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

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: (a)

In a bilateral monopoly, there is both a monopoly (a single seller) and monopsony (a single buyer) in the same market. The one supplier tends to act as monopoly power and looks to charge high prices to the one buyer. The lone buyer looks towards paying a price that is as low as possible.

Since both parties have conflicting goals, the two sides negotiate based on the relative bargaining power of each, with a final price settling in between the two sides’ points of maximum profit.

Answer: (b)

Consumer sovereignty means that buyers ultimately determine which goods and services remain in production.

In unrestricted markets, those with income or wealth are able to use their purchasing power to motivate producers. So ultimately it means how the consumers want to spend their incomes.

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: (d)

In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.

The primary purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors.

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.