Microeconomics Questions and Answers

Q: Which of the following is shown by the Grand Utility Possibility Frontier ?Select the correct answer from the codes given below :(i) The distribution of welfare between individuals(ii) The Pareto-efficient outputs of two products(iii) Pareto-efficient allocation of factors into two products(iv) The Pareto-efficient outputs of more than two products

The answer is (i), (ii) and (iii).The grand utility possibility frontier is the envelope of the utility possibility curves drawn for every point on the production possibility frontier. Each point on it reflects (iii) a Pareto-efficient allocation of factors between the two products (on the contract curve in production), (ii) the resulting Pareto-efficient outputs of the two products, and (i) a particular distribution of welfare between the individuals.The standard model has two products, so (iv), outputs of more than two products, is not what the frontier shows; options including (iv) are wrong.

Q: What is the reason to used stockpilling policy by entrepreneur ?

The reason is to decrease the cost of production.Stockpiling means building up inventories of inputs (or of output). A firm buys raw materials in bulk when prices are low or before expected shortages, and holds stocks to keep production steady instead of changing output and employment with every swing in demand. Both reduce the average cost of production.No entrepreneur stockpiles to raise his own costs, and consumer surplus and taxation are not the firm's aims here.

Q: Why does a firm under perfect competition continue to operate in the long run despite earning only normal/zero profits ?

The firm stays because the opportunity cost of the self-owned factors is already being recovered.In economics, cost includes normal profit: the return the owner's own capital, land and enterprise could earn in their best alternative use. Zero economic profit therefore means the firm earns exactly what its resources could earn elsewhere, so there is no reason to leave the industry.The firm does produce at minimum average cost and price equals marginal cost in the long run, but those are results of competition, not the firm's motive for staying. Identical cost conditions are an assumption of the model, not a reason for continuing to operate.

Q: What is the short run supply curve of a firm in a perfectly competitive market ?

The short-run supply curve is the part of the marginal cost curve that lies above the average variable cost curve.A competitive firm produces where price equals marginal cost. In the short run it continues to produce as long as price covers average variable cost, since fixed costs must be paid anyway. Below minimum AVC (the shutdown point) it produces nothing. So its supply curve is the rising MC curve from the minimum of AVC upwards.The portion above average total cost is the long-run supply condition, where the firm must cover all costs. Average fixed cost plays no part in the shutdown decision, and the AVC curve itself is not a supply curve.

Q: When the Total Product (TP) is maximum, the Average Product (AP) is ................. and the Marginal Product (MP) is ................... .

When TP is maximum, AP is decreasing and MP is zero.Marginal product is the change in total product from one more unit of the variable input. TP stops rising and reaches its peak exactly where an extra unit adds nothing, so MP = 0 there.By that point MP has already fallen below AP, and whenever MP is below AP, AP falls. So AP is positive but decreasing. AP is at its maximum earlier, where MP = AP, and it never falls to zero while TP is positive, which rules out the options calling AP maximum, minimum or zero.

Q: According to Bergson-Samuelson social welfare function approach, social welfare is maximized when ..................... .

Social welfare is maximised when the social indifference curve is tangent to the utility possibility curve.In the Bergson-Samuelson approach, the grand utility possibility frontier shows the highest combinations of individual utilities the economy can reach, and the social welfare function ranks these combinations through social indifference curves. The optimum, sometimes called the point of constrained bliss, is where the highest attainable social indifference curve just touches the utility possibility frontier.An intersection means a higher social indifference curve is still reachable. The production possibility curve is in output space, not utility space, so tangency with it is not the welfare optimum in this framework.

Q: To maintain price leadership, a dominant firm must ensure that ...................... .

The key's answer is that the small firms do not produce more or less than the level agreed upon in the market-sharing agreement.In price leadership, the leader sets the price and the other firms follow it. The arrangement holds only if the followers also keep to the output shares implied by that price. If they produced more than their share, the leader could not sell its own planned output at the price it set, and if they produced less the agreed market split would break down. So the leader must be able to rely on the followers sticking to their agreed quantities.The other options are not conditions of price leadership: the leader's own price defines the market price, and product quality or innovation by small firms are separate matters.

Q: In Chamberlin's alternative approach, why does the excess capacity of a monopolistically competitive firm emerge ?

Excess capacity emerges from the absence of active price competition despite free entry and exit.In Chamberlin's analysis, if firms in a group avoid price cutting, new firms keep entering while profits exist, and each firm's demand curve shifts left until it is tangent to the average cost curve at a point to the left of minimum average cost. Each firm then produces less than its optimum output, which is excess capacity.With active price competition, firms would cut prices and expand output towards the minimum of average cost, reducing excess capacity. So it is the combination of free entry with no price competition that produces it, not free entry or price competition alone.

