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

Answer: (d)

Derived demand is a term in economics, where demand for one good or service occurs as a result of the demand for another intermediate/final good or service. This may occur as the former is a part of the production of the second.

For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed.

As the demand for coal increases, so does its price.

Answer: (d)

The difference between the actual market wage and the reservation wage is called economic rent.

Therefore, the lower a person’s reservation wage compared to the actual wage, the more rent they receive. While labour supply decisions determine the reservation wage, the employment decisions of firms establish the value of the real wage at which any person becomes unemployed (The Goals of Macroeconomic Policy by Martin Prachowny, p. 58).

Answer: (c)

When the percentage change in quantity demanded is less than the percentage change in price, then the demand for the commodity is said to be inelastic.

Price elasticity of demand refers to the degree of responsiveness of quantity demanded to change in price.

Answer: (b)

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location).

In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.

There are six characteristics of monopolistic competition (MC):

1. Product differentiation;
2. many firms;
3. Free entry and exit in the long run;
4. Independent decision making;
5. market power; and
6. Buyers and Sellers do not have perfect information.

Toothpaste, toilet papers, computer software and operating systems are examples of differentiated products.

Answer: (b)

Price elasticity of demand is a measure of the responsiveness of the quantity of a good or service demanded to changes in its price.

This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good.

Answer: (c)

Under perfect competition, the firms operate at the minimum point of the long-run average cost curve.

In this way, the actual long-run output of the firm under monopolistic competition falls short of what is produced under perfect competition which can be considered the socially ideal output. This gives the measure of excess capacity which lies unutilized under imperfect competition.