Microeconomics Questions and Answers

Q: Which of the following explains the concept of risk ?

Risk arises when the variability of possible outcomes is very high.Risk describes a situation where several outcomes are possible, each with a known probability. It is measured by the dispersion of those outcomes around the expected value, usually the variance or standard deviation. The greater the spread of possible outcomes, the greater the risk.Low or zero variability means the outcome is nearly certain, so there is little or no risk. Constant variability does not describe risk, and 'highly accurate' variability is not a meaningful measure.

Q: Which of the following statement(s) is/are true for the assumption of Pure Competition ?Select the correct answer from the codes given below :(i) The firm in pure competition is a price taker(ii) The firms produced homogeneous products(iii) This market includes a large number of firms(iv) The firms produce heterogeneous products

The assumptions are (i), (ii) and (iii).Pure competition assumes a large number of firms (iii), each too small to affect the price, so each is a price taker (i), and all of them produce a homogeneous product (ii), so buyers have no reason to prefer one seller.Heterogeneous products (iv) belong to monopolistic competition, where product differentiation gives each firm some control over its price. Every option including (iv) is therefore wrong, and the options with only two statements leave out a valid assumption.

161.

Which of the following explains the concept of risk ?

A.When the variability of possible outcomes is very high
B.When the variability of possible outcomes is very low
C.When the variability of possible outcomes is constant
D.When the variability of possible outcomes is highly accurate

Exam Year(s)

MH SET - 2025, SET Exam - 2025,

Answer: A

Risk arises when the variability of possible outcomes is very high.

Risk describes a situation where several outcomes are possible, each with a known probability. It is measured by the dispersion of those outcomes around the expected value, usually the variance or standard deviation. The greater the spread of possible outcomes, the greater the risk.

Low or zero variability means the outcome is nearly certain, so there is little or no risk. Constant variability does not describe risk, and 'highly accurate' variability is not a meaningful measure.

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162.

Which of the following statement(s) is/are true for the assumption of Pure Competition ?

Select the correct answer from the codes given below :

(i) The firm in pure competition is a price taker
(ii) The firms produced homogeneous products
(iii) This market includes a large number of firms
(iv) The firms produce heterogeneous 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 - 2025, SET Exam - 2025,

Answer: D

The assumptions are (i), (ii) and (iii).

Pure competition assumes a large number of firms (iii), each too small to affect the price, so each is a price taker (i), and all of them produce a homogeneous product (ii), so buyers have no reason to prefer one seller.

Heterogeneous products (iv) belong to monopolistic competition, where product differentiation gives each firm some control over its price. Every option including (iv) is therefore wrong, and the options with only two statements leave out a valid assumption.

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163.

For downward movement along the iso-quant, MRTS of Labour per unit of capital (MRTSL,K) is given by

A.- dK/dL
B.dK/dL
C.dL/dK
D.- dL/dK

Exam Year(s)

UGC NET - 2012,

Answer: A

Along an isoquant, as labour is added capital is given up, so dK/dL is negative. The marginal rate of technical substitution of labour for capital is defined as the amount of capital that can be given up for one more unit of labour with output unchanged, a positive number, so MRTS(L,K) = - dK/dL, which is option (A). Option (B), dK/dL, is the slope and so is negative, and (C) and (D) are the reciprocal, dL/dK, which gives the substitution of capital for labour instead.

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164.

Charging a different price in different markets is called

A.price discrimination
B.second degree price discrimination
C.third degree price discrimination
D.perfect price discrimination

Exam Year(s)

UGC NET - 2012,

Answer: A

Charging different prices in different markets for the same product is called price discrimination, which is the general term and is option (A). The other options are particular kinds of it. In first-degree (perfect) discrimination each buyer pays the most he is willing to pay. In second-degree discrimination the price depends on the quantity bought, as with block pricing. In third-degree discrimination different groups or markets are charged different prices, which is the nearest to the wording of the question, but the question speaks of the practice in general.

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165.