Q: Which of the following term is more important in welfare economics and in designing government policy ?

The more important term is Consumer surplus.Consumer surplus, the difference between what consumers are willing to pay and what they actually pay, measures the benefit consumers get from a market. Because it can be measured in money terms, it is used in cost-benefit analysis and to judge the welfare effects of taxes, subsidies, tariffs and price controls, for example through deadweight loss.Indifference curves, the equi-marginal principle and revealed preference are tools of consumer theory that explain choice, but they do not give the money measure of welfare gains and losses that policy analysis needs.

Q: Which of the theorems of welfare economics considered that the general competitive equilibrium is Pareto Optimal ?

It is only the first theorem of welfare economics.The first fundamental theorem states that, under perfect competition and without externalities, every general competitive equilibrium is Pareto optimal.The second theorem runs the other way: any Pareto optimal allocation can be reached as a competitive equilibrium, given a suitable redistribution of initial endowments (lump-sum transfers). It concerns how to reach a chosen optimum, not the optimality of competitive equilibrium, so the options naming the second theorem are wrong.

151.

Which of the following is shown by the Grand Utility Possibility Frontier ?

Select the correct answer from the codes given below :

(i) The distribution of welfare between individuals
(ii) The Pareto-efficient outputs of two products
(iii) Pareto-efficient allocation of factors into two products
(iv) The Pareto-efficient outputs of more than two products

A.(i), (iii) and (iv)
B.(i) and (ii) only
C.(ii) and (iii) only
D.(i), (ii) and (iii)

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: D

The answer is (i), (ii) and (iii).

The grand utility possibility frontier is the envelope of the utility possibility curves drawn for every point on the production possibility frontier. Each point on it reflects (iii) a Pareto-efficient allocation of factors between the two products (on the contract curve in production), (ii) the resulting Pareto-efficient outputs of the two products, and (i) a particular distribution of welfare between the individuals.

The standard model has two products, so (iv), outputs of more than two products, is not what the frontier shows; options including (iv) are wrong.

Discuss in Forum

152.

What is the reason to used stockpilling policy by entrepreneur ?

A.To decrease the cost of production
B.To increase the cost of production
C.To increase the consumer surplus
D.To increase the taxation

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: A

The reason is to decrease the cost of production.

Stockpiling means building up inventories of inputs (or of output). A firm buys raw materials in bulk when prices are low or before expected shortages, and holds stocks to keep production steady instead of changing output and employment with every swing in demand. Both reduce the average cost of production.

No entrepreneur stockpiles to raise his own costs, and consumer surplus and taxation are not the firm's aims here.

Discuss in Forum

153.

Why does a firm under perfect competition continue to operate in the long run despite earning only normal/zero profits ?

A.The firm operates at socially optimum level of output in the long run
B.The firm achieves maximum productive efficiency in the long run
C.The opportunity cost of the selfowned factors is already being recovered by the firm in the long run
D.All the firms are operating under identical cost conditions in the long run

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: C

The firm stays because the opportunity cost of the self-owned factors is already being recovered.

In economics, cost includes normal profit: the return the owner's own capital, land and enterprise could earn in their best alternative use. Zero economic profit therefore means the firm earns exactly what its resources could earn elsewhere, so there is no reason to leave the industry.

The firm does produce at minimum average cost and price equals marginal cost in the long run, but those are results of competition, not the firm's motive for staying. Identical cost conditions are an assumption of the model, not a reason for continuing to operate.

Discuss in Forum

154.

What is the short run supply curve of a firm in a perfectly competitive market ?

A.The part of the marginal cost curve that lies above the average cost curve
B.The part of the marginal cost curve that lies above the average fixed cost curve
C.The part of the marginal cost curve that lies above the average variable cost curve
D.The part of the average variable cost curve that lies above the marginal cost curve

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: C

The short-run supply curve is the part of the marginal cost curve that lies above the average variable cost curve.

A competitive firm produces where price equals marginal cost. In the short run it continues to produce as long as price covers average variable cost, since fixed costs must be paid anyway. Below minimum AVC (the shutdown point) it produces nothing. So its supply curve is the rising MC curve from the minimum of AVC upwards.

The portion above average total cost is the long-run supply condition, where the firm must cover all costs. Average fixed cost plays no part in the shutdown decision, and the AVC curve itself is not a supply curve.

Discuss in Forum

155.

