Microeconomics MCQs | ECO402 MCQs | Set 6
Microeconomics MCQs | ECO402 MCQs | Set 6
MCQs (Multiple Choice Questions)
1) What happens in a perfectly competitive industry when economic profit is greater than zero?
a) Existing firms may get larger.
b) New firms may enter the industry.
c) Firms may move along their LRAC curves to new outputs.
d) All of the given options
Correct Answer:
The correct answer is 'd'.
Explanation:
All of the given options can happen in a perfectly competitive industry when economic profit is greater than zero.
- Existing firms may get larger. When firms are earning economic profits, they have an incentive to expand their production and output in order to earn even more profits. This can lead to existing firms getting larger.
- New firms may enter the industry. When economic profits are positive, it signals to potential new entrants that there is an opportunity to make money in the industry. This can lead to new firms entering the industry, which increases competition and reduces economic profits.
- Firms may move along their LRAC curves to new outputs. When firms are earning economic profits, they may choose to move along their long-run average cost (LRAC) curves to new outputs that produce even higher profits.
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2) Which of the following is NOT true about price floors?
a) Consumer surplus is always lower than it would be in the competitive equilibrium.
b) Producer surplus could be lower, higher, or the same as it would be in competitive equilibrium.
c) Producer surplus could be negative as the result of a price floor.
d) Producers will often respond to a price floor by cutting production to the point at which priceequals marginal cost.
Correct Answer:
The correct answer is 'a'.
Explanation:
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3) Indifference curves that are convex to the origin reflect:
b) A decreasing marginal rate of substitution.
c) A constant marginal rate of substitution.
d) A marginal rate of substitution that first decreases, then increases.
Correct Answer:
The correct answer is 'b'.
Explanation:
When an indifference curve is convex to the origin, it indicates a decreasing marginal rate of substitution. This means that as one moves along the curve, the rate at which a consumer is willing to trade one good for another decreases.
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4) Which of the following statements is true regarding the differences between economic and accounting costs?
a) Accounting costs include all implicit and explicit costs.
b) Economic costs include implied costs only.
c) Accountants consider only implicit costs when calculating costs.
d) Accounting costs include only explicit costs.
Correct Answer:
The correct answer is 'd'.
Explanation:
Accounting costs cover explicit costs, which are actual, direct expenses incurred and recorded in financial statements. In contrast, economic costs encompass both explicit (actual) costs and implicit (opportunity) costs, including the value of foregone opportunities or resources employed for which no direct payment is made.
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5) Rabia and Samina are shopping for new cars (one each). Rabia expects to pay $15,000 with 1/5probability and $20,000 with 4/5 probability. Samina expects to pay $12,000 with 1/4 probabilityand $20,000 with 3/4 probability. Refer to the above scenario, Rabia's expected expense for hiscar is:
a) $20,000
b) $19,000
c) $18,000
d) $17,500
Correct Answer:
The correct answer is 'b`.
Explanation:
Rabia's expected expense for her car can be calculated by multiplying each possible expense by its respective probability and summing the results.
E(Rabia)=(Expense1 × Probability1)+(Expense2 × Probability2)
E(Rabia)=(15,000×1/5)+(20,000×4/5)
E(Rabia)=3,000+16,000
E(Rabia)=19,000
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6) A decreasing-cost industry has a downward-sloping:
a) Long-run marginal cost curve.
b) Short-run average cost curve.
c) Short-run marginal cost curve.
d) Long-run industry supply curve.
Correct Answer:
The correct answer is 'd'.
Explanation:
In a decreasing-cost industry, as the industry expands in the long run, the cost of production decreases due to various factors like economies of scale and technological advancements. This results in a downward-sloping long-run industry supply curve, indicating that firms are able to supply more at lower prices as the industry expands.
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7) Producer surplus is measured as the:
a) Area under the demand curve above market price.
b) Entire area under the supply curve.
c) Area under the demand curve above the supply curve.
d) Area above the supply curve up to the market price.
Correct Answer:
The correct answer is 'd'.
Explanation:
Producer surplus is the difference between the actual price that producers receive for their goods or services and the minimum price at which they are willing to produce or sell those goods (represented by the supply curve). It's measured as the area above the supply curve up to the market price.
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8) In a constant-cost industry, an increase in demand will be followed by:
a) No increase in supply.
b) An increase in supply that will not change price from the higher level that occurs after thedemand shift.
c) An increase in supply that will bring price down to the level it was before the demand shift.
d) An increase in supply that will bring price down below the level it was before the demand shift.
Correct Answer:
The correct answer is 'b'.
Explanation:
In a constant-cost industry, an increase in demand prompts an increase in supply. However, in this industry, the cost structure remains constant even as the industry expands. This increase in supply allows for a higher quantity of goods at the market, maintaining the higher price level due to the initial demand shift.
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9) Goods X and Y are complements while goods X and Z are substitutes. If the supply of good X increases:
a) The demand for both Y and Z will increase
b) The demand for Y will increase while the demand for Z will decrease
c) The demand for Y will decrease while the demand for Z will increase
d) The demand for both Y and Z will decrease
Correct Answer:
The correct answer is 'c'.
Explanation:
An increase in the supply of good X, which is a complement to good Y, would lead to a reduction in the demand for good Y. Conversely, as good X is a substitute for good Z, an increase in the supply of X would result in an increase in the demand for good Z.
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10) 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 are true
Correct Answer:
The correct answer is 'd'.
Explanation:
Scale economies: Large-scale production often results in cost advantages, making it difficult for new, smaller entrants to compete effectively.
Patents: Intellectual property rights, like patents, can prevent new entrants from using specific technologies or products, granting exclusive rights to the patent holder.
Strategic actions by incumbent firms: Existing companies may take strategic actions such as aggressive marketing, pricing, or forming alliances that can make it harder for new entrants to gain a foothold in the market.
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