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

Answer: (d)

When the marginal revenue productivity of a factor is equal to the marginal- cost (MR=MC) of the factor, the firm will be in equilibrium and its profits maximized.

Equilibrium in perfect competition is the point where market demands will be equal to market supply.

The condition that price equals both average revenue and marginal revenue (P = AR = MR) is the standard condition for a perfectly competitive firm.

Answer: (d)

The addition to total cost by producing an additional unit of output by a firm is called Marginal cost. Average cost is the total cost of producing a given output divided by that output.

Answer: (a)

The equilibrium price is the price where the goods and services supplied by the producer equals the goods and services demanded by the customer(s).

How the equilibrium price is achieved is through the 'Invisible Hand', or market forces of the economy.

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: (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: (d)

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition.

Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes.

A monopoly is a market structure in which there is only one producer/ seller for a product.