introduction to macro economics section 5 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (a)

Disposable income is total personal income minus personal current taxes (or plus receipts of the government).

In national accounts, definitions, personal income, minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings

Answer: (a)

The Gross Domestic Income (GDI) is the total income received by all sectors of an economy within a nation. It includes the sum of all wages, profits, and taxes, minus subsidies.

Since all income is derived from production (including the production of services), the gross domestic income of a country should exactly equal its gross domestic product (GDP).

Answer: (b)

Normal profit or economic profit is an economic condition occurring when the difference between a firm’s total revenue and the total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market.

In a sense, normal profit is the same as net profit which is calculated by subtracting a company’s total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time.

Accounting profit occurs when revenues are greater than costs, and not equal, as in the case of normal profit.

Answer: (b)

According to the Marginal Productivity Theory, the reward or the price of a factor unit depends upon its productivity or its contribution to the total product. While employing a factor, an employer compares the marginal revenue productivity (MRP) of the lost unit and the marginal cost of the factor.

He will employ a factor up to the point where the reward (marginal cost of the factor) paid to the factor equals its MRP.

If MRP is more than the marginal cost, the employer increases its profits by employing more units of the factor; on the other hand, if the marginal cost of the factor is greater than MRP, it will reduce employment to reduce its loss.

Answer: (d)

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit.

That is, it is the cost of producing one more unit of a good. Marginal cost is independent of the fixed cost and depends on the changes in the variable factors.

Since fixed costs do not change with output, there are no marginal fixed costs when output is increased in the short run.

It is only the variable costs that vary with output in the short run. Therefore, the marginal costs are in fact due to the changes in variable costs, and whatever the amount of fixed cost, the marginal cost is unaffected by it.