Microeconomics MCQs | ECO402 MCQs | Set 4
Microeconomics MCQs | ECO402 MCQs | Set 4
MCQs (Multiple Choice Questions)
1) A production function in which the inputs are perfectly substitutable would have isoquants that are:
a) Convex to the origin.
b) L shaped.
c) Linear.
d) Concave to the origin.
Correct Answer:
The correct answer is 'c'.
Explanation:
When inputs are perfectly substitutable, the production function allows for a direct and linear tradeoff between the inputs. This results in isoquants (curves representing various combinations of inputs that yield the same level of output) that are linear, showcasing a consistent and interchangeable relationship between the inputs.
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2) A change in the slope of the budget line.
a) A parallel outward shift in the budget line.
b) An outward shift in the budget line with its slope
becoming flatter.
c) A parallel inward shift in the budget line.
d) None of the above
Correct Answer:
The correct answer is 'b'.
Explanation:
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3) The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the:
b) Marginal rate of technical substitution.
c) Slope of the isocost curve.
d) Average product of the input.
Correct Answer:
The correct answer is 'b'.
Explanation:
The marginal rate of technical substitution (MRTS) measures the rate at which one input can be decreased (reduced) as another input is increased, while maintaining the same level of output. It indicates the trade-off or substitution rate between two inputs in the production process.
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4) Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?
a) MRSxy = Px/Py.
b) MUx/MUy = Px/Py.
c) Px/Py = money income.
d) Px/Py = slope of the indifference curve at the optimal choice.
Correct Answer:
The correct answer is 'c'.
Explanation:
When Oscar is maximizing utility but not at a corner solution, the ratio of prices (Px/Py) equates to the ratio of marginal utilities (MUx/MUy) of the goods he consumes (option b), and it's also equal to the marginal rate of substitution (MRSxy) between goods X and Y (option a). Additionally, the ratio of prices (Px/Py) is equal to the slope of the indifference curve at the optimal choice (option d). However, it's not necessary for the price ratio (Px/Py) to be equal to Oscar's money income. The equality between price ratio and money income is not a standard condition in utility maximization unless specific assumptions about income and utility function are made.
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5) The object of diversification is:
a) To reduce risk and fluctuations in income.
b) To reduce risk, but not to reduce fluctuations in income.
c) To reduce fluctuations in income, but not to reduce risk.
d) Neither to reduce risk, nor to reduce fluctuations in income.
Correct Answer:
The correct answer is 'a'.
Explanation:
Diversification involves spreading investments across different assets to mitigate risk by avoiding over-exposure to any single asset or risk factor. The primary goal of diversification is to reduce risk and minimize the impact of fluctuations in income or returns.
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6) Due to capacity constraints, the price elasticity of supply for most products is:
a) The same in the long run and the short
run.
b) Greater in the long run than the short run.
c) Greater in the short run than in the long run.
d) Too uncertain to be estimated.
Correct Answer:
The correct answer is 'c'.
Explanation:
In the short run, due to capacity limitations and the inability to quickly adjust production levels, the supply of most products tends to be less responsive to changes in price, resulting in a lower price elasticity of supply. In the long run, firms can adjust their capacity, production methods, and infrastructure, making supply more elastic and responsive to price changes.
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7) Salman would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:
a) We can infer that Salman is risk neutral.
b) We can infer that Salman is risk averse.
c) We can infer that Salman is risk loving.
d) We cannot infer Salman’s risk preferences.
Correct Answer:
The correct answer is 'b'.
Explanation:
Salman's choice of a certain income over a gamble with uncertain outcomes suggests a preference for stability and certainty, indicating risk-averse behavior. This decision reflects a tendency to opt for a known and guaranteed income rather than taking a chance on a gamble, which is characteristic of risk-averse individuals.
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8) Assume that two investment opportunities have identical expected values of $100,000. Investment A has a variance of 25,000, while investment B's variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity:
a) A because it has less risk.
b) A because it provides higher potential earnings.
c) B because it has less risk.
d) B because of its higher potential earnings.
Correct Answer:
The correct answer is 'c'.
Explanation:
Investors who are averse to risk would generally prefer the investment option with lower variance, as it indicates less variability or uncertainty in potential outcomes. Investment B, with a variance of 10,000, would be preferred over Investment A, which has a higher variance of 25,000. This is because lower variance implies a more stable and predictable investment, aligning with the risk-averse preference for stability over higher potential earnings when faced with uncertainty.
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9) The expected value is a measure of:
a) Risk.
b) Variability.
c) Uncertainty.
d) Central tendency.
Correct Answer:
The correct answer is 'd'.
Explanation:
The expected value represents the average or mean outcome in a probability distribution. It is a measure of central tendency, providing an indication of what can be typically or expectedly anticipated from a random variable or uncertain event.
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10) Which of the following costs always declines as output increases?
a) Average cost
b) Fixed cost
c) Average fixed cost
d) Average variable cost
Correct Answer:
The correct answer is 'c'.
Explanation:
Average fixed cost decreases as output increases. This is because fixed costs are spread over a larger quantity of output, resulting in a reduction in the average fixed cost per unit as production increases.
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