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

Answer: (a)

Engel’s law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises.

In other words, the income elasticity of demand for food is between 0 and 1.

Engel’s Law doesn’t imply that food spending remains unchanged as income increases: It suggests that consumers increase their expenditures for food products (in % terms) less than their increases in income.

Answer: (c)

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.

Some of its characteristics are:

1. Profit maximization conditions;
2. Number of firms;
3. Product differentiation;
4. Interdependence;
5. Non-Price Competition, etc.

The distinctive feature of an oligopoly is interdependence.

Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm’s market actions and will respond appropriately.

This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm’s countermoves.

Answer: (b)

Full cost pricing is a practice where the price of a product is calculated by a firm on the basis of its direct costs per unit of output plus a markup to cover overhead costs and profits.

Having worked out what average total cost would be if the level of output expected for the next period of time were actually achieved, firms add to this a 'satisfactory' profit margin.

This is known as 'full cost' pricing. The price is equal to 'full' cost, including an acceptable profit.

Answer: (d)

The theory of Economic problems states that there is scarcity, or that the finite resources available are insufficient to satisfy all human wants and needs.

The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labour) are to be allocated.

Answer: (c)

Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.

Answer: (a)

Any straight-line supply curve passing through the origin has an elasticity of supply equal to 1. The different types of price elasticity of supply are listed below: