Microeconomics Questions and Answers

Answer: B

The supply of good A depends on technology, the prices of inputs and the prices of other goods the firm could produce, and on the number of sellers. The consumer's income affects the demand and not the supply. The answer is consumer income, option B.

A change in the good's own price moves along the supply curve, while the factors above shift it, but consumer income shifts only the demand curve.

Answer: D

In the long run, average cost rises when the firm grows too large and suffers diseconomies of scale, such as labour discontent, poor coordination and managerial problems. Managerial efficiency, improved technology and the division of labour all lower the average cost. The answer is labour discontent, option D.

Answer: C

Perfect competition is a market with a very large number of sellers (and buyers), each too small to affect the price, a homogeneous product and free entry and exit. One seller is a monopoly, a single buyer is a monopsony and restricted entry is a feature of the monopoly. The answer is option C.

Answer: B

For price discrimination the seller must have market power and be able to separate the buyers into groups with different price elasticities of demand, charging a higher price to the group with the less elastic demand. A difference in price elasticity of demand is therefore a necessary condition. Identical tastes or a single homogeneous market would not allow discrimination, and easy resale between markets would defeat it. The answer is option B. Resale must be impossible or costly between the markets, otherwise buyers in the cheap market would sell to those in the dear market.

Answer: D

A rise in the fixed costs of a monopoly does not change its marginal cost or marginal revenue, so the output where MR equals MC and hence the price stay the same, and since total cost rises while revenue does not, the profit decreases. The answer is stay the same, decrease, option D.

Answer: B

A monopoly firm is the only seller, so it faces the whole market demand, which is a downward sloping curve: to sell more it has to lower the price. A horizontal demand curve belongs to a perfectly competitive firm, a vertical one to a fixed supply and a backward bending curve to special cases like labour supply. The answer is option B.

Answer: C

In the kinked demand curve model of oligopoly, a firm believes that its rivals will follow a price cut, so it gains little by cutting, but will not follow a price rise, so it loses its customers by raising it. The demand curve is kinked at the current price and prices are rigid. The key gives option C (other firms follow a price reduction but not a rise).

Answer: A

For Pareto optimality in exchange, the marginal rate of substitution between any two commodities must be equal for both consumers, since otherwise they could both gain by trading. So the marginal condition is that the MRS between two commodities is the same for both consumers. The answer is option A.

Answer: D

Opportunity cost is the value of the best alternative that is given up. The opportunity cost of building a new highway for society is the goods and services that would otherwise have been produced with the same resources. The money spent and the cost of borrowing or taxation are the financial costs, and not the real cost to society. The answer is option D.

Answer: D

The quantity that a consumer plans to buy depends on the consumer's income, the price of the product and expectations of future prices, and on tastes and the prices of related goods. Technology is a factor that affects the supply side, not the demand of the consumer. The answer is technology, option D.