Microeconomics Questions and Answers

Q: The first theorem of welfare economics states that :

The first theorem says a competitive equilibrium is Pareto efficient.The first fundamental theorem of welfare economics states that, under its assumptions (complete markets, price-taking agents, no externalities, no public goods), every competitive equilibrium allocation is Pareto efficient: no one can be made better off without making someone worse off.The theorem is a definite statement, not 'may be' or 'may not be'. Profit maximisation is an assumption about firms' behaviour within the model, not the content of the theorem. The second theorem is the converse: any Pareto-efficient allocation can be reached as a competitive equilibrium after suitable lump-sum transfers.

Q: Asymmetric information results into :

Asymmetric information results in adverse selection.When one side of a market knows more than the other, the less-informed side cannot tell good quality from bad. In Akerlof's market for 'lemons', buyers who cannot judge used cars offer only an average price, so owners of good cars withdraw and the cars left on sale are mostly poor ones. Insurance markets show the same effect, as the riskiest buyers are the keenest to buy cover.This is a market failure, the opposite of market efficiency or market success. Government failure is a different idea, the failure of state intervention to improve on the market.

Q: "As the quantity of one variable input in a production process is increased, with quantities of other inputs remaining constant ...........firstly increases, then after reaching a maximum, starts decreasing and finally becomes negative."

The quantity described is the marginal physical product.This is the law of variable proportions. As one input is increased with the others fixed, the extra output from each additional unit of the variable input, its marginal physical product, at first rises, reaches a maximum, then falls, and finally becomes negative when the fixed inputs are overcrowded.Marginal cost moves in the opposite direction to marginal product and never becomes negative. The value of marginal product and the marginal revenue product are marginal product multiplied by price or by marginal revenue; the law itself is stated in physical units.

Q: Lifetime welfare of an individual ...........

Lifetime welfare of an individual cannot be quantified.Modern welfare economics treats welfare as a subjective state that can be ranked but not measured in units. An individual's welfare over a whole lifetime depends on consumption, health, relationships and satisfaction at every stage, and there is no cardinal scale on which to add these up into a single number.Saying it can be quantified, fully or in some cases, assumes a measurable cardinal utility, which the ordinal approach rejects. Welfare can certainly be imagined and compared in rank, so 'cannot be imagined' goes too far.

Q: Consumer's welfare declines due to ................

Consumer welfare declines due to collusion of firms.When firms collude, by fixing prices, sharing markets or limiting output as a cartel, they act like a monopoly: prices rise above the competitive level and output falls. Consumers pay more and buy less, losing consumer surplus, which is why competition law prohibits cartels.An increase in consumption or in asset holdings raises a consumer's welfare, and freedom of expression has no adverse effect on consumer welfare in the economic sense.

Q: If we sum up present time welfare of all consumers, we ..............

Summing present-time welfare of all consumers, we cannot get aggregate welfare of society.Welfare is subjective and ordinal: each person can rank alternatives, but there is no common unit in which one person's satisfaction can be measured against another's. Adding individual welfare levels requires interpersonal comparisons of utility, which Robbins and the new welfare economics rejected as unscientific. Arrow's impossibility theorem shows further that individual rankings cannot in general be combined into a consistent social ranking.So a simple sum gives neither aggregate social welfare nor a basis for deciding public or foreign policy.

Q: The concept of consumer's welfare is :

Consumer's welfare is a subjective concept.Welfare, or satisfaction, is a psychological state experienced by the consumer. Two people consuming the same goods may feel very different levels of satisfaction, and only the consumer can judge it. This is why economists infer welfare from choices (revealed preference) and rank it ordinally rather than measuring it directly.It is not objective, since it cannot be observed or measured independently of the person. 'Positive' and 'negative' describe the direction of a change in welfare, or a type of economic statement, not the nature of the concept.

Q: Market regulation is required because .................

