introduction to micro economics section 7 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Price elasticity of demand measures consumer response to price changes. If consumers are relatively sensitive to price changes, demand is elastic; if they are relatively unresponsive to price changes, demand is inelastic.

Perfectly inelastic demand is graphed as a line parallel to the vertical axis; perfectly elastic demand is shown by a line above and parallels to the horizontal axis.

When the demand for a commodity is perfectly elastic, the quantity of demand keeps changing with the price. So the coefficient of price elasticity of demand is infinity.

Answer: (b)

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.

Businesses that are part of an oligopoly share some common characteristics: they are less concentrated than in a monopoly but more concentrated than in a competitive system.

This creates a high amount of interdependence which encourages competition in non-pricerelated areas, like advertising and packaging. Tobacco companies, soft drink companies, and airlines are examples of an imperfect oligopoly.

Answer: (b)

The classical economists were of the opinion that – the law of diminishing returns applies only to agriculture and to some extractive industries, such as mining, fisheries urban land, etc. However, it is applicable to other sectors such as manufacturing as well.

Answer: (b)

In macroeconomic theory, liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936) to explain the determination of the interest rate by the supply and demand for money. The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds.

Interest rates, he argues, cannot be a reward for saving as such because, if a person hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although he has nevertheless refrained from consuming all his current income. Instead of a reward for saving, interest in the Keynesian analysis is a reward for parting with liquidity.

Answer: (b)

Complete market information is one of the main features of Perfect Competition. This condition implies close contact between buyers and sellers.

Both of them possess complete knowledge about the prices at which goods are being bought and sold and the prices at which others are prepared to buy or sell.

Answer: (c)

In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve.

There is movement along a demand curve when a change in price causes the quantity demanded to change. When there is a change in an influencing factor other than price, there may be a shift in the demand curve to the left or to the right, as the quantity demanded increases or decreases at a given price.

For example, if there is a positive news report about the product, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right.