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

Answer: (d)

Duopoly means a market in which two producers of the same good are predominantly powerful. In some theories, the term is used specifically to denote the existence of only two suppliers of a good.

Competition refers to a condition in a market in which firms are attempting to increase their profits at the expense of their rivals.

Oligopoly refers to a market that is dominated by a few firms producing differentiated products.

Monopoly refers to a market in which there is only one supplier and no other firms are able to enter. According to the Fair Trading Act, 1973, a Monopoly is defined as any firm (or group of firms acting together) that accounts for 25 per cent or more of the market output of a good or service.

Answer: (d)

Economists divide the factors of production into four categories: land, labour, capital, and entrepreneurship. An entrepreneur is a person who combines the other factors of production – land, labour, and capital – to earn a profit.

His profit is in the form of Net Profit which is achieved by deducting other elements (such as planning the production, producing the commodities on the basis of demand, looking after efficient distribution) from the gross profit.

Answer: (b)

Schumpeter’s (1934) original theory of innovative profits emphasized the role of entrepreneurship (his term was entrepreneurial profits) and the seeking out of opportunities for novel value-generating activities which would expand (and transform) the circular flow of income.

It did so with reference to a distinction between invention or discovery on the one hand and innovation, commercialization and entrepreneurship on the other.

This separation of invention and innovation marked out the typical nineteenth-century institutional model of innovation, in which independent inventors typically fed discoveries as potential inputs to entrepreneurial firms.

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: (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: (c)

The water diamond paradox or puzzle was a mystery of Adam Smith who observed that the price of diamonds was much higher than that of water even though water seemed to offer far more utility than diamonds.

The resolution of this puzzle or paradox is based on the distinction between marginal utility and total utility. The marginal utility of diamonds is very high and so consumers are willing to pay higher prices for diamonds, than for water.