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Part 016 – Micro Economics Previous Year Questions

Q1. Which of the following most closely approximates our definition of oligopoly ?
(a) The cigarette industry.
(b) The barber shops
(c) The gasoline stations
(d) Wheat farmers
Ans: (a) An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Businesses that are part of an oligopoly share some common characteristics: they are less concentrated than in a monopoly, but more concentrated than in a competitive system. This creates a high amount of interdependence which encourages competition in non pricerelated areas, like advertising and packaging. The tobacco companies, soft drink companies, and airlines are examples of an imperfect oligopoly.

Q2. One of the essential conditions of perfect competition is :

(a) product differentiation
(b) multiplicity of prices for identical products at any one time.
(c) many sellers and a few buyers.
(d) Only one price for identical goods at any one time.
Ans: (d) The fundamental condition of perfect competition is that there must be a large number of sellers or firms. Homogeneous Commodity is the second fundamental condition of a perfect market. The products of all firms in the industry are homogeneous and identical. In other words, they are perfect substitutes for one another. There are no trademarks, patents etc. to distinguish the product of one seller from that of another. Under perfect competition, the control over price is completely eliminated because all firms produce homogeneous commodities. This condition ensures that the same price prevails in the market for the same commodity.

Q3. The theory of distribution relates to which of the following?

(a) The distribution of assets
(b) The distribution of income
(c) The distribution of factor payments
(d) Equality in the distribution of the income and wealth
Ans: (d) In economics, distribution theory is the systematic attempt to account for the sharing of the national income among the owners of the factors of production— land, labour, and capital. Traditionally, economists have studied how the costs of these factors and the size of their return—rent, wages, and profits— are fixed. The theory of distribution involves three distinguishable sets of questions. First, how is the national income distributed among persons? Second, what determines the prices of the factors of production? Third, how is the national income distributed proportionally among the factors of production?

Q4. If an industry is characterised by economies of scale then

(a) barriers to entry are not very large
(b) long run unit costs of production decreases as the quantity the firm produces increases
(c) capital requirement are small due to the efficiency of the large scale operation
(d) the costs of entry into the market are likely to be substantial
Ans: (b) In microeconomics, economies of scale are the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. “Economies of scale” is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase.

Q5. Movement along the same demand curve is know as

(a) Extension and Contraction of Demand
(b) Increase and Decrease of Demand
(c) Contraction of supply
(d) Increase of supply
Ans: (b) A shift in the demand curve is caused by a factor affecting demand other than a change in price. If any of these factors change then the amount consumers wish to purchase changes whatever the price. The shift in the demand curve is referred to as an increase or decrease in demand. A movement along the demand curve occurs when there is a change in price. This may occur because of a change in supply conditions. The factors affecting demand are assumed to be held constant. A change in price leads to a movement along the demand curve and is referred to as a change in quantity demanded.

Q6. When there is a change in demand leading to a shift of the Demand Curve to the right, at the same price as before, the quantity demanded will

(a) decrease
(b) increase
(c) remain the same
(d) contract
Ans: (b) In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. There is movement along a demand curve when a change in price causes the quantity demanded to change. When there is a change in an influencing factor other than price, there may be a shift in the demand curve to the left or to the right, as the quantity demanded increases or decreases at a given price. For example, if there is a positive news report about the product, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right.

Q7. The income elasticity of demand being greater than one, the commodity must be

(a) a necessity
(b) a luxury
(c) an inferior good
(d) None of these
Ans: (b) In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.

Q8. When there is one buyer and many sellers then that situation is called

(a) Monopoly
(b) Single buyer right
(c) Down right
(d) Double buyers right
Ans: (b) In economics, a monopsony (mono: single) is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of a good or service, the monopsonist may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers. It is also known as Single buyer Right. A single-payer universal health care system, in which the government is the only “buyer” of health care services, is an example of a monopsony. Another possible monopsony could develop in the exchange between the food industry and farmers.

Q9. The measure of a worker’s real wage is

(a) The change in his productivity over a given time
(b) His earnings after deduction at source
(c) His daily earnings
(d) The purchasing power of his earnings
Ans: (d) A real wage rate is a nominal wage rate divided by the price of a good and is a transparent measure of how much of the good an hour of work buys. It provides an important indicator of the living standards of workers, and also of the productivity of workers. While differences in earnings or incomes may be misleading indicators of worker welfare, real wage rates are comparable across time and location. Nominal wages are not sufficient to tell us if workers gain since, even if wages rise, the price of one of the goods also rises when moving to free trade. The real wage represents the purchasing power of wages— that is, the quantity of goods the wages will purchase.

