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CHAPTER 25
1. Monopolistic competition is characterized by a: 
A) few dominant firms and low entry barriers. 
B) large number of firms and substantial entry barriers. 
C) large number of firms and low entry barriers. 
D) few dominant firms and substantial entry barriers. 

2. Monopolistic competition resembles pure competition because: 
A) both industries emphasize nonprice competition. 
B) in both instances firms will operate at the minimum point on their long-run average total cost curves. 
C) both industries entail the production of differentiated products. 
D) barriers to entry are either weak or nonexistent. 

3. Nonprice competition refers to: 
A) competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts. 
B) price increases by a firm which are ignored by its rivals. 
C) advertising, product promotion, and changes in the real or perceived characteristics of a product. 
D) reductions in production costs which are not reflected in price reductions. 

4. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because: 
A) the number of firms in the industry is larger. 
B) monopolistically competitive firms cannot realize an economic profit in the long run. 
C) of product differentiation and consequent product promotion activities. 
D) monopolistically competitive producers are mutually interdependent in their pricing strategies. 

5. Monopolistically competitive and purely competitive industries are similar in that: 
A) both are assured of short-run economic profits. 
B) both produce differentiated products. 
C) the demand curves facing individual firms are perfectly elastic in both industries. 
D) there are few, if any, barriers to entry. 

6. The monopolistically competitive seller's demand curve will become more elastic the: 
A) more significant the barriers to entering the industry. 
B) greater the degree of product differentiation. 
C) larger the number of competitors. 
D) smaller the number of competitors. 

7. The price elasticity of a monopolistically competitive firm's demand curve varies: 
A) inversely with the number of competitors and the degree of product differentiation. 
B) directly with the number of competitors and the degree of product differentiation. 
C) directly with the number of competitors, but inversely with the degree of product differentiation. 
D) inversely with the number of competitors, but directly with the degree of product differentiation. 

8. In long-run equilibrium a monopolistically competitive firm's price will: 
A) be less than both MC and ATC. 
B) exceed ATC, but equal MC. 
C) exceed MC, but equal ATC. 
D) exceed both MC and ATC. 

9. The term "oligopoly" indicates: 
A) a one-firm industry. 
B) many producers of a differentiated product. 
C) a few firms producing either a differentiated or a homogeneous product. 
D) an industry whose four-firm concentration ratio is low. 

10. Barriers to entry in oligopolistic industries may consist of: 
A) economies of scale. 
B) patents. 
C) ownership of essential resources. 
D) all of the above. 

11. Oligopolistic industries: 
A) are characterized by a relatively large number of small sellers. 
B) may produce either standardized or differentiated products. 
C) always produce differentiated products. 
D) always produce standardized products. 

12. Prices are likely to be least flexible:
A) in oligopoly. 
B) in monopolistic competition. 
C) where product demand is inelastic.
D) in pure competition.

13. Concentration ratios: 
A) may overstate the degree of competition because they ignore imported products. 
B) may overstate the degree of competition because interindustry competition is ignored. 
C) may understate the degree of competition because they ignore imported products. 
D) provide detailed insights as to the price and output behavior of firms which comprise the various industries. 

14. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl Index for this industry: 
A) is 2,525. 
B) is 1,600. 
C) is 2,200. 
D) is 80. 
E) cannot be determined from the information given. 

15. Game theory can be used to demonstrate: 
A) that oligopolistic firms are mutually interdependent. 
B) that independent pricing will lead to low-price policies. 
C) that oligopolists can increase their profits through collusion. 
D) all of the above. 

16. The kinked-demand curve of an oligopolist is based on the assumption that: 
A) competitors will follow a price cut but ignore a price increase. 
B) competitors will match both price cuts and price increases. 
C) competitors will ignore a price cut but follow a price increase. 
D) there is no product differentiation. 

17. The kinked-demand curve model of oligopoly is useful in explaining: 
A) the way that collusion works. 
B) why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost. 
C) why oligopolistic prices might change only infrequently. 
D) the process by which oligopolists merge with one another. 

18. If competing oligopolists completely ignore oligopolist X's price changes, then X's: 
A) demand curve will be less elastic than if the other oligopolists matched X's price changes. 
B) demand curve will be more elastic than if the other oligopolists matched X's price changes. 
C) marginal revenue curve will have a vertical gap. 
D) demand and marginal revenue curves will coincide. 

19. The kinked-demand curve model of oligopoly: 
A) assumes a firm's rivals will ignore a price cut but match a price increase. 
B) embodies the possibility that changes in unit costs will have no effect upon equilibrium price and output. 
C) assumes a firm's rivals will match any price change it may initiate. 
D) assumes a firm's rivals will ignore any price change it may initiate. 

20. A kink may exist in an oligopolist's demand curve because: 
A) products are differentiated. 
B) an abrupt change in price elasticity occurs. 
C) the firm will ignore price cuts by rivals, but will match their price increases. 
D) there is a gap in marginal costs. 

Answer Key: Chapter 25
1. C 
2. D 
3. C 
4. C 
5. D 
6. C 
7. C 
8. C 
9. C 
10. D 
11. B 
12. A 
13. C 
14. C 
15. D 
16. A 
17. C 
18. B 
19. B 

20. B

ECO401 Solved MCQ

“Decreases in aggregate demand decrease real output but leave the price level largely unaffected”.  This is the point of view of which of the following schools of thought?

       ► Monetarist school of thought.

       ► New Classical school of thought.

       ► Real business cycle school of thought.

 

       ► Keynesian school of thought. 

The average propensity to consume is the ratio of:

Select correct option:

 

A change in consumption to a change in disposable income.

A change in consumption to total disposable income at a specific income level.

Total consumption to total disposable income at a specific income level.

Total consumption to a change in disposable income.

Reference

 

 

It measures the percentage change in demand given a percentage change in consumer's income.
Select correct option:
       Price elasticity of demand
       Income elasticity of demand
       Supply price elasticity
       Cross price elasticity

 

Which of the following concepts apply to oligopoly more than to any other market structure?
Select correct option:
       Advertising and product differentiation
       Easy entry and more than one firm in the market
       Homogeneous product and perfect information
       Concentration and interdependence

 

Goods produced by oligopolistic industries are typically:
Select correct option:
       Standardized
       Differentiated
       Differentiated if industrial goods
       Differentiated if consumer goods

 

Many industrial goods produced by oligopolies are standardized--copper, zinc, and steel, for example. Oligopolistic consumer goods industries are typically differentiated and are characterized by substantial advertising

 

 

(NDP), start with Gross Domestic Product and subtract:

 

       ► Depreciation.

