Introduction to Economics MCQs | ECO401 MCQs | Set 5
Introduction to Economics MCQs | ECO401 MCQs | Set 5
MCQs (Multiple Choice Questions)
1) The demand curve for eggs is downward-sloping. Suddenly the price of eggs decreases from Rs.60/- per dozen. This will cause:
a) The demand curve for eggs to shift leftward
b) Quantity demanded of eggs to decrease
c) The demand curve for eggs to shift rightward
d) Quantity demanded of eggs to increase
Correct Answer:
The correct answer is 'd'.
Explanation:
When the price of eggs decreases, according to the law of demand, consumers will generally want to purchase more at the lower price, resulting in an increase in the quantity demanded. This movement occurs along the demand curve, rather than a shift of the curve itself.
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2) Sugar can be produced from sugar beets. If the price of sugar beets falls, which of the following will happen?
a) The demand curve for sugar would shift right.
b) The demand curve for sugar would shift left.
c) The supply curve for sugar would shift right
d) The supply curve for sugar would shift right
Correct Answer:
The correct answer is 'c'.
Explanation:
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3) If Ali prefers a certain oncome over a risky income, Ali is known as:
b) Risk neutral person
c) Risk averse person
d) Irrational person
Correct Answer:
The correct answer is 'c'.
Explanation:
Ali is described as a risk-averse person because they prefer a certain income (a guaranteed income) over a risky income, even if the risky income has a higher expected value. This preference suggests a dislike for taking risks or uncertainties in income. A risk-averse individual tends to avoid uncertainty and is willing to accept a lower but guaranteed income rather than taking a chance on a higher income that carries a degree of risk.
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4) Suppose that 48 units of output are produced by using 12 units of labor. Which of the following is TRUE in this context?
a) The marginal product of labor is 4.
b) The total product of labor is 4.
c) The average product of labor is 4.
d) None of the given option
Correct Answer:
The correct answer is 'c'.
Explanation:
The average product of labor is calculated by dividing the total output (48 units) by the quantity of labor input (12 units), resulting in an average product of 4 units of output per unit of labor.
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5) The rate at which a firm can substitute capital for labour and hold output constant is the:
a) Law of diminishing marginal returns
b) Marginal rate of substitution
c) Marginal rate of technical substituion
d) Marginal rate of production
Correct Answer:
The correct answer is 'c'.
Explanation:
The marginal rate of technical substitution (MRTS) measures the rate at which one input (for instance, capital) can be reduced while simultaneously increasing the quantity of another input (such as labor) to maintain the same level of output. It indicates the ratio at which one input can be substituted for another without impacting the output.
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6) Cost determines all of the following EXCEPT:
a) Firm's behavior
b) How firms should expand?
c) Firm's profitability
d) Demand for a product
Correct Answer:
The correct answer is 'd'.
Explanation:
Costs in a business, including production, operating, and other expenses, have a substantial impact on various aspects of a company's operations and decision-making. They influence a firm's behavior by affecting pricing strategies, production levels, and financial decisions. Costs also significantly affect a firm's profitability because they directly impact the balance between revenue and expenses.
However, costs do not directly determine the demand for a product. The demand for a product is primarily influenced by factors such as consumer preferences, prices, marketing strategies, and external economic conditions. While costs can indirectly influence pricing, which in turn might affect demand, they do not solely determine the level of demand for a product.
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7) Which of the following is TRUE for a monopolistically competitive firm in the short run equilibrium?
a) It will make negative profit (lose money)
b) It will make zero profit (break-even)
c) It will make positive profit.
d) Any of the given is possible
Correct Answer:
The correct answer is 'd'.
Explanation:
A monopolistically competitive firm in the short run can experience different outcomes. It might make positive economic profit, negative economic profit (incurring losses), or zero economic profit (breaking even) depending on market conditions, costs, and demand for its differentiated product.
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8) A firm that benefits from lower costs per unit as it grows is an example of:
a) Economies of scale
b) Diseconomies of scale
c) Increasing opportunity costs
d) Scale reduction
Correct Answer:
The correct answer is 'a'.
Explanation:
Economies of scale refer to the cost advantages that a firm can achieve as it increases its level of production or output. When a firm experiences economies of scale, it means that as the scale of production expands, the average cost of production per unit decreases. This reduction in average costs can occur due to various factors such as efficient use of resources, spreading fixed costs over more units, bulk purchasing, or specialization in production.
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9) Yummy, an ice-cream maker, has discovered that the ratio of the marginal product of labor to the price of labor is 8.5, while the ratio of the marginal product of capital to the price of capital is 7.1. The firm has determined that it does not want to change its total costs. Yummy should:
a) Use more capital and less labor
b) Use more labor and less capital
c) Do nothing, the difference in the rations of marginal product to input price are too small to matter.
d) Do nothing different since there is insufficient information upon which to make a decision
Correct Answer:
The correct answer is 'a'.
Explanation:
The information provided suggests that the ratio of the marginal product to input price differs for labor and capital. Specifically, the ratio of the marginal product of labor to the price of labor is 8.5, while the ratio of the marginal product of capital to the price of capital is 7.1.
Given that Yummy, the ice-cream maker, wants to maintain its total costs, it needs to optimize its input usage to achieve this goal. The difference in the ratios indicates an imbalance in the productivity relative to cost between labor and capital.
Based on the information provided, Yummy should adjust its input usage to maintain total costs without changing output. The solution lies in equalizing the marginal product to input price ratio for both labor and capital. Since the ratio of the marginal product to input price for labor is higher (8.5) than that for capital (7.1), the company should use more capital and less labor to balance these ratios.
Therefore, the correct choice for Yummy would be a) Use more capital and less labor to ensure an equilibrium between the cost and productivity of both inputs, thus meeting the objective of not changing total costs.
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10) If the demand for using gym is price inelastic and your local gym owner increases the fee for using the gym, you would expect:
a) A decrease in total revenue received by the gym owner.
b) An increase in total revenue received by the gym owner.
c) No change in total revenue received by the gym owner.
d) An increase in the hours that people will spend in gym.
Correct Answer:
The correct answer is 'b'.
Explanation:
In cases of price inelastic demand, when the price increases, the decrease in quantity demanded by customers is proportionately smaller than the increase in price. This results in a net gain in total revenue for the gym owner. Customers, despite the price increase, are still willing to pay and use the gym, contributing more revenue overall due to the reduced drop in demand compared to the increased prices.
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