Microeconomics Questions and Answers

211.

As long as the substitution effect dominates the income effect, the labour supply curve is

A.negatively sloped
B.positively sloped
C.bend backward
D.shifting towards left

Exam Year(s)

UGC NET - 2013,

Answer: B

As long as the substitution effect dominates the income effect, a rise in the wage makes leisure dearer and the worker offers more labour, so the labour supply curve is positively sloped. It bends backward only when the income effect becomes stronger than the substitution effect at high wages, which is the reverse case. A negative slope throughout would require the income effect to dominate from the start, and a leftward shift is a change in supply, not a slope. So (B) is the answer. The backward bending portion comes at a higher wage, when workers prefer more leisure to more income.

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212.

The distinguishing characteristics of monopolistic competition are

I. Product differentiation
II. Non-price competition
III. Large number of firms and freedom to entry and exit
IV. Firms are interdependent
Codes :

A.I & III are correct.
B.I, II and IV are correct.
C.I, II and III are correct.
D.I, III and IV are correct.

Exam Year(s)

UGC NET - 2013,

Answer: C

Monopolistic competition is distinguished by product differentiation (I), non-price competition such as advertising and selling costs (II), and a large number of firms with freedom of entry and exit (III). Statement IV, that firms are interdependent, belongs to oligopoly: in monopolistic competition each firm is small and acts without regard to its rivals' reactions. So I, II and III are correct, option (C). Options (A), (B) and (D) leave out a true statement or include the oligopoly feature IV.

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213.

Assertion (A) : Monopoly is Pareto inefficient.

Reason (R) : It would be possible to change the allocation of resources to make the amount of income he would be prepared to pay in exchange of the reduction in price.
Codes :

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

Exam Year(s)

UGC NET - 2013,

Answer: A

The official key is (A): the assertion is correct and the reason is the correct explanation. A monopolist restricts output and charges a price above marginal cost, so there are consumers who value the extra output above its cost. The reason, awkwardly worded, says the allocation could be changed so that consumers pay the price of the reduction for more output, which makes some better off without harming others, and this is why the monopoly outcome is not Pareto efficient. The options that reject either statement are wrong.

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214.

If MPL/MPK does not change with any proportionate change in labour and capital then the production function is

A.Linear
B.Non-linear
C.Homogeneous
D.Homothetic

Exam Year(s)

UGC NET - 2013,

Answer: D

If the ratio MPL/MPK does not change with any proportionate change in labour and capital, then the marginal rate of technical substitution is the same at every point on a ray from the origin, and this is the defining property of a homothetic production function. Homogeneous functions are a special case of homothetic ones and so the test given is the wider property. A linear function has constant MPL and MPK, and a non-linear function is a vague category. So the answer is (D), homothetic. A homothetic function is a monotonic transformation of a homogeneous function, so every homogeneous function has this property but the converse is not true.

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215.

Match the items in the List - I with items in List - II. Select the correct answer from the code given below :

List - I	List - II
I. Agency Theory of Firm	1. O.E. Williamson
II. X-inefficiency	2. M.C. Jensen and W.J. Meckling
III. The Utility Maximisation Model	3. Wilfredo Pareto
IV. Edgeworth box diagram first used by	4. Harvey Leibenstein

Codes : I II III IV

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

Exam Year(s)

UGC NET - 2013,

Answer: B

The correct matching is I-2, II-4, III-1, IV-3. The agency theory of the firm is by M.C. Jensen and W.J. Meckling, X-inefficiency is Harvey Leibenstein's concept, the utility maximisation model of the firm is O.E. Williamson's managerial discretion model, and the Edgeworth box diagram was first used by Wilfredo Pareto. The code 2 4 1 3 is option (B). The other options give at least two wrong pairs, such as giving Leibenstein's concept to Pareto.

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216.

At the point of tangency between short-run average total cost and long-run average cost, the short-run marginal cost

A.greater than long-run marginal cost
B.less than long-run marginal cost
C.is far above long-run marginal cost
D.equals long-run marginal cost

Exam Year(s)

UGC NET - 2013,

Answer: D

At the point of tangency between the short-run average total cost curve and the long-run average cost curve, the short-run marginal cost equals the long-run marginal cost. At that output the short-run and long-run average costs are the same, and since the curves touch with the same slope, the marginal costs derived from them coincide. So (D) is correct. Marginal cost cannot be greater or less than the long-run value at the tangency, and 'far above' is not true of a point where the curves just touch.

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217.

The equilibrium in a market is incomplete with increasing returns to scale only in the case of

A.imperfectly competitive market
B.monopolistic market
C.perfectly competitive market
D.none of the above

Exam Year(s)

UGC NET - 2013,

Answer: C

Under increasing returns to scale, average cost keeps falling as output rises, so a firm that takes price as given would want to expand without limit and no competitive equilibrium exists. That is why the equilibrium is incomplete with increasing returns only in perfect competition, option (C). Imperfectly competitive and monopolistic markets can reach equilibrium with a falling cost curve because the firm faces a falling demand curve and a limit to output. Hence (A), (B) and (D) are wrong. With increasing returns the firm would go on expanding as long as price exceeds its falling marginal cost, so there is no stable output.

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218.

Marginal Cost is less than the Average Cost when Average Cost falls with

A.an increase in output
B.a decrease in output
C.constant output
D.no change in output

Exam Year(s)

UGC NET - 2013,

Answer: A

When average cost is falling, marginal cost is below it: each extra unit adds less to total cost than the existing average, which pulls the average down. So marginal cost is less than average cost when average cost falls with an increase in output. When output decreases, the average cost behaviour depends on the other side of the curve, and at constant output or no change there is no movement along the curve. Marginal cost cuts average cost from below at its minimum point. The marginal cost curve cuts the average cost curve at the lowest point of the latter, and beyond that point marginal cost is above average cost.

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219.

The pure monopolist obtains equilibrium level of output when

A.Marginal Revenue = Marginal Cost
B.Price = Marginal Cost
C.Price is the lowest
D.Price is the highest

Exam Year(s)

UGC NET - 2013,

Answer: A

A pure monopolist maximises profit at the output where marginal revenue equals marginal cost, with marginal cost cutting marginal revenue from below. Price is then read from the demand curve above that output, and it is above marginal cost. Price equal to marginal cost is the rule of perfect competition, not of monopoly. The monopolist does not seek the lowest or the highest price, because the profit is what matters, and neither extreme gives the maximum profit.

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220.

The transformation curve is derived from the

A.Consumption Curve
B.Utility Possibility Curve
C.Social Welfare Function
D.Production Contract Curve

Exam Year(s)

UGC NET - 2013,

Answer: D

The transformation curve (production possibility frontier) is derived from the production contract curve in the Edgeworth box. Every point on the contract curve is an efficient allocation of two inputs between two goods, and the output of the two goods at each point plots one point of the transformation curve. The consumption curve, utility possibility curve and social welfare function belong to the consumption or welfare side of the analysis. The slope of the transformation curve at any point gives the marginal rate of transformation between the two goods.

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