Labour theory of value was propounded by

a. Adam Smith
b. David Ricardo
c. Ragnar Nurkse, Gunnar Myrdal, R.M. Solow
d. Fei-Rani's, Ragnar Nurkse
Codes :

A.a and b
B.a and c
C.a, b, c
D.a, b, c, d

Exam Year(s)

UGC NET - 2012,

Answer: A

The labour theory of value was propounded by Adam Smith and David Ricardo, statements (a) and (b). Smith held that labour was the real measure of value in the early state of society and Ricardo developed it into a theory in which relative values depend on the labour needed to produce goods. Nurkse, Myrdal and Solow are growth theorists and Fei and Ranis are known for the dual economy model, so statements (c) and (d) are wrong. The code is (A).

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166.

Assertion (A) : There is a natural tendency to collude under oligopoly.

Reason (R) : Inter-dependence of firms in oligopolistic markets.
Codes :

A.Both (A) and (R) are correct, but (R) is not the correct explanation of (A).
B.Both (A) and (R) are correct, and (R) is the correct explanation of (A).
C.(A) is correct, but (R) is incorrect.
D.(A) is incorrect, but (R) is correct.

Exam Year(s)

UGC NET - 2012,

Answer: B

Both statements are correct, and the reason is the correct explanation, so (B) is the key. Under oligopoly there are few firms and each of them knows that its price and output affect the others and that the others will react. This inter-dependence makes rivalry costly and leads firms towards a collusive agreement, overt as in a cartel or tacit as in price leadership. So the inter-dependence explains the tendency to collude, and (A), (C) and (D) are wrong.

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167.

Assertion (A) : In short run, the marginal cost of output is the cost of additional labour and materials used in production.

Reason (R) : Materials and labour used in production alone vary in short run.
Codes :

A.(A) is correct and (R) is incorrect.
B.(A) is incorrect, but (R) is correct.
C.Both (A) and (R) are correct and (R) is the correct explanation of (A).
D.Both (A) and (R) are incorrect.

Exam Year(s)

UGC NET - 2012,

Answer: C

Both statements are correct and the reason explains the assertion, so (C) is the key. In the short run some factors, such as plant and equipment, are fixed, and only labour and materials can be varied. So the cost of producing one more unit is the cost of the extra labour and materials used, because there is no change in the fixed cost. Options (A), (B) and (D) call one or both of the statements incorrect.

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168.

Identify the order of chronological development of the theory of demand.

a. Marshall's theory of demand
b. Indifference curves
c. Revealed preference theory
d. Weak Preference ordering theory of demand.
Codes :

A.a, c, d, b
B.d, b, a, c
C.a, c, b, d
D.a, b, c, d

Exam Year(s)

UGC NET - 2012,

Answer: D

The order of development of the theory of demand is Marshall's cardinal utility theory (a) in 1890, the indifference curves (b), developed by Edgeworth and Pareto and then Hicks and Allen in 1934, Samuelson's revealed preference theory (c) in 1938 and the weak preference ordering approach (d) of Houthakker in 1950. So the order is a, b, c, d, option (D). The other options place the later revealed preference or ordering theories before Marshall.

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169.

List - I	List - II
a. Kinked demand curve hypothesis	1. William Baumol
b. Sales maximization model of oligopoly	2. Paul Sweezy
c. Social Welfare Criterion	3. Adam Smith
d. Law of Invisible hand	4. Bergson

Codes : a b c d

A.4 3 1 2
B.2 1 4 3
C.2 3 1 4
D.1 4 3 2

Exam Year(s)

UGC NET - 2012,

Answer: B

The kinked demand curve hypothesis is that of Paul Sweezy (a-2), the sales maximisation model of oligopoly is that of William Baumol (b-1), the social welfare criterion is that of Bergson (c-4) and the law of the invisible hand is Adam Smith's (d-3). So the code is 2, 1, 4, 3, option (B). Options (A), (C) and (D) give the kinked demand curve to Bergson, Baumol or Smith, who did not propose it.

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170.

A demand curve, which is parallel to the horizontal axis, showing quantity, has the price elasticity equal to

A.Zero
B.Infinity
C.Less than one
D.One

Exam Year(s)

UGC NET - 2012,

Answer: B

A demand curve parallel to the horizontal axis, with quantity on that axis, is a horizontal line at one price. At that price consumers will buy any quantity, and at any higher price they will buy nothing, so the quantity responds without limit to a tiny change in price. The price elasticity is therefore infinite.

Zero elasticity belongs to a vertical demand curve, where quantity does not change at all. A value less than one belongs to a steep, inelastic curve, and unit elasticity to a rectangular hyperbola, so options A, C and D are wrong.

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