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

Answer: (a)

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

While businesses can produce and attempt to sell whatever goods they choose, if the goods fail to satisfy the wants and needs, consumers decide not to buy.

If the consumers do not buy, the businesses do not sell and the goods are not produced.

Answer: (c)

Under perfect competition, the firms operate at the minimum point of the long-run average cost curve.

In this way, the actual long-run output of the firm under monopolistic competition falls short of what is produced under perfect competition which can be considered the socially ideal output. This gives the measure of excess capacity which lies unutilized under imperfect competition.

Answer: (b)

Price elasticity of demand is a measure of the responsiveness of the quantity of a good or service demanded to changes in its price.

This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good.

Answer: (b)

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location).

In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.

There are six characteristics of monopolistic competition (MC):

1. Product differentiation;
2. many firms;
3. Free entry and exit in the long run;
4. Independent decision making;
5. market power; and
6. Buyers and Sellers do not have perfect information.

Toothpaste, toilet papers, computer software and operating systems are examples of differentiated products.

Answer: (c)

The water diamond paradox or puzzle was a mystery of Adam Smith who observed that the price of diamonds was much higher than that of water even though water seemed to offer far more utility than diamonds.

The resolution of this puzzle or paradox is based on the distinction between marginal utility and total utility. The marginal utility of diamonds is very high and so consumers are willing to pay higher prices for diamonds, than for water.