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

Answer: (a)

The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

It is equivalent to what a factor could earn for the firm in alternative uses.

Answer: (c)

J.S. Mill developed the wages-fund theory. This theory of wage was an attempt to show that in certain circumstances wages could rise above subsistence level.

According to this theory, a fund of capital has to be accumulated in advance before wages could be paid. This fund of capital is called wages-fund out of which wages are paid to labourers.

Answer: (b)

Production involves the transformation of inputs into outputs. The output is a function of the input. The functional relationship between physical inputs and the physical output of a firm is called the production function. The word ‘function’ in mathematics means the precise relationship that exists between one dependent variable and a number (or one) of independent variables.

The production function states the maximum quantity of output that can be produced from any given quantity of various inputs during a given period of time.

Answer: (b)

The Marginal Propensity to Consume (MPC) is measured as the ratio of the change in consumption to the change in income, thus giving us a figure between 0 and 1.

The MPC can be more than one if the subject borrowed money to finance expenditures higher than their income. One minus the MPC equals the marginal propensity to save.

Answer: (c)

In economics, factors of production are the inputs to the production process. Factors of production’ may also refer specifically to the ‘primary factors’, which are stocks including land, labour (the ability to work), and capital goods applied to production. Many economists today consider “human capital” (skills and education) as the fourth factor of production, with entrepreneurship as a form of human capital.

In markets, entrepreneurs combine the other factors of production, land, labour, and capital, in order to make a profit. Often these entrepreneurs are seen as innovators, developing new ways to produce and new products. In a planned economy, central planners decide how land, labour, and capital should be used to provide maximum benefit for all citizens.