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

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: (a)

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.

Answer: (d)

The law of demand states that other things remaining the same, the quantity demanded of a commodity is inversely related to its price.

Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same.

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.