Microeconomics Questions and Answers

Answer: B

When total product is at its maximum, marginal product is Zero.

With one variable input, marginal product is the change in total product from one more unit of that input: \(MP = \Delta TP/\Delta L\). Total product rises while MP is positive, reaches its peak where MP falls to zero, and declines once MP turns negative. So the maximum of TP coincides with MP = 0, the end of stage II of production.

MP reaches its own maximum much earlier, at the point of inflexion of the TP curve, and it is falling, not rising, in the range that leads up to the TP peak. 'Falling' describes MP on the way to the peak, but at the peak itself MP is exactly zero.

Answer: C

People who choose the riskiest investments are Risk seekers.

Attitudes to risk are classified by comparing a gamble with its expected value. A risk seeker (risk lover) prefers the gamble to a certain sum equal to its expected value; the utility of wealth is convex for such a person, so he chooses the most risky investments.

A risk-averse person prefers the certain sum and needs a premium to accept risk, and a risk-neutral person is indifferent and looks only at expected returns. 'Risk takers' is an everyday phrase rather than one of the three categories of expected-utility theory, so the technical answer is risk seekers.

Answer: C

In a game the players know their decisions are Strategically interdependent.

Game theory studies situations in which each player's best choice depends on what the others do, and every player knows this. A firm in an oligopoly setting its price, for example, must anticipate its rivals' responses, because their choices affect its payoff and its choice affects theirs.

'Independent' decisions would make the game trivial, since each player could ignore the others. 'Dependant' alone misses the essential point that the dependence runs both ways and is taken into account strategically, and 'mutually inclusive' is a term from probability, not game theory.

Answer: B

A successful advertisement campaign makes the demand curve Shift to the right.

Advertising changes consumers' tastes and preferences in favour of the product, which is one of the non-price determinants of demand. At every price, consumers now want to buy more, so the whole demand curve shifts outward to the right; this is an increase in demand, not a movement along the curve.

A leftward shift would mean a fall in demand, the opposite of a successful campaign. Advertising does not make the demand curve upward sloping, and a curve parallel to the Y axis would mean perfectly inelastic demand, which is not what advertising produces.

Answer: A

Economic rent is the payment to a factor whose supply is Completely inelastic.

In Ricardo's and the modern theory, economic rent is the part of a factor's earnings above its transfer earnings, the minimum needed to keep it in its present use. When supply is perfectly inelastic, as with land in fixed total supply, the factor would be available even at a zero price, so its entire payment is economic rent.

With completely elastic supply, the whole payment is transfer earnings and rent is zero. With unit or ordinary elasticity, payment is partly rent and partly transfer earnings, so these do not describe a factor whose payment is pure rent.

Answer: D

The general equilibrium model was developed by Leon Walras.

In his Elements of Pure Economics (1874), Walras set out a system of simultaneous equations describing supply and demand in all markets at once, and asked whether a set of prices exists that clears every market together. This is the foundation of general equilibrium theory, later made rigorous by Arrow and Debreu.

Alfred Marshall is the founder of partial equilibrium analysis, which studies one market at a time. Adam Smith described the invisible hand but built no formal model, and Kaldor and Hicks are known for the compensation criterion in welfare economics.

Answer: D

The one that is not a static property of general equilibrium is efficient distribution of profits.

A competitive general equilibrium has three static efficiency properties: efficiency in production (factors allocated among firms so that marginal rates of technical substitution are equal), efficiency in exchange (goods distributed among consumers so that marginal rates of substitution are equal, the equilibrium of consumption), and efficiency in the product mix (the marginal rate of transformation equals the marginal rate of substitution).

The first three options name these properties. The distribution of profits is not an efficiency condition: in long-run competitive equilibrium economic profits are zero, and how income is shared is a matter of equity, not of the static efficiency of the equilibrium.

Answer: A

Every point on the Edgeworth contract curve is a Pareto efficient point.

The contract curve joins the points in the Edgeworth box where the two consumers' indifference curves are tangent, so their marginal rates of substitution are equal. At such a point no reallocation can make one person better off without making the other worse off, which is the definition of Pareto efficiency.

Points off the curve are Pareto inefficient or suboptimal, since moving towards the curve can make both people better off. 'Pareto's welfare point' is not a standard term, and the contract curve contains many efficient points, not one.

Answer: B

The key's answer is Externalities.

There is no standard result called the 'third fundamental theorem of welfare economics': textbooks give two, that a competitive equilibrium is Pareto efficient and that any Pareto efficient allocation can be reached as a competitive equilibrium after a suitable redistribution of endowments. A 'third' theorem is a label some authors use for other results, and I could not find which one the paper means. Whatever it is, the welfare theorems all assume that there are no externalities: an externality is a cost or benefit not priced in the market, and competitive prices then fail to reflect true social cost.

Economies of scale and economies of scope are also ruled out by the second theorem's convexity condition, which is the reason a candidate may hesitate between those options and externalities; diseconomies of scale do not break convexity, so option C is the weakest. The key's choice of externalities is kept because no other reading of the question is better supported.

Answer: A

The market allocation under adverse selection is Pareto inefficient.

Adverse selection arises from asymmetric information: one side of the market knows the quality or risk of what is traded and the other does not. In Akerlof's market for lemons, buyers offer only an average price, owners of good cars withdraw, and the market shrinks or collapses even though trades that would benefit both sides exist.

Because mutually beneficial trades fail to take place, the outcome is not Pareto efficient or optimal; this is a classic case of market failure. That rules out the three options describing the allocation as efficient or optimal.