       ► Depreciation and indirect business taxes.

       ► Depreciation, indirect business taxes and corporate profits.

       ► Depreciation, indirect business taxes, corporate profits and social insurance contributions

 

REF: 

 

Net domestic product = NDP = GDP – depreciation.

National income = NDP – statistical discrepancy + NFFI.

Personal income = national income  - taxes on production and imports – social security contributions – corporate profits tax and undistributed profits + transfer payments (like social security income).

Disposable income = personal income – personal taxes and can be either consumed or saved.

Note from definition of disposable income that disposable income + personal Taxes = personal income

The Economizing Problem
1. The fundamental problem of economics implies that:
a. governments must be relied upon to supply essential goods and services
b. inflation and unemployment are unavoidable
c. growing populations will deplete natural resources
d. individuals and communities must make choices among competing alternatives
(FH,vuZs)
Answer: d
Feedback: The fundamental economic problem is one of scarce resources relative to human wants. Such scarcity can never be eliminated; it implies we must make choices.

2. An economy that has achieved “full production” has achieved:
a. Both allocative and productive efficiency
b. Allocative but not productive efficiency
c. Productive but not allocative efficiency
d. Neither allocative nor productive efficiency
Answer: a
Feedback: An economy that is both producing the goods and services most desired by society (allocative efficiency) and is producing them at lowest cost (productive efficiency) is said to have achieved “full production.”

3. Government authorities have managed to reduce the unemployment rate from 6% to 4% in a hypothetical economy. As a result:
a. the economy’s production possibilities curve has shifted outward
b. the economy has moved downward along its production possibilities curve
c. the economy has moved from a point inside to a point closer to its production possibilities curve
d. the economy’s production possibilities curve has become steeper
Answer: c
Feedback: The construction of the production possibilities curve assumes that all available resources are fully employed. A reduction in unemployment will bring the economy closer to this frontier.

4. Consider an economy that can produce either capital goods or consumer goods. If the opportunity cost of consumer goods is always 5 capital goods, then:
a. the production possibilities curve is a straight line
b. the opportunity cost of capital goods is always 5 consumer goods
c. the production possibilities curve is upward sloping
d. the production possibilities curve is bowed inward
Answer: a
Feedback: A constant opportunity cost implies that any increase in consumer goods always requires the same sacrifice of capital goods, in this case 5 units. In this case, the law of increasing cost does not apply and the production possibilities curve is straight line.

5. Which of the following would most likely shift the production possibilities curve for a nation outward?
a. A reduction in unemployment
b. An increase in the production of capital goods
c. A reduction in discrimination
d. An increase in the production of consumer goods
Answer: b
Feedback: Increased production of capital goods will create more productive resources and increase the productive capacity of the nation. A reduction in unemployment or discrimination will not increase productive capacity, but will push the nation closer to its production possibilities curve from a point inside it.


6. Margaret decides to stay home and study for her exam rather than going out with her friends to a movie. Her dilemma is an example of:
a. the economic perspective
b. marginal analysis
c. allocative efficiency
d. opportunity cost
Answer: d
Feedback: Opportunity cost is defined as the value of the best foregone alternative. In this case, Margaret has foregone the movie in order to study.

9. A nation achieves “allocative efficiency” if:
a. it produces at a point on, rather than inside, its production possibilities curve
b. it produces that combination of goods most desired by society
c. all available resources are fully employed
d. marginal benefit exceeds marginal cost for every possible good
Answer: b
Feedback:Allocative efficiency refers to the production of society’s most desired goods, while productive efficiency refers to the production of goods at lowest cost. Productive efficiency implies production at a point on the production possibilities curve, but not necessarily the point that society most prefers.

10. In the circular flow diagram, firms:
a. receive revenue and supply resources in the resource market
b. receive revenue and demand resources in the product market
c. incur costs and demand resources in the resource market
d. incur costs and supply goods and services in the product market
Answer: c
Feedback: In the resource market, households supply resources in exchange for incomes; firms demand those resources and incur costs in acquiring them.

ECO401 MCQs

ECO401 - INTRODUCTION TO ECONOMICS

RANGE OF MCQS  FROM HANDOUTS

INTRODUCTION TO ECONOMICS (LECT. 1-2)

 

1   The process by which resources are transformed into useful forms is

  1. Capitalization.
  2. Consumption.
  3. Allocation.
  4. D. Production.

 

2   The concept of choice would become irrelevant if

  1. Capital was eliminated.
  2. B. Scarcity were eliminated.
  3. we were dealing with a very simple, one-person economy.
  4. poverty were eliminated.

 

3   Which of the following is not a resource as the term is used by economists?

  1. A. money.
  2. land.
  3. buildings.
  4. labor.

 

4   Capital, as economists use the term,

  1. is the money the firm spends to hire resources.
  2. is money the firm raises from selling stock.
  3. refers to the process by which resources are transformed into useful forms.
  4. refers to things that have already been produced that are in turn used to produce other goods and services.

 

5   Opportunity cost, most broadly define, is

  1. the additional cost of producing an additional unit of output.
  2. B. what we forgo, or give up, when we make a choice or a decision.
  3. a cost that cannot be avoided, regardless of what is done in the future.
  4. the additional cost of buying an additional unit of a product.

 

6   A graph showing all the combinations of goods and services that can be produced if all of society's resources are used efficiently is a

  1. demand curve.
  2. supply curve
  3. production possibility frontier.
  4. circular-flow diagram.

 

7   Periods of “less than full employment” of resources correspond to

  1. points on the ppf.
  2. points outside the ppf.
  3. either points inside or outside the ppf.
  4. D. points inside the ppf.

 

8   What lies is at the heart of the allocation of goods and services in a free-market economy?

  1. Concerns of equity or equal distribution among individuals.
  2. The order or command of the ruling government or dictator.
  3. The wishes of consumers in the market.
  4. D. The price mechanism.

