introduction to micro economics section 4 MCQ Questions & Answers Detailed Explanation

Answer: (b)

According to Keynes’ psychological law of consumption, increased aggregate consumption is due to increased aggregate income – aggregate consumption increases with increase in aggregate income but the increase in consumption is less than the increase in the income.

This is because when the basic necessities or demands of the people are already fulfilled, they start saving the extra additional income.

Answer: (d)

For certain goods called necessities, demand is not related to income. Demand for salt does not increase with the increase in income & does not decrease with the decrease in income.

It means that it is irrespective of income. The demand curve slopes downward for goods like salt, but it is inelastic.

Answer: (c)

Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale. When the firm produces below its minimum efficient scale, it is under-utilizing its available resources.

In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.

Answer: (b)

Under perfect competition, the control over price is completely eliminated because all firms produce homogeneous commodities. This condition ensures that the same price prevails in the market for the same commodity.

Answer: (a)

The interest rate is the cost of demanding or borrowing loanable funds. Alternatively, the interest rate is the rate of return from supplying or lending loanable funds. The demand for loanable funds takes account of the rate of return on capital.

The rate of return on capital is the additional revenue that a firm can earn from its employment of new capital. This additional revenue is usually measured as a percentage rate per unit of time, which is why it is called the rate of return on capital.

Firms will demand loanable funds as long as the rate of return on capital is greater than or equal to the interest rate paid on funds borrowed. In case of an increase in interest rate, return on capital decreases.

Answer: (a)

Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unity.

That is, it is the cost of producing one more unit of a good. To illustrate marginal cost let’s assume that the total cost of producing 10,000 units is Rs. 50,000.

If we produce a total of 10,001 units the total cost is Rs. 50,002. That would mean the marginal cost—the cost of producing the next unit—was Rs. 2.