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Microeconomics Questions and Answers

41.

If Total Revenue (TR) = \(110Q - 5Q^2\), Average Revenue (AR) will be:

Exam Year(s)

DSSSB PGT - 2023,

Answer: A

Average revenue is total revenue divided by output.

\[ AR = \frac{TR}{Q} = \frac{110Q - 5Q^2}{Q} = 110 - 5Q \]

The marginal revenue is the derivative \(110 - 10Q\), which is the second option, so it is the usual confusion. The option 110 - 25Q has no basis, and 5Q is just the subtracted term. The answer is 110 - 5Q, option A.

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42.

A monopolistically competitive firm earns supernormal profit in the short run because of:

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

A monopolistically competitive firm sells a differentiated product, so it has some control over the price it fixes. This control, based on the loyalty of its buyers to its brand, lets it earn super normal profit in the short run. Free entry and exit removes the profit in the long run, and imperfect knowledge is a feature of the buyers. The key gives control over the price of the product, option D. In the long run entry of new firms brings the profit down to the normal level.

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43.

A collusion is tacit when:

Exam Year(s)

DSSSB PGT - 2023,

Answer: C

A collusion is tacit when the firms agree without any formal or written agreement, which makes it hard to detect, as when firms follow the price set by a leader. The kinked demand curve and price wars are other oligopoly features, and cheating on each other describes the breakdown of collusion. The answer is firms do not document their agreement and collude, option C.

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44.

Which of the following is not a feature of monopolistic competition?

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

Monopolistic competition has many buyers and sellers, excess capacity (firms produce below the minimum average cost) and a marginal revenue curve below the average revenue curve, since the demand curve slopes down. The demand curve of the firm is not perfectly inelastic: with many close substitutes it is fairly elastic. The answer is option D.

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45.

A monopolist's profit-maximizing level of output is:

Exam Year(s)

DSSSB PGT - 2023,

Answer: A

A monopolist produces where marginal revenue equals marginal cost, and because its price is above marginal cost it restricts output compared with the competitive level that maximises the sum of consumer and producer surplus. So the profit maximising output is below the level that maximises total surplus, which is the source of the deadweight loss. The answer is option A.

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46.

What is the relationship between Price (P), Marginal Revenue (MR), and Marginal Cost (MC) for a profit-maximizing monopoly that charges the same price to all consumers?

Exam Year(s)

DSSSB PGT - 2023,

Answer: C

A single price monopolist faces a downward sloping demand curve, so to sell one more unit it must cut the price on all units, and the marginal revenue is less than the price. The profit maximising rule is MR = MC. So P is greater than MR and MR equals MC. The answer is option C.

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47.

Normative economics' statements:

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

Normative economics gives value judgements about what ought to be, and so its statements are subjective and prescribe what should be done. Positive economics describes how and why things happen, and its statements are objective and testable. The answer is option D.

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48.

Risk refers to a situation in which:

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

Risk is a situation in which the exact outcome is not known, but the probability of each possible outcome is known, as in a game of chance. Uncertainty is the situation where the probabilities are not known either. The answer is option D.

Frank Knight separated risk, where probabilities can be given to the outcomes, from uncertainty, where they cannot, and insurance is possible only for risk.

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49.

What happens to elasticity of demand for a commodity, if the time involved is long?

Exam Year(s)

DSSSB PGT - 2023,

Answer: B

Demand for a commodity is more elastic in the long run than in the short run, because with more time consumers can find substitutes and change habits, and so the elasticity of demand increases when the time involved is long. The answer is increases, option B.

Marshall noted that in the short run consumers cannot easily change their buying, so demand is less elastic, and with time they find substitutes.

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50.

If average product of labour is positive but declining, marginal product of labor could be:

Exam Year(s)

DSSSB PGT - 2023,

Answer: D

When the average product of labour is positive but declining, the marginal product is below the average product. The marginal product can then be positive and declining, zero, or even negative, since all that is needed is that it is below the average. So all the given options are possible. The answer is option D.

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