 

 

9   The phrase 'ceteris paribus' is best expressed as

  1. A. 'all else equal.'
  2. 'everything affects everything else.'
  3. 'scarcity is a fact of life.'
  4. 'there is no such thing as a free lunch.'

 

 

10   Laboratory (or controlled) experiments cannot be performed in economics because:

  1. of resource scarcity.
  2. economics is a natural science.
  3. of the difficulty of distinguishing between normative and positive statements.
  4. D. economics is a social science.

 

11 Positive statements are:

 

  1. value judgments
  2. B. verifiable or testable
  3. statements in the affirmative
  4. good statements

 

12 The former Soviet Union was an example of:

  1. planned economy
  2. free-market/capitalism
  3. dictatorship
  4. a mixed economy

 

13. Rational choice or rational decision-making involves

A. comparing the net benefit of a choice with the total net benefit foregone of all the alternatives combined

B. weighing up total costs and total benefits associated with a decision

C. weighing up marginal costs and marginal benefits associated with a decision

D. all of the above.

 

 

 

14 The PPF can be used to illustrate:

A. the principle of opportunity costs and increasing opportunity costs

B. the distinction between micro and macroeconomics

C. efficient, infeasible and inefficient production combinations

D. all of the above

DEMAND, SUPPLY AND EQUILIBRIUM (LECT. 3-5)

 

Note for students: Unless otherwise stated, you should assume that we are operating in

P-Q space.

 

  1. The concept of “interdependence of markets” can refer to the interdependence between:
    1. two or more factor markets
    2. goods and factor markets
    3. goods markets
    4. D. all of the above

 

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  1. The 'law of demand' implies that
    1. A. as prices fall, quantity demanded increases.
    2. as prices fall, demand increases.
    3. as prices rise, quantity demanded increases.
    4. as prices rise, demand decreases.

 

  1. What effect is working when the price of a good falls and consumers tend to buy it instead of other goods?
    1. the substitution effect.
    2. the ceteris paribus effect.
    3. the total price effect.
    4. the income effect.

 

 

  1. The quantity demanded (Qd) of a soft drink brand A has decreased. This could be because:
    1. A’s consumers have had an increase in income.
    2. B. the price of A has increased.
    3. A’s advertising is not as effective as in the past.
    4. the price of rival brand B has increased.

 

 

  1. Demand curves in P-Q space are derived while holding constant
    1. consumer tastes and the prices of other goods.
    2. incomes, tastes, and the price of the good.
    3. incomes and tastes.
    4. D. incomes, tastes, and the prices of other goods.

 

 

  1. Suppose the demand for good Z goes up when the price of good Y goes down. We can say that goods Z and Y are
    1. perfect substitutes.
    2. unrelated goods.
    3. C. complements.
    4. substitutes.

 

 

  1. If the demand for coffee decreases as income decreases, coffee is
  2. A. a normal good.
  3. a complementary good.
  4. an inferior good.
  5. a substitute good.

 

 

  1. Which of the following will NOT cause a shift in the demand curve for compact discs?
  2. a change in the price of pre-recorded cassette tapes.
  3. a change in wealth.
  4. a change in income.
  5. D. a change in the price of compact discs.

 

 

  1. Which of the following is consistent with the law of supply?
  2. As the price of calculators rises, the supply of calculators increases, ceteris paribus.
  3. As the price of calculators falls, the supply of calculators increases, ceteris paribus.
  4. As the price of calculators rises, the quantity supplied of calculators increases, ceteris paribus.
  5. As the price of calculators rises, the quantity supplied of calculators decreases, ceteris paribus.

 

 

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  1. The price of computer chips used in the manufacture of personal computers has fallen. This will lead to __________ personal computers.
  2. a decrease in the supply of
  3. a decrease in the quantity supplied of
  4. C. an increase in the supply of
  5. an increase in the quantity supplied of

 

 

 

  1. When there is excess demand in an unregulated market, there is a tendency for
  2. quantity demanded to increase.
  3. quantity supplied to decrease.
  4. price to fall.
  5. D. price to rise.

 

 

  1. Equilibrium in the market for good A obtains
  2. when there is no surplus or shortage prevailing in the market
  3. where the demand and supply curves for A intersect
  4. when all of what is produced of A is consumed
  5. D. all of the above

 

 

  1. A shift in the demand curve (drawn in the traditional Price-Quantity space) to the left may be caused by
  2. a decrease in supply.
  3. B. a fall in income.
  4. a fall in the price of a complementary good.
  5. a fall in the number of substitute goods.

Assume the good is normal

 

  1. A shift in the demand curve (drawn in Income-Quantity space) to the left may be caused by
  2. a fall in the price of a complementary good.
  3. a fall in income.
  4. a change in tastes such that consumers prefer the good more.
  5. D. a rise in the number of substitute goods.

Assume the good is normal

 

 

  1. A movement along the demand curve (drawn in Quantity-Price space) to the left may be caused by
  2. A. an increase in supply.
  3. a rise in income.
  4. a rise in the price of a complementary good.
  5. a fall in the number of substitute goods.

Assume the good is normal

 

  1. When the market operates without interference, price increases will distribute what is available to those who are willing and able to pay the most. This process is known as
  2. price fixing.
  3. quantity setting.
  4. quantity adjustment.
  5. D. price rationing.

 

  1. How many different equilibria can obtain when you allow for shifts in the demand and/or the supply curves?

 

  1. 2
  2. 4
  3. C. 8
  4. 16

 

  1. What will happen to equilibrium price and quantity when the demand curve shifts to the left and the supply curve shifts to the right

  1. A. price falls unambiguously but the effect on quantity cannot be determined
  2. both price and quantity falls unambiguously
  3. quantity falls unambiguously but the effect on price cannot be determined
  4. the effect on both price and quantity cannot be determined

 

  1. What will happen to equilibrium price and quantity when both the demand and supply curves shift to the left

 

A. price falls unambiguously but the effect on quantity cannot be determined

B   both price and quantity falls unambiguously

  1. C. quantity falls unambiguously but the effect on price cannot be determined
  2. the effect on both price and quantity cannot be determined

 

  1. A price ceiling imposed by the government can cause a shortage (excess demand)

A. when the price ceiling is above the free (or unregulated) market price

B. when the price ceiling is below the free (or unregulated) market price

C. when the price ceiling is equal to the free (or unregulated) market price

D. either of the above

 

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  1. What is the effect of imposing a fixed per unit tax on a good on its equilibrium price and quantity?

