introduction to micro economics section 2 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Adam Smith, a Scottish moral philosopher and a pioneer of political economy, is cited as the “father of modern economics.”

He is best known for two classic works:

1. The Theory of Moral Sentiments (1759), and
2. An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

The Wealth of Nations is considered the first modern work of economics.

Answer: (d)

Average fixed cost curve is never ‘U’ shaped. Since total fixed costs are unchanged as output rises, the average fixed cost curve falls continuously as output is increased.

Answer: (c)

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.

Answer: (b)

In a free-market economy, resources are allocated through the interaction of free and self-directed market forces.

This means that what to produce is determined by consumers’ capacity to spend. How to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.

Answer: (b)

A Giffen good is a good whose consumption increases as its price increases. (For a normal good, as the price increases, consumption decreases.) Thus, the demand curve will be upward instead of downward sloping.

A Giffen good has an upward-sloping demand curve because it is exceptionally inferior. It has a strong negative income elasticity of demand such that when a price changes the income effect outweighs the substitution effect and this leads to a perverse demand curve.

Answer: (a)

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.