Market regulation is required because firms tend to collide, that is, to collude (the paper prints 'collide').Left alone, firms in concentrated markets have an incentive to agree on prices, output or market shares, earning monopoly profits at consumers' expense. Regulation, and in India the Competition Act of 2002 enforced by the Competition Commission, exists to prevent such cartels and the abuse of dominance.Providing welfare facilities to workers, reducing costs and offering consumers variety are beneficial behaviour, not reasons for regulating markets.

Q: The entire set of Pareto-optimal allocation in the Edgeworth Box is called the :

The set of Pareto-optimal allocations is the contract curve.In the Edgeworth box, an allocation is Pareto optimal when the two consumers' indifference curves are tangent, so their marginal rates of substitution are equal and no trade can make one better off without harming the other. The locus of all these tangency points, running from one origin of the box to the other, is the contract curve.Supply and demand curves describe market behaviour, not the set of efficient allocations, and 'Edgeworth curve' is not the standard name, even though the box is Edgeworth's.

111.

Absolute value of the slope of the production possibilities frontier at any point :

A.is equal to the marginal rate of transformation
B.is equal to the marginal rate of substitution
C.marginal rate of substitution is equal to marginal rate of transformation
D.marginal rate of substitution is not equal to marginal rate of substitution

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

The absolute slope of the production possibilities frontier is equal to the marginal rate of transformation.

The frontier shows the combinations of two goods an economy can produce with given resources. Its slope tells how much of good Y must be given up to produce one more unit of X, and that rate is by definition the marginal rate of transformation, \(MRT_{XY} = |dY/dX|\).

The marginal rate of substitution is the slope of an indifference curve, a matter of preferences, not production. The equality MRS = MRT is the condition for the best point on the frontier, not a description of its slope at any point, and the last option compares MRS with itself.

Discuss in Forum

112.

The first theorem of welfare economics states that :

A.A competitive equilibrium is Pareto efficient
B.A competitive equilibrium may be Pareto efficient
C.A competitive equilibrium may not be Pareto efficient
D.A competitive equilibrium maximises profit

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

The first theorem says a competitive equilibrium is Pareto efficient.

The first fundamental theorem of welfare economics states that, under its assumptions (complete markets, price-taking agents, no externalities, no public goods), every competitive equilibrium allocation is Pareto efficient: no one can be made better off without making someone worse off.

The theorem is a definite statement, not 'may be' or 'may not be'. Profit maximisation is an assumption about firms' behaviour within the model, not the content of the theorem. The second theorem is the converse: any Pareto-efficient allocation can be reached as a competitive equilibrium after suitable lump-sum transfers.

Discuss in Forum

113.

Asymmetric information results into :

A.Market efficiency
B.Adverse selection by consumer
C.Government failure
D.Market success

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: B

Asymmetric information results in adverse selection.

When one side of a market knows more than the other, the less-informed side cannot tell good quality from bad. In Akerlof's market for 'lemons', buyers who cannot judge used cars offer only an average price, so owners of good cars withdraw and the cars left on sale are mostly poor ones. Insurance markets show the same effect, as the riskiest buyers are the keenest to buy cover.

This is a market failure, the opposite of market efficiency or market success. Government failure is a different idea, the failure of state intervention to improve on the market.

Discuss in Forum

114.

"As the quantity of one variable input in a production process is increased, with quantities of other inputs remaining constant ...........firstly increases, then after reaching a maximum, starts decreasing and finally becomes negative."

A.Marginal cost of the product
B.Value of marginal product
C.Marginal physical product
D.Marginal revenue product

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

The quantity described is the marginal physical product.

This is the law of variable proportions. As one input is increased with the others fixed, the extra output from each additional unit of the variable input, its marginal physical product, at first rises, reaches a maximum, then falls, and finally becomes negative when the fixed inputs are overcrowded.

Marginal cost moves in the opposite direction to marginal product and never becomes negative. The value of marginal product and the marginal revenue product are marginal product multiplied by price or by marginal revenue; the law itself is stated in physical units.