 

  1. Price falls, quantity rises
  2. B. Price rises, quantity falls
  3. Both price and quantity fall
  4. Both price and quantity rise

 

 

  1. A price floor is
  2. a maximum price usually set by government, that sellers may charge for a good or service.
  3. a minimum price usually set by government, that sellers must charge for a good or service.
  4. the difference between the initial equilibrium price and the equilibrium price after a decrease in supply.
  5. the minimum price that consumers are willing to pay for a good or service.

 

  1. The need for rationing a good arises when
  2. there is a perfectly inelastic demand for the good.
  3. supply exceeds demand.
  4. C. demand exceeds supply.
  5. a surplus exists.

 

  1. If the “regulated-market” price is below the equilibrium (or “free-market” price) price,
  2. the quantity demanded will be greater than quantity supplied.
  3. demand will be less than supply.
  4. quantity demanded will be less than quantity supplied.
  5. quantity demanded will equal quantity supplied.

 

  1. If a government were to fix a minimum wage for workers that was higher than the market-clearing equilibrium wage, economists would predict that
  2. A. more workers would become employed.
  3. there would be more unemployment.
  4. the costs and prices of firms employing cheap labour would increase.
  5. wages in general would fall as employers tried to hold down costs.

ELASTICITIES (LECT. 6-8)

 

1. Alpha Corporation produces chairs. An economist working for the firm predicts that 'if people's incomes rise next year, then the demand for our chairs will increase, ceteris paribus.' The accuracy of the economist's prediction depends on whether the chairs Alpha produce

  1. A. are normal goods.
  2. have few complementary goods.
  3. have many complementary goods.
  4. have few substitutes.

 

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2   When the decrease in the price of one good causes the demand for another good to decrease, the goods are

  1. complements.
  2. normal.
  3. inferior.
  4. D. substitutes.

 

3 The price elasticity of demand is the

  1. A. ratio of the percentage change in quantity demanded to the percentage change in price.
  2. ratio of the change in price to the change in quantity demanded.
  3. C. ratio of the change in quantity demanded to the change in price.
  4. ratio of the percentage change in price to the percentage change in quantity demanded.

 

4 The price of apples falls by 5% and quantity demanded increases by 6%. Demand for apples is:

  1. inelastic.
  2. perfectly inelastic.
  3. C. elastic.
  4. perfectly elastic.

 

5   The price of bread increases by 22% and the quantity of bread demanded falls by 25%. This indicates that demand for bread is

  1. A. elastic.
  2. inelastic.
  3. unitarily elastic
  4. perfectly elastic

 

 

6   If the cross-price elasticity of demand between two goods is negative, then the two goods are

  1. unrelated goods.
  2. substitutes.
  3. C. complements.
  4. normal goods.

 

 

7   If the quantity demanded of beef increases by 5% when the price of chicken increases by 20%, the cross-price elasticity of demand between beef and chicken is

  1. -4.
  2. 4.
  3. -0.25.
  4. D. 0.25.

 

8 The government is considering placing a tax on cigarettes to raise revenue to finance health-care projects. The demand for cigarettes is price inelastic. Which of the following statements is TRUE?

  1. This is a very good way to raise revenue both in the short term and in the long term because there are no substitutes for cigarettes.
  2. The tax on cigarettes will raise substantial revenue in the short term, but may not raise as much revenue as anticipated in the long term because the demand for cigarettes is likely to become more elastic over time.
  3. This tax will not raise much revenue either in the short term or the long term since demand is price inelastic.
  4. No tax revenue can be raised in this way because sellers of cigarettes will just lower their price by the amount of the tax and therefore the price of cigarettes to consumers will not change.

 

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9   The burden (incidence) of a tax will fall mainly on the producers if:

  1. A. The producers are the ones legally obliged to pay the tax.
  2. B. Supply is inelastic and demand is elastic.
  3. Demand is inelastic and supply is elastic.
  4. There are many producers in the market.

 

10   Income elasticity of demand is the % change in quantity demanded divided by the % change in income. Which type of goods have negative income elasticity of demand?

  1. A. Inferior goods.
  2. Normal goods.
  3. Substitute goods.
  4. Complementary goods.

 

11. Each type of elasticity has its own set of determinants. You are given four determinants below. Match them with the three types of elasticity given:

 

  1. The number and closeness of substitute goods:
  2. Time:
  3. The proportion of income spent on the goods:
  4. The rate at which the desire for a good is satisfies as consumption increases:

 

PES: price elasticity of supply

IED: Income elasticity of demand

PED: price elasticity of demand

 

  1. i = IED; ii = PES; iv: PED
  2. i = IED, ii, iii, iv = PED
  3. i, ii and iii = PED; iv = IED; ii = PES
  4. None of the above

where “=” means “is a determinant of”

 

12 If total revenue rises by 10% when price increases by 5%, this means:

A. demand is price inelastic

B. demand is price elastic

C. demand is unit elastic

D. demand is perfectly inelastic

 

13. If a 5% increase in price causes no change in total revenue, this means:

A. demand is price inelastic

B. demand is price elastic

C. demand is unit elastic

D. demand is perfectly inelastic

 

14. Which of the following statements is true:

A. Because a straight line demand curve has constant slope, price elasticity of demand will remain constant as we move along various points on the curve.

B. Three supply curves, with different slopes, but all originating from the origin will have different price elasticities of supply.

C. We only need to know the magnitude of the elasticity, not its sign, to determine whether it falls in the elastic or inelastic range

D. A straight line demand curve with a slope of -1 delivers unit elasticity.

 

15. When firms advertise their product, they are trying to:

A. Shift the demand curve to the right

B. Make the demand curve steeper

C. Make demand for the product more inelastic

D. All of the above

 

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16. “It is possible for milk to be treated as an inferior good and a normal good by different population segments in the same economy.”

A. False. A good can only have one characterization in an economy, normal or inferior, not both

B. False. Milk is always and everywhere a normal good.

C. True. Rich people will spend less on milk as their incomes increase, while poor people will spend more on milk as their incomes increase.

