Multiple Choice: 1. If 8 percent increase in the price of one good results in an
ID: 1181272 • Letter: M
Question
Multiple Choice:
1. If 8 percent increase in the price of one good results in an increase of 4 percent in the quantity
demanded of another good, then it can be concluded that the two goods are:
a) complements.
b) substitutes.
c) independent.
d) normal.
2. The law of diminishing marginal utility explains why:
a) supply curves are upsloping.
b) demand curves are downsloping.
c) real income of the consumer rises when the price of a commodity falls.
d) substitution effect is always higher than income effect mentioned in c) above.
3. A necessary and sufficient condition for a rational consumer to be in equilibrium or at that position where he
maximizes utility is that the marginal utility:
a) of all products he consumes is zero.
b) of all products he consumes is positive.
c) is the same for all products.
d) per last dollar is the same for products consumed.
4. Diminishing returns are observed in increases of production output by adding a variable input to a fixed of
inputs because:
a) the ability or quality of the variable input added decreases are more is used.
b) the firm must lower the price of its product when it produces more units of output.
c) the per unit cost it must pay for the variable input increases as more of the input is used.
d) as more variable input is used, the amount of fixed input per variable input decreases.
5. A necessary and sufficient condition for a rational consumer to be in equilibrium or at that position where he
maximizes utility as he spends the last dollar of his budget is that the marginal utility:
e) of all products he consumes is zero.
f) of all products he consumes is positive.
g) is the same for all products.
h) per dollar for all products is the same.
6. The short run marginal cost (MC) curve eventually rises because of:
a) diseconomies of scale.
b) decreasing per unit fixed costs.
c) diminishing marginal returns.
d) increasing marginal productivity of the variable input.
7. Other things being equal, if the prices of a firm
Explanation / Answer
1. The two goods are substitutes. When the price of first good rose, its quantity fell, and quantity of second good increased. Which means substitution took place.
2. The law of diminishing marginal utility explains why demand curves are downsloping. As more is consumed, marginal utility starts diminishing, thus a consumer will now demand more, only when there is incentive, the same thing is offered for a lower price. Thus the negative relationship between demand and price.
3. The marginal utility per last dollar is the same for products consumed. If this is not so, then he will always tilt his consumption in favour of goods for which marginal utility per last dollar is more until he again reaches an equality among all
4. Diminishing returns are observed in increases of production output by adding a variable input to a fixed of inputs because as more variable input is used, the amount of fixed input per variable input decreases. This sets in some inefficiency and thus diminishing returns.
5. He maximizes utility as he spends the last dollar of his budget is that the marginal utility per dollar for all products is the same. . If this is not so, then he will always tilt his consumption in favour of goods for which marginal utility per last dollar is more until he again reaches an equality among all
6. Diminishing marginal returns. Diminishing marginal returns lead to first a stagnation (for which MC is minimum) and them a fall in output (for which MC starts rising)
7. Other things being equal, if the prices of a firm
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