Introduction to Economics MCQs | ECO401 MCQs | Set 1
Introduction to Economics MCQs | ECO401 MCQs | Set 1
MCQs (Multiple Choice Questions)
1) Which of the following can be thought of as a barrier to entry?
a) Scale economies
b) Patents
c) Strategic actions by incumbent firms
d) All of the given options
Correct Answer:
The correct answer is 'd'.
Explanation:
All three of the options listed (scale economies, patents, and strategic actions by incumbent firms) can be thought of as barriers to entry for new firms in a particular market.
a) Scale economies: When existing firms in a market have achieved significant scale economies, they can produce goods or services at a lower cost per unit. This cost advantage can make it difficult for new entrants to compete effectively, as they may not have the same cost efficiencies.
b) Patents: Patents grant exclusive rights to inventors or companies for a certain period, during which others are prohibited from producing, using, or selling the patented technology or product. This exclusivity can create a barrier to entry for competitors who may want to offer a similar product or service.
c) Strategic actions by incumbent firms: Incumbent firms in a market may take strategic actions to deter or hinder new entrants. These actions can include aggressive pricing, marketing, or other competitive tactics that make it challenging for new firms to gain a foothold in the market.
So, all of these options can act as barriers to entry for new firms.
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2) A new technology that reduces costs for firms:
a) Shifts the supply curve to the right
b) Shifts the supply curve to the left
c) Reduces the equilibrium quantity
d) Raises the equilibrium price
Correct Answer:
The correct answer is 'a'.
Explanation:
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3) The point at which AC intersects MC is where:
b) MC is at its minimum.
c) AC is at its minimum.
d) AC is at its maximum.
Correct Answer:
The correct answer is 'c'.
Explanation:
The point at which the average cost (AC) curve intersects the marginal cost (MC) curve is where the average cost is at its minimum. This is often referred to as the minimum point on the AC curve, and it represents the level of production at which the firm is operating most efficiently in terms of cost per unit of output.
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4) A normative economic statement:
a) Is a statement of fact
b) Is a hypothesis used to test economic theory
c) Is a statement of what ought to be, not what is
d) Is a statement of what will occur if certain assumptions are true
Correct Answer:
The correct answer is 'c'.
Explanation:
A normative economic statement expresses a value judgment or opinion about what should or ought to happen in the economy. It is not a statement of objective fact or a description of what currently exists (positive economic statement). Normative statements often involve ethical, political, or policy considerations and represent subjective views about what economic policies or outcomes are desirable.
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5) If the income elasticity of demand is 1/2, the good is:
a) A luxury
b) A normal good (but not a luxury).
c) An inferior good.
d) A Giffen good.
Correct Answer:
The correct answer is 'b'.
Explanation:
If the income elasticity of demand is positive but less than 1, it indicates that the good is a normal good. In this case, with an income elasticity of demand of 1/2, the good is a normal good. However, it is not considered a luxury (which typically has an income elasticity greater than 1) or an inferior good (which has a negative income elasticity). It is also not a Giffen good, as Giffen goods have unique characteristics related to their price elasticity, not income elasticity.
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6) If the income elasticity of demand is 2, the good is:
a) A luxury
b) A normal good (but not a luxury).
c) An inferior good.
d) A Giffen good.
Correct Answer:
The correct answer is 'a'.
Explanation:
If the income elasticity of demand is 2, it indicates that the good is a luxury. Luxury goods have income elasticities greater than 1, which means that as consumers' incomes increase, they are willing to spend a proportionally larger amount on these goods. So, in this case, a good with an income elasticity of 2 is considered a luxury.
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7) If the demand curve for a good is downward sloping, then the good:
a) Can be normal or inferior
b) Must be inferior
c) Must be Giffen
d) Must be normal
Correct Answer:
The correct answer is 'd'.
Explanation:
If the demand curve for a good is downward-sloping, it means that as the price of the good decreases, the quantity demanded increases, which is the typical behavior for normal goods. Normal goods have a negative price elasticity of demand (the quantity demanded increases as the price falls), and this is represented by a downward-sloping demand curve.
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8) Diminishing marginal returns implies:
a) Increasing marginal costs
b) Decreasing average variable costs
c) Decreasing average fixed costs
d) Decreasing marginal costs
Correct Answer:
The correct answer is 'a'.
Explanation:
Diminishing marginal returns means that as additional units of a variable input are added to a fixed input (holding all other factors constant), the additional output or benefit from each additional unit of the variable input will start to decrease. This leads to an increase in the marginal cost of producing each additional unit, as it becomes less efficient to produce more. So, diminishing marginal returns imply increasing marginal costs.
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9) Factor markets, which are also termed resource markets, exchange the:
a) Lands
b) Labors
c) Services of factors
d) Factors themselves
Correct Answer:
The correct answer is 'd'.
Explanation:
Factor markets, also known as resource markets, are where the various factors of production (land, labor, capital, and entrepreneurship) are bought and sold. These markets exchange the actual factors themselves, such as land, labor (workers), physical capital (like machinery), and entrepreneurship (business expertise and management). So, the correct answer is "d) Factors themselves.
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10) For a monopolist, changes in demand will lead to changes in:
a) Output with no change in price
b) Price with no change in output
c) Both price and quantity
d) All of the given options
Correct Answer:
The correct answer is 'c'.
Explanation:
For a monopolist, changes in demand will lead to changes in both price and quantity. Unlike in a perfectly competitive market where price is constant and firms adjust output in response to changes in demand, a monopolist has the ability to set the price and, therefore, can adjust both price and quantity based on changes in demand. If demand increases, the monopolist can raise the price and potentially increase the quantity supplied. Conversely, if demand decreases, the monopolist can lower the price and reduce the quantity supplied. So, the correct answer is " Both price and quantity."
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