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

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: (b)

All goods which are meant either

1. for consumption by consumers or
2. for investment by firms are called final goods.

They are finished goods, meant for final use. These are neither resold nor do they enter into further stages of production. For example, Cars, television sets, cloth, food, machinery, equipment etc. are final goods.

Answer: (c)

In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good.

An Inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers' demand increases when their income increases.

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: (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: (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.