introduction to micro economics section 1 MCQ Questions & Answers Detailed Explanation

Answer: (a)

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?

Answer: (a)

A perfectly competitive industry is comprised of a large number of relatively small firms that sell identical products.

Each perfectly competitive firm is so small relative to the size of the market that it has no market control, it has no ability to control the price.

In other words, it can sell any quantity of output it wants at the going market price. This translates into a horizontal or perfectly elastic demand curve.

Answer: (b)

Because the monopolist is the market's only supplier, the demand curve the monopolist faces is the market demand curve.

The market demand curve is downward sloping, reflecting the law of demand.

The fact that the monopolist faces a downward-sloping demand curve implies that the price a monopolist can expect to receive for its output will not remain constant as the monopolist increases its output.

Answer: (d)

The Law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant.

That is, if the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in the quantity of goods demanded by the consumer will be negatively correlated to the change in the price of the good.

When there is excess demand for the commodity the price starts rising and it continues to rise till equilibrium price is reached.

Answer: (c)

There are 4 factors of production;

1. land,
2. labour,
3. capital and
4. entrepreneurship.

The demand for the factors of production is a derived demand. That means these factors of production are demanded because there is a demand for the end product they produce.

Answer: (b)

The stages of Law of Variable Proportion are:

Stage 1: Increasing return;

Stage 2: Diminishing return; and

Stage 3: Negative Return.

In the third stage, the Marginal Product of the variable factor is zero. In this stage, the Total Product starts diminishing.