D. True. Some people in the economy like milk, others don’t.

 

17   A lower income country, Z, that exports primary products and imports luxury goods eventually runs into balance of payments problems because:

 

  1. the income elasticity of demand for Z’s exports is low, while the income elasticity of demand for Z’s imports is high
  2. Z’s exports grow at a slower rate than the rate of growth of the world income; Z’s imports rise at a faster rate than the rate of growth of Z’s income
  3. Z’s terms of trade (price of exports / price of imports) deteriorate
  4. D. All of the above.

 

18 “The government of a lower income country, K, is worried that rising domestic prices will lead to higher imports and therefore cause balance of payments problems.” This most closely illustrates which elasticity concept:

 

  1. Price elasticity of demand
  2. Price elasticity of supply
  3. Income elasticity of demand
  4. D. Cross price elasticity of demand

BACKGROUND TO DEMAND (LECT. 9-12)

(TO BE HANDED TO STUDENTS AFTER LECTURE 12)

 

1 Economists use the term utility to mean

  1. the value of a product before it has been advertised.
  2. B. the satisfaction a consumer obtains from a good or service.
  3. any characteristic of a good or service which cannot be measured.
  4. the contribution a good or service makes to social welfare.

 

2   Economists use the term marginal utility to mean

  1. additional satisfaction gained divided by additional cost of the last unit.
  2. B. additional satisfaction gained by the consumption of one more unit of a good.
  3. total satisfaction gained when consuming a given number of units.
  4. the process of comparing marginal units of all goods which could be purchased.

 

3   The law of diminishing marginal utility states that

  1. total satisfaction will decrease as more units of the good are consumed.
  2. B. the satisfaction derived from each additional unit of a good consumed will decrease.
  3. total utility will become negative.
  4. Both the first and third option.

 

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4   By total consumer surplus economists mean (in P-Q space)

  1. A. The area of the triangle formed by the demand curve, the price axis and the equilibrium price line.
  2. the area between the average revenue and marginal revenue curves.
  3. the difference between the maximum price the consumer is willing to pay for a good (vertical-intercept of demand curve) and the minimum price the producer is willing to sell at (vertical intercept of supply curve).
  4. A and C.

 

5   The equation for Rida’s demand curve for bouquets of flowers is P = 40 - 2Q. If the price of a bouquet is Rs18, her consumer surplus will be

 

  1. Rs198
  2. Rs121.
  3. C. Rs11.
  4. Rs242.

 

 

6   The price of an ice cream cone is $1.50 and you buy three ice cream cones per week. If the price of an ice cream cone falls to $1.25 and you still buy three ice cream cones per week, which of the following is (are) correct?

  1. A. The marginal utility of the fourth ice cream cone per week must be worth less than $1.25 to you.
  2. The total utility of the four ice cream cones per week must be worth less than $5.75 (=3*$1.50 +$1.25) to you.
  3. The total utility of the four ice cream cones per week must be less than $5.00 (3*$1.25+$1.25) to you.
  4. None of the above.

 

7   Economists have used the idea of diminishing marginal utility to explain why

  1. demand curves slope downwards.
  2. demand curves become flatter at lower prices.
  3. demand curves are inelastic.
  4. D. Both the first and second option.

 

8   A consumer will buy more units of a good if the value of the good's

  1. total utility is greater than price.
  2. marginal utility is less than price.
  3. C. marginal utility is greater than price.
  4. total utility is less than price.

 

9   The diamond-water paradox can be explained by suggesting that the price of a product is determined by

  1. consumer incomes.
  2. B. its marginal utility.
  3. consumer surplus.
  4. diminishing marginal utility.

 

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10   A utility-maximising consumer changes her spending on goods X and Y until

  1. MUx = MUy
  2. Px (MUx) = Py(MUy)
  3. TUx/Px = TUy/Py
  4. D. MUx (Py) = MUy (Px)

 

11   The MUx/MUy ratio is 10 and the Px/Py ratio is 8, so the consumer should buy

  1. less X and more Y.
  2. more X and more Y.
  3. C. more X and less Y.
  4. less X and less Y.

 

 

12   Economists define an indifference curve as the set of points

  1. at which the consumer is in equilibrium as the consumer's income changes.
  2. which yield the same marginal utility.
  3. C. which yield the same total utility.
  4. At which the consumer is in equilibrium as prices change.

 

 

13 Which of the following is a property of an indifference curve?

  1. the marginal rate of substitution is constant as you move along an indifference curve.
  2. marginal utility is constant as you move along an indifference curve.
  3. C. it is convex to the origin.
  4. total utility is greatest where the 45 degree line cuts the indifference curve.

 

14   The limits imposed on household choices by income, wealth, and product prices are captured by the

  1. A. budget constraint.
  2. choice set.
  3. assumption of perfect knowledge.
  4. preference set.

 

15   Waris has Rs5000 a week to spend on units of food and clothing. The unit price of food is Rs100 and the unit price of clothing is Rs250. Which of the following pairs of food and clothing are in the Waris's choice set?

  1. 50 units of clothing and 50 units of food.
  2. 20 units of clothing and 50 units of food.
  3. 10 units of clothing and 25 units of food.
  4. D. 0 units of clothing and 50 units of food.

 

16   If a household's money income is doubled,

  1. the budget constraint will shift in and parallel to the old one.
  2. the budget constraint is not affected.
  3. the budget constraint will swivel outward at the Y-intercept.
  4. the budget constraint will shift out parallel to the old one.

 

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17   The curve that is traced out when we keep indifference curves constant and move the budget line parallel to its original position is

  1. A. the income-consumption curve.
  2. the Engel curve.
  3. the demand curve.
  4. the income-demand curve.

 

 

18   The curve that is traced out when we keep indifference curves constant and swivel the budget line at the Y-intercept to reflect a change the price of good X, is

  1. the Engel curve.
  2. the demand curve for X.
  3. the substitution curve.
  4. D. the price-consumption curve for X.

 

19   The curve that is traced out when we keep indifference curves and the total effective budget constant and only change the relative price of good X (i.e. slope of budget line) is:

A   the Engel curve.

  1. the demand curve for X.
  2. B. the substitution curve.
  3. the price-consumption curve for X.

