introduction to micro economics section 4 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (a)

In economics, the law of demand is an economic law, which states that consumers buy more of a good when its price is lower and less when its price is higher.

The Law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant.

That is, if the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in the number of goods demanded by the consumer will be negatively correlated to the change in the price of the good.

Answer: (a)

Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unity.

That is, it is the cost of producing one more unit of a good. To illustrate marginal cost let’s assume that the total cost of producing 10,000 units is Rs. 50,000.

If we produce a total of 10,001 units the total cost is Rs. 50,002. That would mean the marginal cost—the cost of producing the next unit—was Rs. 2.

Answer: (a)

The interest rate is the cost of demanding or borrowing loanable funds. Alternatively, the interest rate is the rate of return from supplying or lending loanable funds. The demand for loanable funds takes account of the rate of return on capital.

The rate of return on capital is the additional revenue that a firm can earn from its employment of new capital. This additional revenue is usually measured as a percentage rate per unit of time, which is why it is called the rate of return on capital.

Firms will demand loanable funds as long as the rate of return on capital is greater than or equal to the interest rate paid on funds borrowed. In case of an increase in interest rate, return on capital decreases.

Answer: (b)

Under perfect competition, the control over price is completely eliminated because all firms produce homogeneous commodities. This condition ensures that the same price prevails in the market for the same commodity.

Answer: (d)

‘Producer Surplus’ is an economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good.

The difference, or surplus amount, is the benefit that the producer receives for selling the good in the market.