1.
Economics is often described as the science of constrained choice because it studies
decisions made under the condition of Scarcity.
2. Which type of analysis explains how an economic system works without value
judgments? Positive analysis
3. Who is considered the father of modern economics, having written 'The Wealth of
Nations' in 1776? Adam smith
4. In a perfectly competitive market, firms are price takers. T
[Link] curves cannot intersect. T (Downward sloping, Cannot intersect, Convex
(diminishing MRS))
6. Which conditions must be satisfied for an allocation to be Pareto efficient in general
equilibrium?
Exchange Efficiency, Production Efficiency , Product-Mix Efficiency
7. Which factors directly determine a consumer's optimal choice in microeconomic
models? Consumer preferences and budget
8. The law of demand states that quantity demanded increases as price increases, ceteris
paribus. F
The law of demand states that, ceteris paribus (all else being equal), as the price of a good
or service increases, the quantity demanded decreases. Conversely, when the price
decreases, the quantity demanded increases, representing an inverse or negative
relationship between price and quantity.
8. Which of the following are types of utility functions studied in consumer theory?
Cobb-Douglas Utility Function, Perfect Substitutes Utility Function (Linear), Perfect
Complements Utility Function (Leontief), Quasi-linear Utility Function
9. The additional satisfaction gained from consuming one more unit of a good is called:
Marginal utility
10. Which market structure is characterized by homogeneous products and price-taking
firms? Perfect competition
[Link] market structure is characterized by homogeneous products and price-taking
firms? Perfect competition
[Link] the short run, at least one factor of production is fixed. T
13.A Giffen good is one where the substitution effect dominates the income effect. F
14. A Giffen good is a specific, rare type of inferior good where the income effect
dominates the substitution effect.
15. The supply curve generally has a positive slope, reflecting that higher prices lead to
higher quantities supplied. T
16. Profit maximization occurs when price equals which cost measure in perfect
competition? Marginal cost
17. The Engel curve shows the relationship between income and quantity demanded of a
good. T
18. Which factors can shift the demand curve to the right?
• Increase in Consumer Income
• Change in Consumer Preferences
• Increase in Population or Market Size
• Descrease in Price of Substitute Goods
• Decrease in Price of Complementary Goods
• Expectations of Future Price Increase.
19. Total surplus in a competitive market is the sum of consumer surplus and producer
surplus
20. Which are types of technological progress affecting production functions?
• Capital-deepening technical progress:
• Labour-deepening technical progress:
• Neutral-technical progress:
21. When the price of a good changes, the change in demand due to altered relative prices
of goods is called: substitution effect
22. Consumer surplus measures the difference between willingness to pay and the actual
price paid. T
23. The shutdown rule in the short run states that a firm produces only if: price is greater
than or equal to average variable cost
24. Which of the following government interventions typically create deadweight loss
in competitive markets without externalities?
• Price Ceilings (e.g., Rent Control): A maximum legal price set below the
equilibrium price, which creates shortages and reduces the quantity traded.
• Price Floors (e.g., Minimum Wage): A minimum legal price set above the
equilibrium price, which creates surpluses and reduces the quantity traded.
• Taxes (e.g., Excise Taxes): Taxes drive a wedge between the price consumers
pay and sellers receive, lowering the quantity below the competitive
equilibrium.
• Subsidies: Similar to taxes, subsidies create a wedge, but in this case,
encouraging overproduction/overconsumption beyond the socially optimal
level, creating inefficiency.
• Quotas: Restrictions on the quantity of a good that can be produced or sold
25. According to the first theorem of welfare economics, competitive equilibrium is:Pareto
efficient
26. Isoquants slope negatively, represent equal output combinations, and higher isoquants
indicate higher output. They cannot intersect.
[Link] describe for Microeconomics is : Microeconomics focuses on the decisions of
individual agents (consumers, firms, workers) and how they interact in markets.
28. The relationship between quantity demand and price is opposite.
29. Which of the following are considered exogenous variables in consumer choice
models?
• Consumer Income: The budget available to the consumer, usually taken as given.
• Prices of Goods: Market prices that the consumer takes as fixed, especially in
perfect competition.
• Consumer Preferences: Often viewed as given (tastes, utility parameters) in
neoclassical theory.
• Demographic Variables: Population characteristics such as age, education levels,
or family size.
• Environmental Factors: External conditions like weather (relevant for
transportation or clothing choices).
• Government Policies/Regulations: Taxes or subsidies affecting the budget set.
Income and prices are determined outside the model (exogenous), while quantities
consumed and preferences are part of the model.
30. Which curve shows combinations of goods yielding equal utility? An indifference curve
31. A Giffen good violates the law of demand. T
32. The Engel curve shows the relationship between income and quantity demanded. T
33. In the long run, firms produce at the minimum point of: Average Total Cost (ATC) curve
34. Which of the following are assumptions about consumer preferences?
Consumer preferences are assumed to be complete, transitive, and monotonic.
Intersection is not an assumption.
• Completeness: Consumers can compare and rank all possible combinations of
goods, preferring one over the other or feeling indifferent.
• Transitivity: Preferences are consistent; if A is preferred to B, and B to C, then A
is preferred to C.
• Non-satiation ("More is Better"): Consumers prefer larger quantities of goods
over smaller ones.
• Convexity: Consumers generally prefer a mix of goods, favoring "average"
bundles over extremes.
35. Returns to scale describe how output changes when all inputs change proportionally.
36. Which of the following are characteristics of perfectly competitive markets?
Perfect competition features homogeneous products, price-taking firms, and free entry.
Differentiated goods are not a feature.
• Many buyers and sellers: There are a large number of participants such that each
individual buyer or seller is small relative to the overall market.
• Homogeneous products: All firms sell identical or standardized products that are
perfect substitutes for one another.
• Free entry and exit: Firms can enter or leave the industry without significant legal,
financial, or technological barriers.
• Price takers: Individual firms must accept the prevailing market price determined
by overall supply and demand; they cannot influence this price.
• Perfect information: All buyers and sellers have complete knowledge regarding
prices, product quality, and production techniques.
• Perfect resource mobility:
• Zero economic profit in the long run
37. The marginal rate of substitution (MRS) is: Ratio of marginal utilities of two goods
38. Producer surplus is: Producer surplus is the difference between the market price and
the minimum price producers are willing to accept.
39. Which of the following are effects of a price change on demand? Substitution effect,
income effect
Price changes affect demand through the substitution effect and income effect.
40. A corner solution occurs when the consumer consumes positive quantities of both
goods. F
41. A Giffen good is characterized by: Positive substitution effect and negative income
effect, with income effect dominating
42. Which of the following are considered exogenous variables in consumer choice
models? Income and price of goods.
43. The marginal rate of substitution (MRS) represents:
The slope of the indifference curve