Microeconomics MCQs | ECO402 MCQs | Set 9
Microeconomics MCQs | ECO402 MCQs | Set 9
MCQs (Multiple Choice Questions)
1) Which of the following will NOT cause a rightward shift in the demand curve for beer?
a) A change in the price of beer.
b) A decrease in the price of potato chips (a compliment).
c) A health study indicating positive health benefits of moderate beer consumption.
d) An increase in the price of French wine (a substitute).
Correct Answer:
The correct answer is 'a'.
Explanation:
A change in the price of beer would not shift the demand curve; rather, it would cause movement along the existing demand curve.
However, factors such as a decrease in the price of a complementary good (like potato chips), a health study indicating positive benefits, or an increase in the price of a substitute (like French wine) could potentially cause a rightward shift in the demand curve for beer by increasing consumer interest and preferences for beer.
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2) The assumption that preferences are complete:
a) Recognizes that there may be pairs of market baskets that cannot be compared.
b) Means that between any two market baskets of goods, the consumer can determine that either one is preferred to the other or that she is indifferent between them.
c) Means that a consumer will spend his entire income.
d) Is unnecessary, as long as transitivity is assumed.
Correct Answer:
The correct answer is 'b'.
Explanation:
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3) The slope of an indifference curve reveals:
b) The marginal rate of substitution of one good for another good.
c) The ratio of market prices.
d) That preferences are transitive.
Correct Answer:
The correct answer is 'b'.
Explanation:
The slope of an indifference curve illustrates the rate at which a consumer is willing to exchange or substitute one good for another while maintaining the same level of satisfaction. This is known as the marginal rate of substitution (MRS), which represents the quantity of one good that a consumer is willing to give up in exchange for one additional unit of another good, without changing their level of satisfaction or utility.
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4) Ahmad's preferences for good X and good Y are shown in the diagram
below.
Based on figure given above, it can be inferred that:
a) Ahmad does not consider good X as "good."
b) Ahmad will never purchase any of good Y.
c) Ahmad regards good X and good Y as perfect substitutes.
d) Ahmad regards good X and good Y as perfect complements.
Correct Answer:
The correct answer is 'b'.
Explanation:
The indifference curves also show that Ahmad is willing to substitute good X for good Y and vice versa. This means that good X and good Y are not perfect substitutes or perfect complements. So, statements (c) and (d) are incorrect.
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5) If indifference curves are concave to the origin, which of the following assumptions regarding preferences is being violated?
a) Diminishing marginal rates of substitution.
b) Transitivity of preferences.
c) More is preferred to less.
d) Completeness.
Correct Answer:
The correct answer is 'a'.
Explanation:
The concavity of indifference curves implies that the marginal rate of substitution (MRS) diminishes as one moves along the curve. This means that as more of one good is substituted for another, the additional utility gained from each unit of the second good decreases. If the MRS doesn't remain constant, the assumption of diminishing marginal rates of substitution is violated.
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6) Assume that food is measured on the horizontal axis and clothing on the vertical the price of food falls relative to that of clothing then the budget line will be
a) Become flatter
b) Become steeper
c) Shift outward
d) Become steeper or flatter depending on the relationship between prices and income.
Correct Answer:
The correct answer is 'a'.
Explanation:
When the price of one good (in this case, food) falls relative to the price of another good (clothing), it changes the slope of the budget line. The budget line becomes flatter because the consumer can now purchase relatively more units of food without sacrificing as much clothing as they did before due to the decrease in the price of food.
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7) Denise is shopping for lobsters and eclairs. When she faces budget line b1, she market basket A over market basket B. When she faces budget line b2, she chooses basket B over basket C. Which of the following assumptions of consumer theory helps us determine Denise’s preference for ordering over basket A and basket C?
a) Completeness.
b) More is better than less.
c) Transitivity.
d) Convexity.
Correct Answer:
The correct answer is 'c'.
Explanation:
Transitivity of preferences means that if a consumer prefers basket A over basket B, and basket B over basket C, then the consumer must also prefer basket A over basket C. In this scenario, if Denise chooses basket A over basket B when facing budget line b1 and basket B over basket C when facing budget line b2, the assumption of transitivity allows us to conclude that Denise should prefer basket A over basket C.
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8) Which of the following is NOT an assumption regarding people's preferences in the theory of consumer behavior?
a) Preferences are complete
b) Consumers prefer more of a good to less.
c) Preferences are transitive.
d) None of the given options.
Correct Answer:
The correct answer is 'b'.
Explanation:
This statement, "Consumers prefer more of a good to less," is an essential assumption and a fundamental aspect of consumer behavior. The other options—preferences being complete (a), preferences being transitive (c), are also standard assumptions in consumer theory. Therefore, the correct answer is (d) None of the given options does not correctly identify an assumption that is not part of the theory of consumer behavior.
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9) If current output is less than the profit-maximizing output then which of the following must be TRUE?
a) Total revenue is less than total cost.
b) Average revenue is greater than average cost.
c) Marginal revenue is less than marginal cost.
d) Marginal revenue is greater than marginal cost.
Correct Answer:
The correct answer is 'c'.
Explanation:
When operating below the profit-maximizing output level, the marginal revenue earned from selling an additional unit is less than the marginal cost of producing that additional unit. At the profit-maximizing output level, marginal revenue equals marginal cost. Therefore, if the firm is producing below this level, marginal revenue is less than marginal cost.
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10) The indifference curve between expected return and the standard deviation of risk return for a-averse investor is:
a) Downward-sloping.
b) Upward-sloping.
c) Horizontal.
d) Vertical.
Correct Answer:
The correct answer is 'a'.
Explanation:
For a risk-averse investor, the indifference curve between expected return and risk (measured by standard deviation) is downward-sloping. This reflects the investor's preference for higher returns and a lower level of risk. Investors generally aim to achieve higher returns for a given level of risk, resulting in a negative relationship between the expected return and the level of risk (standard deviation).
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