Business Economics Questions and Answers

Answer: A

With perfect complements, indifference curves are right angled (L-shaped).

Perfect complements are consumed in a fixed proportion, like left and right shoes. An extra unit of one good without the other adds nothing to satisfaction, so each indifference curve has a corner at the fixed ratio, with a vertical arm above and a horizontal arm to the right. The marginal rate of substitution is zero or infinite along the arms.

Convex, downward-sloping curves describe goods that are imperfect substitutes. Perfect substitutes give straight downward-sloping lines. 'Left angled' is not a recognised shape.

Answer: C

Both X and Y are correct.

The long run average cost curve is U-shaped, but flatter than the short run curves, because in the long run the firm can adjust all inputs and economies and diseconomies of scale set in gradually. That is statement X.

It is drawn as the curve that is tangent to each short run average cost curve, enveloping them all from below, which is why it is called the envelope curve (statement Y). Since both are true, the options rejecting one or both are wrong.

Answer: B

The cost that is not fixed is charges for fuel and electricity.

Fuel and power consumed in running machines rise and fall with the volume of output, so they are variable costs.

Interest on borrowed capital, depreciation on equipment and buildings, and contractual rent are incurred whatever the level of output in the short run. They are the standard examples of fixed costs.

Answer: C

The structure is monopoly.

A monopolist is the only seller of its product, so the firm is the industry, and the downward-sloping market demand curve is the firm's own demand curve.

Under perfect competition the firm faces a horizontal demand curve at the market price, quite different from the downward-sloping market curve. Under monopolistic competition and oligopoly there are many or several firms, each facing only a part of market demand.

Answer: C

Both X and Y are correct.

Selling cost is expenditure incurred to change the demand for a product, chiefly advertising and sales promotion; Chamberlin introduced the idea, and competitive advertising by rival firms is its standard example (statement X).

Monopolistic competition is also said to involve several wastes: excess capacity, because each firm produces short of the minimum point of its average cost curve; competitive advertising that largely cancels out; too many firms and brands; and cross-transport. That is statement Y, so both are true.

Answer: D

The feature that does not belong is interdependence.

Interdependence, where each firm must allow for its rivals' reactions when setting price or output, is the defining feature of oligopoly. Under monopolistic competition there are so many firms that each acts independently.

Product differentiation, free entry and exit, and selling costs are all characteristic features of monopolistic competition as Chamberlin described it.

Answer: C

The correct matching is (w)-(ii) (x)-(iv) (y)-(i) (z)-(iii).

• Monopolistic competition: Edward Chamberlin, The Theory of Monopolistic Competition (1933).
• Price rigidity: Paul Sweezy, whose kinked demand curve (1939) explains sticky oligopoly prices.
• Dumping: selling the same good at different prices in foreign and domestic markets.
• Collusion: firms working together to fix prices.

Options pairing price rigidity with collusion or monopolistic competition with Sweezy reverse these attributions.

Answer: D

The person who did not contribute is Robert Samuelson.

John von Neumann and Oskar Morgenstern founded game theory with Theory of Games and Economic Behavior (1944). John Nash introduced the Nash equilibrium for non-cooperative games in 1950 and shared the 1994 Nobel prize for it.

No Robert Samuelson figures among the contributors to the theory of games. The name looks like a distractor built on Paul Samuelson, the economist, whose work was on consumer theory, welfare and macroeconomics rather than game theory.

Answer: C

Demand for necessities is usually highly inelastic (the paper prints 'inealstic').

Necessities such as food grains, salt and essential medicines must be bought whatever the price, and they have few substitutes, so a change in price produces a proportionately smaller change in the quantity demanded.

Highly elastic demand is typical of luxuries and goods with close substitutes, infinitely elastic demand is a theoretical case (a perfectly competitive firm's demand curve), and unitary elasticity is the borderline case where spending stays constant.

Answer: B

The price elasticity would be less than 1.

Addictive products are consumed out of habit or dependence, so consumers keep buying them when prices rise. The proportionate fall in quantity is smaller than the proportionate rise in price, which means demand is inelastic, with elasticity less than one. This is why governments can raise large revenue from taxes on tobacco and alcohol.

Elasticity greater than one or infinite would mean consumers cut back sharply or switch entirely, and unitary elasticity would mean spending stayed constant, none of which fits addictive goods.