 

20   If the income and substitution effects of a price increase work in the same direction the good whose price has changed is a

  1. inferior good.
  2. Giffen good.
  3. C. normal good.
  4. superior good.

 

21 If the price (or budget) line has a slope of -2 and it cuts indifference curve ICa at points P and R (given that the slope of ICa at point P is -4 and at point R is -1), the consumer can maximize utility by:

 

  1. choosing consumption bundle P
  2. choosing consumption bundle R
  3. C. moving to a higher indifference curve
  4. we don’t enough information to answer the question

 

  1. Indifference curves cannot
    1. be L shaped
    2. be straight lines
    3. C. intersect
    4. all of the above

 

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23 The main problem with marginal utility analysis is:

 

  1. that it cannot solve problems involving more than two goods
  2. B. its cardinal measurement of utility
  3. its inability to explain the diamond-water paradox
  4. all of the above

 

 

24   This question is about the demand for washing machines under uncertainty about whether the machine will turn out to be a good buy or a bad one. The odds ratio (OR) is defined as the ratio of the probability of the machine being good to the probability of the machine being bad. Let’s say the OR is < 1, and the consumer does not buy the machine. What can you conclude about the consumer’s attitude towards risk?

 

  1. She is risk averse
  2. She is risk neutral
  3. She is risk loving
  4. D. We do not have enough information to answer the question

 

  1. The concept of diminishing marginal utility of income (DMUy) helps explain:
  2. why a marginal dollar might have higher utility for a pauper than a millionaire
  3. why the total utility curve (in Utility-Income space) is convex
  4. why the average consumer is risk-averse
  5. D. all of the above

 

  1. “Moral hazard” and “adverse selection” are problems related to asymmetric information, that arise
  2. in ex-ante and ex-post contexts, respectively
  3. B. in ex-post and ex-ante contexts, respectively
  4. in ex-ante contexts
  5. in ex-post contexts

ASSIGNMENT 5

BACKGROUND TO SUPPLY/COSTS (LECT. 13-18)

 

1   Profit-maximising firms want to maximize the difference between

  1. A. total revenue and total cost.
  2. marginal revenue and marginal cost.
  3. marginal revenue and average cost.
  4. total revenue and marginal cost.

 

2   Which statement is FALSE?

  1. Fixed costs do not depend on the firm's level of output.
  2. Fixed costs are zero if the firm is producing nothing.
  3. Fixed costs are the difference between total costs and total variable costs.
  4. There are no fixed costs in the long run.

 

3   Which of the following is most likely to be a variable cost for a firm?

  1. The monthly rent on office space that it leased for a year.
  2. The franchiser's fee that a restaurant must pay to the national restaurant chain.
  3. The interest payments made on loans.
  4. D. Workers’ wages.

4   The costs that depend on output in the short run are

  1. total variable costs only.
  2. B. both total variable costs and total costs.
  3. total costs only.
  4. total fixed cost only.

 

5   The short run, as economists use the phrase, is characterized by

  1. a period where the law of diminishing returns does not hold.
  2. at least one fixed factor of production, and firms neither leaving nor entering the industry.
  3. all inputs being variable.
  4. no variable inputs - that is all of the factors of production are fixed.

 

6   Diminishing marginal returns implies

  1. increasing average fixed costs.
  2. decreasing marginal costs.
  3. decreasing average variable costs.
  4. D. increasing marginal costs.

 

7   Which of the following is a correct statement about the relationship between average product (AP) and marginal product (MP)?

  1. If AP is at a maximum, then MP is also.
  2. If TP is declining then AP is negative.
  3. C. If AP exceeds MP, then AP is falling.
  4. If AP = MP, then total product is at a maximum.

 

8   If the total product of two workers is 80 and the total product of 3 workers is 90, then the marginal product of the third worker is _____ and the average product of the third worker is _______.

  1. 270; 160
  2. 3.33; 10
  3. C. 10; 30
  4. 30; 10

 

9   Engineers for Imran Bike Company have determined that a 15% increase in “all” inputs will cause a 15% increase in output. Assuming that input prices remain constant, you correctly deduce that such a change will cause _________ as output increases.

  1. Long-run average costs to increase
  2. Long-run marginal costs to increase
  3. C. Long-run average costs to remain constant
  4. Long-run average costs to decrease

 

10   Suppose Isa Khan’s Ice Cream experiences economies of scale up to a certain point and diseconomies of scale beyond that point. Its long-run average cost curve is most likely to be

  1. upward sloping to the right.
  2. B. U-shaped.
  3. horizontal.
  4. downward sloping to the right.

 

11   A graph showing all the combinations of capital and labour that can be used to produce a given amount of output is

  1. an isocost line.
  2. a production function.
  3. C. an isoquant.
  4. an indifference curve.

 

12   The rate at which a firm can substitute capital for labour and hold output constant is the

  1. law of diminishing marginal returns.
  2. B. marginal rate of technical substitution.
  3. marginal rate of substitution.
  4. marginal rate of production.

 

13   A graph showing all the combinations of capital and labour available for a given total cost is the

  1. budget constraint.
  2. isoquant.
  3. expenditure set.
  4. D. isocost line.

 

14   The formula for average fixed costs is

  1. dTFC/dq.
  2. B. TFC/q.
  3. q/TFC.
  4. TFC - q.

 

15   The formula for AVC is

  1. q/TVC.
  2. dTVC/dq.
  3. dq/dTVC.
  4. D. TVC/q.

 

16   Marginal revenue is

  1. the additional profit the firm earns when it sells an additional unit of output.
  2. B. the added revenue that a firm takes in when it increases output by one additional unit.
  3. the difference between total revenue and total costs.
  4. the ratio of total revenue to quantity.

 

17   A firm in a perfectly competitive industry is producing 50 units, its profit-maximising quantity. Industry price is Rs 2,000; total fixed costs are 25,000 and average variable costs are Rs 800. The firm's economic profit is

  1. Rs 15,000.
  2. Rs 25,000.
  3. C. Rs 35,000.
  4. Zero.

 

18   The amount of profit a firm makes can be shown on a diagram using

  1. A. the AC and AR curves.
  2. the MR and AR curves.
  3. the AC and MC curves.
  4. the MR and MC curves.

 

19 A firm’s choice of profit-maximising output can be shown on a diagram using

  1. the AC and AR curves.
  2. the MR and AR curves.
  3. the AC and MC curves.
  4. D. the MR and MC curves.

