Microeconomics Questions and Answers

Answer: D

In a one shot prisoner's dilemma the dominant strategy for each player is to cheat (confess), because it gives the better pay off whatever the other does. When the game is repeated with the same opponent, cheating invites retaliation and cooperation can be sustained. So cheating is the best strategy when the game is played once. The answer is you play the game once, option D. In a repeated game with the same person, a player who cheats can be punished, which makes cooperation worthwhile.

Answer: D

The market demand curve is the horizontal sum of the individual demand curves: at each price the quantities that the individual consumers wish to buy are added up. Adding the elasticities, adding consumer surplus to expenditure or multiplying price by quantity does not give a demand curve. The answer is by combining individual demand curves horizontally, option D. Adding along the horizontal axis means adding the quantities that each consumer buys at the same price.

Answer: D

Economies of scale arise from producing in bulk, since fixed costs are spread over more units and larger plants allow greater specialisation and purchase discounts, so the average cost falls as output increases. Learning by doing is an effect of cumulative experience, and joint production of different products is an economy of scope. The key gives production in bulk, option D. Bulk production lowers the cost per unit as the fixed cost is spread over more units.

Answer: D

The average fixed cost curve is a rectangular hyperbola, since total fixed cost is constant, and AFC = TFC/Q, so AFC times Q is always the same number. The average variable cost, marginal cost and average cost curves are U shaped. The answer is the average fixed cost curve, option D.

Answer: D

A monopoly firm is not protected from losses by its market power. In the short run it may make super normal profit, normal profit or a loss, depending on where its demand curve lies relative to its average cost curve. So all three outcomes are possible, and the correct option is the one that lists all of them. The answer is option D. Whether it earns profit depends on the position of the demand curve relative to the average cost curve.

In the long run a monopoly that makes losses leaves the market, so only normal or super normal profit can last, while the short run allows all three.

Answer: A

Price discrimination on a personal basis means charging different prices to different persons according to their ability to pay or need, as with concessions to students. Geographical (place based) discrimination is a different type, based on the location of the buyer, and so it is the exception. The key gives geographical, option A. Geographical discrimination is based on place, and not on the personal qualities of the buyer.

Pigou classified discrimination as by persons, by place and by use, and geographical discrimination is the one by place.

Answer: B

Pareto efficiency in the product mix requires that the marginal rate of substitution of consumers in consumption equals the marginal rate of product transformation in production, so that what consumers are willing to give up of one good for another equals what the economy has to give up in production. The condition MRS = MRPT is therefore the product mix efficiency condition, option B. Equal MRS across consumers is exchange efficiency, and equal MRTS across firms is factor efficiency.

Answer: C

Microeconomics deals with the basic questions of what to produce, how to produce and for whom to produce, with the choices of individual units. Whether the economy is growing is a question about the whole economy, so it falls in macroeconomics. The answer is 'Is the economy growing?', option C.

Answer: D

At consumer's equilibrium the indifference curve touching the budget line is the highest attainable, and utility is maximised at the point of tangency, where the slope of the indifference curve equals that of the budget line. The equilibrium point lies on the budget line, not inside the feasible area, since a point inside the budget line would leave income unspent and a higher indifference curve reachable. So the statement that it may lie within the feasible area is the exception. The answer is option D.

Answer: A

A demand curve shifts to the left when demand falls at every price. Research linking alcohol with heart disease changes tastes against it and reduces demand. A decrease in indirect tax lowers the price and moves along the curve or raises supply, a rise in real income raises the demand for a normal good, and a successful advertising campaign increases demand. The answer is option A. The other three changes would either raise demand or move the market along the curve, and so they cannot shift it to the left.