introduction to macro economics section 5 MCQ Questions & Answers Detailed Explanation

Answer: (b)

Normal profit or economic profit is an economic condition occurring when the difference between a firm’s total revenue and the total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market.

In a sense, normal profit is the same as net profit which is calculated by subtracting a company’s total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time.

Accounting profit occurs when revenues are greater than costs, and not equal, as in the case of normal profit.

Answer: (b)

According to the Marginal Productivity Theory, the reward or the price of a factor unit depends upon its productivity or its contribution to the total product. While employing a factor, an employer compares the marginal revenue productivity (MRP) of the lost unit and the marginal cost of the factor.

He will employ a factor up to the point where the reward (marginal cost of the factor) paid to the factor equals its MRP.

If MRP is more than the marginal cost, the employer increases its profits by employing more units of the factor; on the other hand, if the marginal cost of the factor is greater than MRP, it will reduce employment to reduce its loss.

Answer: (d)

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit.

That is, it is the cost of producing one more unit of a good. Marginal cost is independent of the fixed cost and depends on the changes in the variable factors.

Since fixed costs do not change with output, there are no marginal fixed costs when output is increased in the short run.

It is only the variable costs that vary with output in the short run. Therefore, the marginal costs are in fact due to the changes in variable costs, and whatever the amount of fixed cost, the marginal cost is unaffected by it.

Answer: (a)

Disposable income is total personal income minus personal current taxes (or plus receipts of the government).

In national accounts, definitions, personal income, minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings

Answer: (c)

A Closed economy is an economy in which no activity is conducted with outside economies.

A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy's borders.

Answer: (d)

Desired savings are kept equal to desired investment by responses to interest rate changes.

Savings identity or the savings-investment identity is a concept in National Income Accounting stating that the amount saved (S) in an economy will be the amount invested (I). This identity only holds true because investment here is defined as including inventories.

Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by the business to increase investment.