Microeconomics MCQs | ECO402 MCQs | Set 5
Microeconomics MCQs | ECO402 MCQs | Set 5
MCQs (Multiple Choice Questions)
1) Which of the following pairs of goods are NOT complements?
a) Hockey sticks and hockey pucks
b) Computer CPU’s and computer monitors
c) On campus student housing and off campus rental apartments
d) All of the given options
Correct Answer:
The correct answer is 'c'.
Explanation:
The only pair of goods that is not complementary is on campus student housing and off campus rental apartments. On campus student housing and off campus rental apartments are substitutes for each other. This means that consumers will tend to choose one over the other, depending on their preferences and budget.
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2) If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the:
a) Rate at which the firm can replace capital with labor without changing the output rate.
b) Average rate at which the firm can replace capital
with labor without changing the output rate.
c) Marginal product of labor.
d) Marginal product of capital.
Correct Answer:
The correct answer is 'a'.
Explanation:
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3) Which of the following is a positive statement?
b) Smoking should be restricted on all airline flights.
c) All automobile passengers should be required to wear seatbelts in order to protect them against injury.
d) None of the given options.
Correct Answer:
The correct answer is 'd'.
Explanation:
The given options do not offer factual, verifiable statements. They present normative judgments or opinions (statements about what should or should not be done) rather than factual or objective claims that can be tested or proven true or false.
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4) What happens if price falls below the market clearing price?
a) Demand shifts out.
b) Supply shifts in.
c) Quantity demanded decreases, quantity supplied increases, and price falls.
d) Quantity demanded increases, quantity supplied decreases, and price rises.
Correct Answer:
The correct answer is 'd'.
Explanation:
When the price falls below the market clearing price, the quantity demanded increases as consumers are more willing to buy at a lower price. However, the quantity supplied decreases because producers are less willing to supply the product at a lower price, which ultimately results in a rise in the price as the market moves back towards equilibrium.
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5) If X and Y are perfect substitutes, which of the following assumptions about indifference curves is not satisfied?
a) Completeness.
b) Transitivity.
c) More is preferred to less.
d) Diminishing marginal rate of substitution.
Correct Answer:
The correct answer is 'd'.
Explanation:
With perfect substitutes, the marginal rate of substitution between X and Y remains constant. Indifference curves are linear, indicating a constant trade-off rate between X and Y, contrary to the assumption of diminishing marginal rate of substitution where the rate at which one good is substituted for another diminishes as the consumer moves along the curve.
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6) The endpoints (horizontal and vertical intercepts) of the budget line:
a) Measure its slope.
b) Measure the rate at which one good can be substituted for another.
c) Measure the rate at which a consumer is willing to trade one good for another.
d) Represent the quantity of each good that could be purchased if all of the budget allocated to that good.
Correct Answer:
The correct answer is 'd'.
Explanation:
The intercepts on the axes of the graph of the budget line display the maximum quantity of each good that could be purchased if all the budget were allocated to that specific good, assuming the entire budget is spent.
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7) A Rolling Stones song goes: “You can’t always get what you want.” This echoes an important theme from microeconomics. Which of the following statements is the best example of this theme?
a) Consumers must make the best purchasing decisions they can, given their limited income.
b) Workers do not have as much leisure as they would like, given their wages and working conditions.
c) Workers in planned economies, such as North Korea, do not have much choice over jobs.
d) Firms in market economies have limited financial resources.
Correct Answer:
The correct answer is 'a'.
Explanation:
This statement reflects the concept of scarcity, wherein consumers face constraints on their purchasing power due to limited income. They must make choices and trade-offs regarding what goods or services to purchase, as they cannot afford to buy everything they desire. This resonates with the idea that individuals' desires or preferences often surpass their financial means, resulting in the need to prioritize and make decisions based on their budget constraints.
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8) 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 relationship between the expected return and standard deviation of a portfolio. It shows that investors can trade off expected return for standard deviation, and vice versa.
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9) If a competitive firm's marginal cost always increases with output, then at the profit maximizingoutput level, producer surplus is:
a) Zero because marginal costs equal marginal revenue.
b) Zero because price equals marginal costs.
c) Positive because price exceeds average variable costs.
d) Positive because price exceeds average total costs.
Correct Answer:
The correct answer is 'c'.
Explanation:
The producer surplus is the difference between the price of a good and the marginal cost of producing it. At the profit maximizing output level, a competitive firm's marginal revenue (MR) is equal to the price of the good. This means that the firm is producing the output level where the last unit produced is generating the same amount of revenue as it is costing to produce.
If the firm's marginal cost (MC) always increases with output, then the MC curve will be above the MR curve at the profit maximizing output level. This means that the firm is generating a positive producer surplus, because the price of the good is exceeding the marginal cost of producing it.
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10) Governments may successfully intervene in competitive markets in order to achieve economic efficiency:
a) At no time; competitive markets are always efficient without government intervention.
b) In cases of positive externalities only.
c) In cases of negative externalities only.
d) In cases of both positive and negative externalities.
Correct Answer:
The correct answer is 'd'.
Explanation:
Government intervention in competitive markets can effectively address situations of market failure, specifically in cases of both positive and negative externalities. For negative externalities, such as pollution, the government can intervene to reduce the harmful effects. In the case of positive externalities, like education or research, government intervention can help by providing subsidies or incentives to enhance these beneficial outcomes.
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