introduction to micro economics section 5 MCQ Questions & Answers Detailed Explanation

Answer: (a)

The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

It is equivalent to what a factor could earn for the firm in alternative uses.

Answer: (c)

J.S. Mill developed the wages-fund theory. This theory of wage was an attempt to show that in certain circumstances wages could rise above subsistence level.

According to this theory, a fund of capital has to be accumulated in advance before wages could be paid. This fund of capital is called wages-fund out of which wages are paid to labourers.

Answer: (b)

Production involves the transformation of inputs into outputs. The output is a function of the input. The functional relationship between physical inputs and the physical output of a firm is called the production function. The word ‘function’ in mathematics means the precise relationship that exists between one dependent variable and a number (or one) of independent variables.

The production function states the maximum quantity of output that can be produced from any given quantity of various inputs during a given period of time.

Answer: (a)

The law of diminishing returns (also the law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant (“ceteris paribus”), will at some point yield lower per-unit returns.

The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact, this is common.

Answer: (a)

Elasticity (e) expressed by the formula 1 > e > 0 is relatively inelastic. Elasticity is responsiveness of one variable to a change in another, when other conditions are held constant.

Answer: (c)

According to the Law of demand, consumers buy more of a good when its price is lower and less when its price is higher.

It states that the quantity demanded and the prices of a commodity are inversely related, other things remaining constant.