still apply to this firm.
d) The firm has decreasing returns to scale but nonetheless the law of diminishing marginal productivity may still apply to this firm.
Correct Answer:
The correct answer is 'c'.
Explanation:
If the consultant for Mattel reports that their long-run average cost curve is decreasing, it implies that the firm is experiencing economies of scale. So, the correct option would be: c) The firm has increasing returns to scale, but the law of diminishing marginal productivity may still apply to this firm.
The decreasing long-run average cost curve signifies that the firm can produce its output at a lower cost as it increases the scale of production. This is indicative of increasing returns to scale. However, this doesn't necessarily mean that the law of diminishing marginal productivity does not apply. It's possible for the firm to experience economies of scale while still encountering diminishing returns at the margin as they expand production.
______________________________
9) If the cross price elasticity of demand between two goods X and Y is positive; it means that goods are:
a) Independent.
b) Complements.
c) Substitutes.
d) Inferior.
Correct Answer:
The correct answer is 'c'.
Explanation:
A positive cross price elasticity of demand indicates that when the price of good Y increases, the quantity demanded of good X also increases. This suggests that the two goods are substitutes, as an increase in the price of one leads to an increase in the demand for the other.
______________________________
10) Which of the following best expresses the law of demand?
a) A higher price reduces demand.
b) A lower price reduces demand.
c) A higher price reduces quantity demanded.
d) A lower price shifts the demand curve to the right.
Correct Answer:
The correct answer is 'c'.
Explanation:
The law of demand states that all else being equal, when the price of a good or service increases, the quantity demanded for that good or service decreases. It focuses on the inverse relationship between price and quantity demanded, indicating that as price rises, the quantity demanded falls.
______________________________
No comments