Discuss in Forum

115.

Lifetime welfare of an individual ...........

A.Can be quantified only in some cases
B.Can be quantified
C.Cannot be quantified
D.Cannot be imagined

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

Lifetime welfare of an individual cannot be quantified.

Modern welfare economics treats welfare as a subjective state that can be ranked but not measured in units. An individual's welfare over a whole lifetime depends on consumption, health, relationships and satisfaction at every stage, and there is no cardinal scale on which to add these up into a single number.

Saying it can be quantified, fully or in some cases, assumes a measurable cardinal utility, which the ordinal approach rejects. Welfare can certainly be imagined and compared in rank, so 'cannot be imagined' goes too far.

Discuss in Forum

116.

Consumer's welfare declines due to ................

A.Collusion of firms
B.Increase in consumption
C.Increase in asset holding
D.Freedom of expression

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

Consumer welfare declines due to collusion of firms.

When firms collude, by fixing prices, sharing markets or limiting output as a cartel, they act like a monopoly: prices rise above the competitive level and output falls. Consumers pay more and buy less, losing consumer surplus, which is why competition law prohibits cartels.

An increase in consumption or in asset holdings raises a consumer's welfare, and freedom of expression has no adverse effect on consumer welfare in the economic sense.

Discuss in Forum

117.

If we sum up present time welfare of all consumers, we ..............

A.Can decide public policy
B.Can get aggregate welfare of society
C.Cannot get aggregate welfare of society
D.Can decide foreign policy

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

Summing present-time welfare of all consumers, we cannot get aggregate welfare of society.

Welfare is subjective and ordinal: each person can rank alternatives, but there is no common unit in which one person's satisfaction can be measured against another's. Adding individual welfare levels requires interpersonal comparisons of utility, which Robbins and the new welfare economics rejected as unscientific. Arrow's impossibility theorem shows further that individual rankings cannot in general be combined into a consistent social ranking.

So a simple sum gives neither aggregate social welfare nor a basis for deciding public or foreign policy.

Discuss in Forum

118.

The concept of consumer's welfare is :

A.subjective
B.objective
C.negative
D.positive

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

Consumer's welfare is a subjective concept.

Welfare, or satisfaction, is a psychological state experienced by the consumer. Two people consuming the same goods may feel very different levels of satisfaction, and only the consumer can judge it. This is why economists infer welfare from choices (revealed preference) and rank it ordinally rather than measuring it directly.

It is not objective, since it cannot be observed or measured independently of the person. 'Positive' and 'negative' describe the direction of a change in welfare, or a type of economic statement, not the nature of the concept.

Discuss in Forum

119.

Market regulation is required because .................

A.firms tend to collide
B.firms provide welfare facilities to workers with each other
C.firms reduce costs of goods
D.firms provide variety to consumers

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

Market regulation is required because firms tend to collide, that is, to collude (the paper prints 'collide').

Left alone, firms in concentrated markets have an incentive to agree on prices, output or market shares, earning monopoly profits at consumers' expense. Regulation, and in India the Competition Act of 2002 enforced by the Competition Commission, exists to prevent such cartels and the abuse of dominance.

Providing welfare facilities to workers, reducing costs and offering consumers variety are beneficial behaviour, not reasons for regulating markets.

Discuss in Forum

120.

The entire set of Pareto-optimal allocation in the Edgeworth Box is called the :

A.Contract curve
B.Supply curve
C.Demand curve
D.Edgeworth curve

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

The set of Pareto-optimal allocations is the contract curve.

In the Edgeworth box, an allocation is Pareto optimal when the two consumers' indifference curves are tangent, so their marginal rates of substitution are equal and no trade can make one better off without harming the other. The locus of all these tangency points, running from one origin of the box to the other, is the contract curve.

Supply and demand curves describe market behaviour, not the set of efficient allocations, and 'Edgeworth curve' is not the standard name, even though the box is Edgeworth's.

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