introduction to micro economics section 2 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (d)

In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. The sunk cost is distinct from economic loss. Sunk costs may cause cost overrun.

Answer: (a)

Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).

It is the sacrifice related to the second-best choice available to someone, or group, who has picked among several mutually exclusive choices. When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource.

If, for example, we spend time and money going to a movie, we cannot spend that time at home reading a book, and we cannot spend the money on something else.

If our next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure we forgo by not reading the book.

Answer: (b)

A Giffen good is a good whose consumption increases as its price increases. (For a normal good, as the price increases, consumption decreases.) Thus, the demand curve will be upward instead of downward sloping.

A Giffen good has an upward-sloping demand curve because it is exceptionally inferior. It has a strong negative income elasticity of demand such that when a price changes the income effect outweighs the substitution effect and this leads to a perverse demand curve.

Answer: (b)

In a free-market economy, resources are allocated through the interaction of free and self-directed market forces.

This means that what to produce is determined by consumers’ capacity to spend. How to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.

Answer: (d)

The law of demand states that other things remaining the same, the quantity demanded of a commodity is inversely related to its price.

Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same.