Microeconomics MCQs | ECO402 MCQs | Set 7
Microeconomics MCQs | ECO402 MCQs | Set 7
MCQs (Multiple Choice Questions)
1) A new technology which reduces costs for firms’:
a) Shifts the supply curve to the right
b) Shifts the supply curve to the left
c) Reduces the equilibrium quantity
d) Raises the equilibrium price
Correct Answer:
The correct answer is 'a'.
Explanation:
When firms adopt a new technology that decreases their production costs, they can supply more goods or services at every price. This shift in supply is to the right, indicating an increase in the quantity supplied at any given price level.
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2) A normative economic statement:
a) Is a statement of fact.
b) Is a hypothesis used to test economic theory.
c) Is a statement of what ought to be, not what is.
d) Is a statement of what will occur if certain assumptions are true.
Correct Answer:
The correct answer is 'c'.
Explanation:
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3) The extra value that consumers receive above what they pay for that good is called:
b) Utility
c) Marginal utility
d) Consumer surplus
Correct Answer:
The correct answer is 'd'.
Explanation:
Consumer surplus is the additional benefit or value that consumers derive from a good or service beyond what they actually pay for it. It represents the difference between what consumers are willing to pay for a good (based on their perceived value or the maximum price they're willing to pay) and the actual price they pay in the market.
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4) The point at which AC intersects MC is where:
a) AC is decreasing.
b) MC is at its minimum.
c) AC is at its minimum.
d) AC is at its maximum.
Correct Answer:
The correct answer is 'c'.
Explanation:
This point indicates the minimum average cost because, at this intersection, the marginal cost curve cuts the average cost curve from below, causing the average cost to decrease. This occurs when marginal cost is less than average cost, resulting in a decline in average cost.
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5) What happens in the market for airline travel when the price of traveling by rail decreases?
a) The demand curve shifts left.
b) The demand curve shifts right.
c) The supply curve shifts left.
d) The supply curve shifts right.
Correct Answer:
The correct answer is 'a`.
Explanation:
The demand curve for airline travel will shift left when the price of traveling by rail decreases. This is because rail and airline travel are substitutes, meaning that consumers can switch between the two modes of transportation depending on their preferences and budget. If the price of rail travel decreases, then it becomes more attractive to consumers, and some consumers will switch from airline travel to rail travel. This will reduce the demand for airline travel, and the demand curve will shift left.
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6) If diminishing marginal utility holds, and a person consumes less of a good, then all else being equal:
a) The price of the good will rise.
b) Marginal utility will rise
c) Expenditure on the good will increase
d) Marginal utility will decline
Correct Answer:
The correct answer is 'b'.
Explanation:
A decrease in the price of traveling by rail makes rail transportation more affordable and relatively cheaper compared to airline travel. As a result, consumers might opt for rail travel instead of air travel, which leads to an increase in the demand for rail transportation. This, in turn, reduces the demand for airline travel, causing the demand curve for airline travel to shift to the left.
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7) Prospective sunk costs:
a) Are relevant to economic decision-making.
b) Are considered as investment decisions.
c) Rise as output rises.
d) Do not occur when output equals zero.
Correct Answer:
The correct answer is 'd'.
Explanation:
Sunk costs are expenses that have been incurred and cannot be recovered, regardless of future decisions or outcomes. "Prospective" implies potential or anticipated costs. These costs, by definition, cannot occur when output (or activity) is at zero because they are related to future decisions or activities. Sunk costs only occur after an expense has been made and are irrelevant to future decision-making.
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8) An isoquant:
a) Must be linear.
b) Cannot have a negative slope.
c) Is a curve that shows all the combinations of inputs that yield the same total output.
d) Is a curve that shows the maximum total output as a function of the level of labor input.
Correct Answer:
The correct answer is 'c'.
Explanation:
Isoquants represent various combinations of inputs, such as labor and capital, that produce the same level of output. They are not required to be linear, and they illustrate the different input combinations that result in the same total output level. They help depict the various ways factors of production can be combined to achieve a specific level of output.
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9) Which of the following would cause a shift to the right of the supply curve for gasoline? I. Alarge increase in the price of public transportation. II. A large decrease in the price of automobiles. III. A large reduction in the costs of producing gasoline.
a) I only.
b) II only.
c) III only.
d) II and III only.
Correct Answer:
The correct answer is 'c'.
Explanation:
A large reduction in the costs of producing gasoline (III) would cause an increase in the supply of gasoline. Lower production costs would incentivize suppliers to offer more gasoline at every price level, leading to a rightward shift in the supply curve.
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10) If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is:
a) Raise prices.
b) Lower prices to gain revenue from extra volume.
c) Shut down immediately, but not liquidate the business.
d) Continue operating, but plan to go out of business.
Correct Answer:
The correct answer is 'b'.
Explanation:
When the price is between AVC and ATC, the firm is covering its variable costs but not fully covering its fixed costs. In a perfectly competitive market, the firm should continue operating in the short run, even if it's making some contribution towards covering fixed costs. Lowering prices to increase sales volume can help maximize revenue and contribute more toward covering the fixed costs, despite not making a profit. This approach is more practical than raising prices or immediately shutting down.
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