Microeconomics MCQs | ECO402 MCQs | Set 3
Microeconomics MCQs | ECO402 MCQs | Set 3
MCQs (Multiple Choice Questions)
1) When the average product is decreasing, marginal product:
a) Equals average product.
b) Is increasing.
c) Exceeds average product.
d) Is less than average product.
Correct Answer:
The correct answer is 'd'.
Explanation:
When the average product is decreasing, it means that the additional output generated by each additional unit of input (average product) is diminishing.
The marginal product is the additional output gained by adding one more unit of input. When the average product is decreasing, it indicates that the marginal product is less than the average product. This is because the additional output gained by adding one more unit of input (marginal product) is contributing less to the overall average due to the diminishing returns or inefficiency in the production process.
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2) If Px = Py, then when the consumer maximizes utility:
a) X must equal Y.
b) MU(X) must equal MU(Y).
c) MU(X) may equal MU(Y), but it is not necessarily so.
d) X and Y must be substitutes.
Correct Answer:
The correct answer is 'b'.
Explanation:
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3) Which of the following will NOT cause a shift to the right in the demand curve for beer?
b) A health study indicating positive health benefits of moderate beer consumption.
c) An increase in the price of French wine (a substitute).
d) A decrease in the price of potato chips (a complement).
Correct Answer:
The correct answer is 'a'.
Explanation:
Changes in the price of beer cause movements along the demand curve, not shifts. When the price changes, the quantity demanded changes, resulting in a movement along the demand curve, not a shift.
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4) The law of diminishing returns applies to:
a) The short run only.
b) The long run only.
c) Both the short and the long run.
d) Neither the short nor the long run.
Correct Answer:
The correct answer is 'c'.
Explanation:
The principle of diminishing returns states that as additional units of a variable input are added to fixed inputs, at some point, the marginal product of the variable input will decrease. This principle applies to both short-run and long-run production processes across various industries and scenarios.
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5) Any risk-averse individual would
always:
a) Take a 10% chance at $100 rather than a sure $10.
b) Take a 50% chance at $4 and a 50% chance at $1
rather than a sure $1.
c) Take a sure $10 rather than a 10% chance at
$100.
d) Take a sure $1 rather than a 50% chance at $4 and a 50% chance at losing $1.
Correct Answer:
The correct answer is 'd'.
Explanation:
The risk-averse individual opts for the guaranteed $1 rather than taking a chance where there's a 50% probability of gaining $4 but also a 50% chance of losing $1. This choice reflects the preference for a certain, stable outcome rather than a riskier situation that might result in either higher gains or losses.
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6) The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the:
a) Variance
b) Standard deviation
c) Expected value
d) Coefficient of variation
Correct Answer:
The correct answer is 'c'.
Explanation:
The expected value is a measure of the central tendency of a probability distribution and represents the average outcome when considering the probabilities of different outcomes. It is calculated by summing the products of each possible outcome and its respective probability.
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7) The expected value is the weighted average of the payoffs or values resulting from all possible outcomes. The budget line in portfolio analysis shows that:
a) The expected return on a portfolio increases as the standard deviation of that return increases.
b) The expected return on a portfolio increases as the standard deviation of that return decreases.
c) The expected return on a portfolio is constant.
d) The standard deviation of a portfolio is constant.
Correct Answer:
The correct answer is 'b'.
Explanation:
The budget line in portfolio analysis shows the trade-off between expected return and risk, where risk is measured by the standard deviation of return.
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8) For an inferior good:
a) The price elasticity of demand is negative; the income elasticity of demand is negative.
b) The price elasticity of demand is positive; the income elasticity of demand is negative.
c) The price elasticity of demand is negative; the income elasticity of demand is positive.
d) The price elasticity of demand is positive; the income elasticity of demand is positive.
Correct Answer:
The correct answer is 'a'.
Explanation:
In the case of an inferior good, the demand for the product increases when the consumer's income decreases. Consequently, the price elasticity of demand is negative (as demand rises when price falls) and the income elasticity of demand is also negative (demand rises as income falls).
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9) Which of the following statements about markets and industries is TRUE?
a) A market includes buyers but not sellers.
b) A market includes sellers but not buyers.
c) An industry includes buyers but not sellers.
d) An industry includes sellers but not buyers.
Correct Answer:
The correct answer is 'd'.
Explanation:
An industry comprises all the firms or businesses involved in the production of similar goods or services. It includes the sellers or producers within a particular sector or field. Conversely, a market refers to the interaction between buyers and sellers where the exchange of goods or services takes place.
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10) When the snob effect exists, a change in price is likely to:
a) Change total revenue less than if there were no network externalities.
b) Change total revenue more than if there were no network externalities.
c) Change total revenue the same amount as if there were no network externalities.
d) Not change total revenue at all.
Correct Answer:
The correct answer is 'a'.
Explanation:
The snob effect, where some consumers value a product more when its price is higher, may affect total revenue. When this effect is present, changes in price might lead to a relatively smaller impact on total revenue compared to a scenario where there are no network externalities. This is due to the particular preference of certain consumers for higher-priced goods, which can influence the total revenue but may not change it as significantly as it would in the absence of these network effects.
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