Q10. Average Revenue means

(a) the revenue per unit of commodity sold
(b) the revenue from all commodities sold
(c) the profit realised from the marginal unit sold
(d) the profit realised by sale of all commodities
Ans: (a) Average revenue is the revenue per unit of the commodity sold. It can be obtained by dividing the TR by the number of units sold. Then, AR = TR/Q AR. In other words, it means price. Since the demand curve shows the relationship between price and the quantity demanded, it also represents the average revenue or price at which the various amounts of a commodity are sold, because the price offered by the buyer is the revenue from seller’s point of view. Therefore, average revenue curve of the firm is the same as demand curve of the consumer.

Q11. Economic rent refers to

(a) Payment made for the use of labour
(b) Payment made for the use of capital
(c) Payment made for the use of organisation
(d) Payment made for the use of land
Ans: (d) Rent refers to that part of payment by a tenant which is made only for the use of land, i.e., free gift of nature. The payment made by an agriculturist tenant to the landlord is not necessarily equals to the economic rent. A part of this payment may consist of interest on capital invested in the land by the landlord in the form of buildings, fences, tube wells, etc. The term ’economic rent’ refers to that part of payment which is made for the use of land only, and the total payment made by a tenant to the landlord is called ‘contract rent’. Economic rent is also called surplus because it emerges without any effort on the part of a landlord.

Q12. If the price of an inferior good falls, its demand

(a) rises
(b) falls
(c) remains constant
(d) can be any of the above
Ans: (a) Some goods are known as inferior goods. With inferior goods, there is an inverse relationship between real income and the demand for the good in question. If real incomes rise, the demand for an inferior good will fall. If real incomes fall (in a recession, for instance), the demand for an inferior good will rise. Example: Bus travel. As people get richer, they are more likely to buy themselves a car, or use a taxi, rather than rely on the more inferior bus, so the demand for bus travel falls as real incomes rise.

Q13. The Marginal Utility Curve slopes downward from left to right indicating

(a) A direct relationship between marginal utility and the stock of commodity
(b) A constant relationship between marginal utility and the stock of commodity
(c) A proportionate relationship between marginal utility and the stock of commodity
(d) An inverse relationship between marginal utility and the stock of commodity
Ans: (d) The Marginal Utility Curve is a curve illustrating the relation between the marginal utility obtained from consuming an additional unit of good and the quantity of the good consumed. The negative slope of the marginal utility curve reflects the law of diminishing marginal utility. The marginal utility curve also can be used to derive the demand curve. Marginal Utility is the utility derived from the last unit of a commodity purchased. One of the earliest explanations of the inverse relationship between price and quantity demanded is the law of diminishing marginal utility. This law suggests that as more of a product is consumed the marginal (additional) benefit to the consumer falls; hence consumers are prepared to pay less.

Q14. In equilibrium, a perfectly competitive firm will equate

(a) marginal social cost with marginal social benefit
(b) market supply with market demand
(c) marginal profit with marginal cost
(d) marginal revenue with marginal cost
Ans: (d) A perfectly competitive firm’s supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. In that price equals marginal revenue for a perfectly competitive firm, price is also equal to marginal cost. In other words, the firm produces by moving up and down along its marginal cost curve. The marginal cost curve is thus the perfectly competitive firm’s supply curve.

Q15. Equilibrium is a condition that can

(a) never change
(b) change only if some outside factor changes
(c) change only if some internal factor changes
(d) change only if government policies change
Ans: (c) In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. For example, in the standard text-book model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied is equal. Equilibrium can change if there is a change in demand or supply conditions which are internal factor changes. In equilibrium, the price is endogenous because producers change their price

Q16. Enterpreneurial ability is a special kind of labour that

(a) is hired out to firms at high wages
(b) organizes the process of production
(c) produces new capital goods to earn interest
(d) manages to avoid losses by continual innovation
Ans: (b) In economics, factors of production are the inputs to the production process. Factors of production’ may also refer specifically to the ‘primary factors’, which are stocks including land, labor (the ability to work), and capital goods applied to production. Many economists today consider “human capital” (skills and education) as the fourth factor of production, with entrepreneurship as a form of human capital. In markets, entrepreneurs combine the other factors of production, land, labor, and capital, in order to make a profit. Often these entrepreneurs are seen as innovators, developing new ways to produce and new products. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens.