 

20   A firm will shut down in the short run if

  1. A. total variable costs exceed total revenues.
  2. average cost exceeds price.
  3. total costs exceed total revenues.
  4. it is suffering a loss.

MARKET STRUCTURES & SELECTED ISSUES IN MICROECONOMICS

 

  1. If you were running a firm in a perfectly competitive industry you would be spending your time making decisions on
    1. how much of each input to use.
    2. how much to spend on advertising.
    3. what price to charge.
    4. the design of the product.

 

  1. Market power is
    1. a firm's ability to charge any price it likes.
    2. B. a firm's ability to raise price without losing all demand for its product.
    3. a firm's ability to sell any amount of output it desires at the market-determined price.
    4. a firm's ability to monopolise a market completely.

 

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  1. When ______ substitutes exist, a monopolist has ______ power to raise price.
    1. more; more
    2. fewer; less
    3. no; infinite
    4. D. more; less

 

  1. 4) If a firm has some degree of market power, then output price
    1. A. becomes a decision variable for the firm.
    2. is determined by the actions of other firms in the industry.
    3. no longer influences the amount demanded of the firm's product.
    4. is guaranteed to be above a firm's average cost.

 

  1. Relative to a competitively organised industry, a monopoly
    1. produces less output, charges lower prices and earns economic profits.
    2. produces more output, charges higher prices and earns economic profits.
    3. C. produces less output, charges higher prices and earns economic profits.
    4. produces less output, charges lower prices and earns only a normal profit.

 

  1. The cosmetics industry is not considered by economists to be a good example of perfect competition because
    1. firms spend a large amount of money on advertising.
    2. profit margins are very high for both producers and retailers.
    3. there are a very large number of firms in the industry.
    4. there are many government health controls on cosmetic products.

 

  1. If firms can neither enter nor leave an industry, the relevant time period is the
    1. long run.
    2. immediate run.
    3. intermediate run.
    4. D. short run.

 

  1. In the long run
    1. A. there are no fixed factors of production.
    2. all firms must make economic profits.
    3. a firm can vary all inputs, but it cannot change the mix of inputs it uses.
    4. a firm can shut down, but it cannot exit the industry.

 

  1. A normal rate of profit
    1. is the rate of return on investments over the interest rate on risk-free government bonds.
    2. is the rate that is just sufficient to keep owners or investors satisfied.
    3. Means zero return for owners or investors.
    4. is the difference between total revenue and total costs.

 

10)  If Wafa Enterprises is earning a rate of return greater than the return necessary for the business to continue operations, then

  1. total costs exceed normal profit.
  2. the firm is earning an economic profit.
  3. normal profit is zero.
  4. total costs exceed total revenue.

 

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11)  Economic profits are

  1. A. the difference between total revenue and total costs.
  2. anything greater than the normal opportunity cost of investing.
  3. a rate of profit that is just sufficient to keep owners and investors satisfied.
  4. the opportunity costs of all inputs.

 

 

12)  The slope of the marginal revenue curve is

  1. the same as the slope of the demand curve.
  2. half as steep as the demand curve.
  3. C. twice as steep as the demand curve.
  4. always equal to one.

 

13)  In a monopoly, marginal revenue is

  1. less than price at low levels of output and greater than price at high levels of output.
  2. always greater than price.
  3. C. lower than price for all units other than the first.
  4. always equal to price.

 

14)  Suppose we know that a monopolist is maximising her profits. Which of the following is a correct inference? The monopolist has

  1. maximised the difference between marginal revenue and marginal cost.
  2. maximised its total revenue.
  3. C. equated marginal revenue and marginal cost.
  4. set price equal to its average cost.

 

 

15)  An industry that realises such large economies of scale in producing its product that single-firm production of that good or service is most efficient is called

  1. an economies of scale monopoly.
  2. B. a natural monopoly.
  3. a government franchise monopoly.
  4. a fixed cost monopoly.

 

16)  How can a government regulate a monopoly firm making supernormal profits so that a “socially optimal” outcome obtains:

  1. A. set the firm’s price (and quantity) corresponding to the point where the MC curve intersects the AC curve from below.
  2. set the firm’s price (and quantity) corresponding to the point where the MC curve intersects the MR curve from below.
  3. set the firm’s price (and quantity) corresponding to the point where the MR curve intersects the AC curve and AC>MR after that point.
  4. set the firm’s price (and quantity) corresponding to the point where the AR curve intersects the MC curve and MC>AR after that point.

 

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17)  Monopolistic competition differs from perfect competition primarily because

  1. in perfect competition, firms can differentiate their products.
  2. in monopolistic competition, firms can differentiate their products.
  3. in monopolistic competition, there are relatively few firms.
  4. in perfect competition, there are no barriers to entry.

 

18)  In monopolistic competition, firms achieve some degree of market power

  1. by producing differentiated products.
  2. because of barriers to entry into the industry.
  3. because of barriers to exit from the industry.
  4. by virtue of size alone.

 

19)  A monopolistically competitive firm that is incurring a loss will produce as long as the price that the firm charges is sufficient to cover

  1. advertising costs.
  2. fixed costs.
  3. marginal costs.
  4. D. variable costs.

 

20)  A firm in a monopolistically competitive industry

  1. A. must lower price to sell more output.
  2. sells a fixed amount of output regardless of price.
  3. can sell an infinite amount of output at the market-determined price.
  4. must raise price to sell more output.

 

21)  The “long-run” equilibrium outcomes in monopolistic competition and perfect competition are similar in the sense that under both market structures

  1. A. firms will only earn a normal profit.
  2. the efficient output level will be produced in the long run.
  3. firms will be producing at minimum average cost.
  4. firms realise all economies of scale.

22)  A form of industry structure characterised by a few firms each large enough to influence market price is

  1. monopolistic competition.
  2. monopoly.
  3. perfect competition.
  4. D. oligopoly.

 

23)  When one firm in the cooking oil market started an advertising campaign that stressed the nutritional value of its cooking oil, all other cooking oil manufacturers started similar advertising campaigns. This suggests that the cooking oil market is

  1. monopolistically competitive.
  2. B. oligopolistic.
  3. perfectly competitive.
  4. indeterminate from this information.