When the Total Product (TP) is maximum, the Average Product (AP) is ................. and the Marginal Product (MP) is ................... .

A.maximum, minimum
B.minimum, maximum
C.Decreasing, zero
D.Zero, decreasing

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: C

When TP is maximum, AP is decreasing and MP is zero.

Marginal product is the change in total product from one more unit of the variable input. TP stops rising and reaches its peak exactly where an extra unit adds nothing, so MP = 0 there.

By that point MP has already fallen below AP, and whenever MP is below AP, AP falls. So AP is positive but decreasing. AP is at its maximum earlier, where MP = AP, and it never falls to zero while TP is positive, which rules out the options calling AP maximum, minimum or zero.

Discuss in Forum

156.

According to Bergson-Samuelson social welfare function approach, social welfare is maximized when ..................... .

A.The social indifference curve is tangent to the utility possibility curve
B.The social indifference curve intersects the utility possibility curve
C.The social indifference curve is tangent to the production possibility curve
D.The social indifference curve intersects the production possibility curve

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: A

Social welfare is maximised when the social indifference curve is tangent to the utility possibility curve.

In the Bergson-Samuelson approach, the grand utility possibility frontier shows the highest combinations of individual utilities the economy can reach, and the social welfare function ranks these combinations through social indifference curves. The optimum, sometimes called the point of constrained bliss, is where the highest attainable social indifference curve just touches the utility possibility frontier.

An intersection means a higher social indifference curve is still reachable. The production possibility curve is in output space, not utility space, so tangency with it is not the welfare optimum in this framework.

Discuss in Forum

157.

To maintain price leadership, a dominant firm must ensure that ...................... .

A.the small firms do not produce more or less than the level agreed upon market sharing agreement
B.it does not charge a price higher than the market price
C.the small firms do not improve the quality of the product
D.the small firms do not introduce innovations

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: A

The key's answer is that the small firms do not produce more or less than the level agreed upon in the market-sharing agreement.

In price leadership, the leader sets the price and the other firms follow it. The arrangement holds only if the followers also keep to the output shares implied by that price. If they produced more than their share, the leader could not sell its own planned output at the price it set, and if they produced less the agreed market split would break down. So the leader must be able to rely on the followers sticking to their agreed quantities.

The other options are not conditions of price leadership: the leader's own price defines the market price, and product quality or innovation by small firms are separate matters.

Discuss in Forum

158.

In Chamberlin's alternative approach, why does the excess capacity of a monopolistically competitive firm emerge ?

A.Absence of active price competition despite free entry and exit
B.Active price competition and free entry and exit
C.Active price competition
D.Free entry and exit

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: A

Excess capacity emerges from the absence of active price competition despite free entry and exit.

In Chamberlin's analysis, if firms in a group avoid price cutting, new firms keep entering while profits exist, and each firm's demand curve shifts left until it is tangent to the average cost curve at a point to the left of minimum average cost. Each firm then produces less than its optimum output, which is excess capacity.

With active price competition, firms would cut prices and expand output towards the minimum of average cost, reducing excess capacity. So it is the combination of free entry with no price competition that produces it, not free entry or price competition alone.

Discuss in Forum

159.

Which of the following term is more important in welfare economics and in designing government policy ?

A.Indifference curve
B.Consumer surplus
C.Equi-marginal utility
D.Revealed preference

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: B

The more important term is Consumer surplus.

Consumer surplus, the difference between what consumers are willing to pay and what they actually pay, measures the benefit consumers get from a market. Because it can be measured in money terms, it is used in cost-benefit analysis and to judge the welfare effects of taxes, subsidies, tariffs and price controls, for example through deadweight loss.

Indifference curves, the equi-marginal principle and revealed preference are tools of consumer theory that explain choice, but they do not give the money measure of welfare gains and losses that policy analysis needs.

Discuss in Forum

160.

Which of the theorems of welfare economics considered that the general competitive equilibrium is Pareto Optimal ?

A.Only first theorem of welfare economics
B.Only second theorem of welfare economics
C.Both the first and second theorem of welfare economics
D.Neither the first nor second theorem of welfare economics

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: A

It is only the first theorem of welfare economics.

The first fundamental theorem states that, under perfect competition and without externalities, every general competitive equilibrium is Pareto optimal.

The second theorem runs the other way: any Pareto optimal allocation can be reached as a competitive equilibrium, given a suitable redistribution of initial endowments (lump-sum transfers). It concerns how to reach a chosen optimum, not the optimality of competitive equilibrium, so the options naming the second theorem are wrong.

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