Q17. Transfer earning or alternative cost is otherwise known as

(a) Variable cost
(b) Implicit cost
(c) Explicit cost
(d) Opportunity cost (economic cost)
Ans: (d) Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, we spend time and money going to a movie, we cannot spend that time at home reading a book, and we cannot spend the money on something else. If our next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure we forgo by not reading the book.

Q18. Demand of commodity mainly depends upon–

(a) Purchasing will
(b) Purchasing power
(c) Tax policy
(d) Advertisement
Ans: (b) The demand of commodity mainly stems from the consumption capacity of the buyer. Demand is equal to desire plus ability to pay plus will to spend. Demand for a commodity depends upon number of factors called Determinants. The demand function can be symbolically expressed as: QdN = f (PN, PR, I, T, E, O) where, QdN = Quantity demanded for the commodity; PN = Price of the commodity; PR = Price of related commodity; I = Income of consumers; T = Taste & Preferences of the consumers; in English = Expectations about the future prices; and O= other factors.

Q19. Equilibrium price means

(a) Price determined by demand and supply
(b) Price determined by Cost and Profit
(c) Price determined by Cost of production
(d) Price determined to maximise profit
Ans: (a) Equilibrium price is a state in economy where the supply of goods matches demand. When a major index experiences a period of consolidation or sideways momentum, it can be said that the forces of supply and demand are relatively equal and that the market is in a state of equilibrium. In short, it is the market price at which the supply of an item equals the quantity demanded.

Q20. When marginal utility is zero, the total utility is

(a) Minimum (b) Increasing
(c) Maximum (d) Decreasing
Ans: (c) Marginal utility measures the extra utility (or satisfaction) from consuming an additional unit of a product. Total utility is the total satisfaction from the consumption of the product. According to the Law of Diminishing Marginal Utility, total utility increases at a diminishing rate. When marginal utility is 0 this means there is no increase in total satisfaction from the consumption of that unit. So the total unit is at maximum.

Q21. Operating Surplus arises in the

(a) Government Sector
(b) Production for self-consumption
(c) Subsistence farming
(d) Enterprise Sector
Ans: (a) Operating surplus is an accounting concept used in national accounts statistics (such as United Nations System of National Accounts (UNSNA) and in corporate and government accounts. It is the balancing item of the Generation of Income Account in the UNSNA. It may be used in macro-economics as a proxy for total pre-tax profit income, although entrepreneurial income may provide a better measure of business profits. In UNSNA, “implicit (imputed) rents” on land owned by the enterprise and the “implicit (imputed) interest” chargeable on the use of the enterprise’s own funds are excluded from operating surplus.

Q22. Sellers market denotes a situation where :

(a) commodities are available at competitive rates
(b) demand exceeds supply
(c) supply exceeds demand
(d) supply and demand are evenly balanced
Ans: (b) Seller’s market is a market which has more buyers than sellers. High prices result from this excess of demand over supply. The opposite of the seller’s market is the buyer’s market, where supply greatly exceeds demand.

Q23. The fixed cost on such factors of production which are neither hired nor bought by the firm is called

(a) social cost
(b) opportunity cost
(c) economic cost
(d) surcharged cost
Ans: (a) Social cost is defined as a sum of the private cost and external costs. The social cost is generally not borne by an individual. It may be borne by entire society, city or even country. This is not a one-time cost like private cost. This cost is recurrent and it is very difficult to calculate due to the inclusion of external costs. The cost may result from an event, action, or policy changes. Social costs are not calculated whenever a seller sells any product or item to buyer. This cost is added up from the use of that product.

Q24. The ‘break-even point’ is where

(a) marginal revenue equals marginal cost
(b) average revenue equals average cost
(c) total revenue equals total cost
(d) None of these
Ans: (b) The break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has “broken even”. A profit or a loss has not been made, although opportunity costs have been “paid”, and capital has received the risk-adjusted, expected return.

Q25. One of the essential conditions of Monopolistic competition is

(a) Many buyers but one seller
(b) Price discrimination
(c) Product differentiation
(d) Homogeneous product
Ans: (c) Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit.

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