 

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24)  An industry that has a relatively small number of firms that dominate the market is called

  1. a natural monopoly.
  2. a colluding industry.
  3. a merged industry.
  4. D. a concentrated industry.

 

25)  Assume that firms in an oligopoly are currently colluding to set price and output to maximise total industry profit. If the oligopolists are forced to stop colluding, the price charged by the oligopolists will _______ and the total output produced will ________.

 

  1. increase; decrease
  2. increase; increase
  3. decrease; decrease
  4. D. decrease; increase

 

26)  A group of firms that gets together to make price and output decisions is called

  1. a non-collusive oligopoly.
  2. price leadership.
  3. C. a cartel.
  4. a concentrated industry.

 

27)  In which of the following circumstances would a cartel be most likely to work?

  1. The coffee market, where the product is standardised and there are a large number of coffee growers.
  2. The automobile industry, where there are few producers but there is great product differentiation.
  3. C. The market for copper, where there are very few producers and the product is standardised.
  4. The fast-food market, where there are a large number of producers but the demand for fast food is inelastic.

 

 

 

28)  A collusive oligopoly (with a dominant price leader) will produce a level of output

  1. that would prevail under perfect competition.
  2. between that which would prevail under perfect competition and that which a monopolistic competitor would choose in the same industry.
  3. between that which would prevail under perfect competition and that which a monopolist would choose in the same industry.
  4. equal to what a monopolist would choose in the same industry.

 

29)  The kinked demand curve model of oligopoly assumes that the price elasticity of demand

  1. in response to a price increase is more than the elasticity of demand in response to a price decrease.
  2. is constant regardless of whether price increases or decreases.
  3. is infinite if price increases and zero if price decreases.
  4. in response to a price increase is less than the elasticity of demand in response to a price decrease.

 

30)  Price discrimination involves

  1. firms selling different products at different prices to different consumers.
  2. B. firms selling the same product at different prices to different consumers.
  3. consumers discriminating between different sellers on the basis of the different prices they quote for different products.
  4. consumers discriminating between different sellers on the basis of the different prices they quote for the same product.

 

31)  Price discrimination often favours public interest because it

  1. allows some products to be produced that would otherwise not be produced in the economy due to the fear of making losses.
  2. opens consumption possibilities to consumers that would otherwise not be inaccessible (or unaffordable) if a single price prevailed in the market.
  3. allows firms to make supernormal profits which in turn allows them to sustain price wars when breaking into new markets.
  4. d) all of the above

 

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32)  Oligopolistic firms making their price-output decisions keeping in view the current and possible future decisions of their rival firms, is an example of:

 

  1. A. Strategic interaction
  2. Prisoner’s dilemma
  3. Price leadership
  4. None of the above

 

 

33)  Given the following table, what would Firm A, which is a firm operating in a duopoly (along with firm B) do, if it were following a maximin strategy?

(p stands for profit or payoff)

 

STRATEGY FOR FIRM A

 

 

Not lower price

Lower price

STRATEGY FOR FIRM B

Not lower price

pA = Rs 400m

pA = Rs 300m

Lower price

pA = Rs 100m

pA = Rs 200m

 

  1. A. Lower its price
  2. Not lower its price
  3. We do not have information on pB so we cannot answer the question
  4. None of the abov

 

 

34)  Which of the following would NOT constitute a pure public good?

  1. National defense.
  2. A new national holiday.
  3. C. Free health service.
  4. National environmental protection.

 

35)  One of the characteristics of a public good, X, is that it is “non-rival”. It means:

  1. It is not possible to exclude anyone from using (or benefiting from) X.
  2. There is no substitute for X.
  3. C. One person’s use of X does not affect another person’s ability to use (or benefit from) X.
  4. None of the above.

 

36)  Why might advertising exceed its socially optimal level?

  1. Because the marginal social costs of advertising are less than the marginal private costs.
  2. B. Because private firms do not or cannot incorporate marginal external costs when deciding how much to advertise.
  3. The marginal external benefit to advertising is not taken into account by firms.
  4. D. None of the above.

 

37)  If MSBX > MPBX, what can the government do to align the market outcome with the social optimum:

  1. A. Impose a consumption tax.
  2. Impose a production tax.
  3. C. Provide a consumption subsidy.
  4. Provide a production subsidy

 

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38)  If the VMP for labour > the MRP for labour, and there is no government intervention, you can conclude that the underlying market structure is:

  1. a monopoly.
  2. perfect competition.
  3. C. not perfect competition.
  4. none of the above.

 

39)  A backward bending labour supply curve (roughly similar in shape to an inverted C) obtains when the income effect of a wage rise (beyond a certain wage level) dominates the substitution effect. If it was also the case that the income effect of a wage reduction (below a certain wage level) dominated the substitution effect, what would the complete labour supply curve roughly look like in “wage-hours worked” space?

 

  1. a 3.
  2. an inverted 3.
  3. an S.
  4. D. an inverted S.

 

40)  A firm is considering the project of buying an ice-cream producing machine costing Rs.1,000,000 that will serve for 10 years and then have a scrap value of Rs. 110,000 at the end of 10 years. If the present value of the net ice-cream sales revenues that the machine will generate is Rs.900,000, then, assuming a 10% annual discount rate:

 

  1. A. the firm should not buy the machine because the NPV associated with the overall project is negative.
  2. the firm should be indifferent between buying and not buying because the NPV of the overall project is zero.
  3. The firm should buy the machine because the NPV of the overall project is positive.
  4. None of the above.

 

41)  If the quarterly rent from a house is Rs.5,000, the annual interest rate is fixed at 5%, and housing market conditions are stable, what would you expect the market price of the house to be?

  1. Rs.100,000
  2. Rs.200,000
  3. C. Rs.400,000
  4. Rs.800,000

 

42)  There are many differences between labour and land as factors of production, for e.g.:

 

  1. Labour cannot be purchased like land, it can only be rented.
  2. There is no obvious reason why landowners will reduce the supply of land when the rental price of land goes up.
  3. The decision to hire labour does not directly depend on the interest rate.
  4. D. All of the above.

43)  Information products are unique in that the marginal cost of __________ the product is virtually zero.

A. producing

B. distributing

C. accessing

D. all of the above

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