Economics Test - 1

The correct answer option 3.

Key Points

• Ragnar Kittil Frisch was a Norwegian econometrician and economist who was a winner of the 1969 Nobel Prize for Economics.
• He was a pioneer of econometrics which is the application of mathematical models and statistical techniques to economic data. He also coined it and many other economics terms. One of the founders of the Econometric Society, he also was the editor of Econometrica for 21 years.
• In an article on business cycles, Frisch was likely the first person to have referred to the study of individual firms and industries as “microeconomics.” Moreover, he referred to the study of the aggregate economy as “macroeconomics.”
• The purpose of Microeconomics is to study behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets.
• In macroeconomics, on the other hand, we try to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level. Here, we are interested in finding out how the levels of these aggregate measures are determined and how the levels of these aggregate measures change over time. Some of the important questions that are studied in macroeconomics are as follows: What is the level of total output in the economy? How is the total output determined? How does the total output grow over time?

The correct answer is Option 4.

Key Points

• The central problem of the economy 
  • What is produced and in what quantities?
  • For whom are these goods produced?
  • How are these goods produced?
• It depends on the society on how many and which types of goods are to be produced. Whether to produce more of food, clothing, and housing or to have more luxury goods. Whether to have more agricultural goods or to have industrial products and services. Whether to use more resources in research and health or to use more resources in building military services.
• Every society has to decide the method and factors of production for each of the different goods and services. Whether it'll be labor-intensive or more machine-intensive. Which of the available technologies to adopt in the production of each of the goods?
• How allocation of goods is done in an Economy. Who gets more and who gets less? Whether or not to ensure a minimum amount of consumption for everyone in the economy. Whether or not elementary education and basic health services should be available freely for everyone in the economy.
• Hence the central problem of the economy involves all the options above.

Unemployment is studied under Macroeconomics. Hence Option 4 is Correct.

• Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
• Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
• Microeconomics involves several key principles including (but not limited to)
  • Demand, Supply, and Equilibrium: Prices are determined by the theory of supply and demand.
  • Production Theory: This principle is the study of how goods and services are created or manufactured.
  • Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.
  • Labor Economics: This principle looks at workers and employers, and tries to understand the pattern of wages, employment, and income.

The correct answer is capitalism.

Key Points 

• Capitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.
• The essential feature of capitalism is the motive to make a profit. 
• In a capitalist economy, capital assets such as factories, mines, and railroads can be privately owned and controlled.
• Labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses.
• In a capitalist economy, only those consumer goods will be produced that are in demand.

Additional Information 

• Pillers of Capitalism:
  • Private property, which allows people to own tangible assets such as land and houses and intangible assets such as stocks and bonds.
  • Self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure. 
  • Competition, through firms’ freedom to enter and exit markets, maximizes social welfare, that is, the joint welfare of both producers and consumers;
  • A market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers—prices, in return, allocate resources, which naturally seek the highest reward, not only for goods and services but for wages as well;
  • Freedom to choose with respect to consumption, production, and investment—dissatisfied customers can buy different products, investors can pursue more lucrative ventures, workers can leave their jobs for better pay; and
  • Limited role of government, to protect the rights of private citizens and maintain an orderly environment that facilitates proper functioning of markets.
  • The extent to which these pillars operate distinguishes various forms of capitalism.
  • In free markets, also called laissez-faire economies, markets operate with little or no regulation. In mixed economies, so called because of the blend of markets and government, markets play a dominant role, but are regulated to a greater extent by government to correct market failures, such as pollution and traffic congestion; promote social welfare; and for other reasons, such as defense and public safety. Mixed capitalist economies predominate today.

The correct answer is A commodity whose benefits are indivisibly spread among the entire community.

Key Points

• Public Good:
  • Public goods are goods that are commonly available to all people within a society or community and that possess two specific qualities: they are non-excludable and non-rivalrous. Everyone has access to use them, and their use does not deplete their availability for future use.
  • A commodity whose benefits are indivisibly spread among the entire community. Hence, Option 2 is correct.
  • Non-excludability - Individuals or groups of individuals can’t be specifically excluded from using the goods
  • Non-rivalry - The use of the goods by some individuals doesn’t cause a reduction in their availability to others, which would thereby violate the first quality
  • Public goods are generally considered goods that are available to anyone.
  • They differ from common goods in that the latter are typically non-excludable but are usually rivalrous to some extent.
  • Wild game used for food is an example of a common good.

Additional Information

• • People cannot generally be excluded from obtaining and using it; however, the same animals cannot be used more than once.
  • The list of public goods varies, depending on how specifically the term is viewed. However, common examples of public goods include:
  • Street lighting - It is generally provided by communities, and consumption/use of the lighting doesn’t prevent others from using it as well.
  • Emergency services - They are provided to communities, and their use benefits and strengthens the community.
  • National defense - Whether paid or voluntary, national defense services protect the country as a whole.

The correct answer is Option 1.

Key Points

• Opportunity Cost
  • Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
  • Because opportunity costs are unseen by definition, they can be easily overlooked.
  • Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making.
  • Opportunity cost is the forgone benefit that would have been derived from an option not chosen. Hence, Statement 4 is not correct.
  • To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Hence, Statement 1 is correct.
  • Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making. Hence, Statement 3 is not correct.
  • The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. 
  • Opportunity cost analysis plays a crucial role in determining a business’s capital structure. Hence, Statement 2 is not correct.
  • A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost.

The Correct Answer is shift rightward.

Key Points

• Following a change in the underlying determinant of demand, the direction of the demand curve will shift to the left or right.
• Increases in demand are illustrated in the demand curve by a change to the right. This may be caused by a variety of factors, including an increase in sales, an increase in a substitute's price or a decrease in a supplement's price.
• A change in demand to the right implies a rise in the sum requested at any price. Conversely, for a variety of reasons, demand will decrease and cause a change to the left of the demand curve, including a decline in sales, assuming that a good is a normal good, a drop in the price of a replacement, and an increase in the price of a supplement.
• Following a shift in one or more of the underlying determinants of supply, the direction of a supply curve can change. For instance, a cost adjustment, such as a change in the cost of labor or raw materials, can shift the direction of the supply curve.
• The Production Possibility Curve (PPC) is the locus of different combinations of two commodities that can be generated with a given amount of resources and technology (the direction of a moving point). It's also known as the curve of transformation.

 The correct answer is Equilibrium.​​

Key Points

• In equilibrium, the aggregate quantity that all firms wish to sell equals the quantity that all the consumers in the market wish to buy.
• Both the consumers' and firms' objectives are compatible in the market equilibrium.
• The price at which equilibrium is reached is called the equilibrium price and the quantity bought and sold at this price is called equilibrium quantity.
• When the market supply is greater than market demand, we say that there is an excess supply in the market at that price.
• When market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price.
• Equilibrium in a perfectly competitive market can be defined alternatively as zero excess demand-zero excess supply situation
• Whenever market supply is not equal to market demand, and hence the market is not in equilibrium, there will be a tendency for the price to change. 

Since we have to find the equilibrium quantity, 

73000 - 30P = 18000 + 25P ⇒ P = 1000

Now, if we put P = 1000 in any of the given equations of demand or supply, (D or S)

D = 43000 units 

Therefore the equilibrium quantity is 43000 units. 

The correct answer is Continuous use.

• A production possibilities curve (PPC) shows the maximum amount of one good that can be produced given a production level for some other good, and given the total amounts of inputs available for the production of both goods, and given the technology of production. 
• The PPC can be used to illustrate the concepts of scarcity, opportunity cost, Economic efficiency, inefficiency, economic growth and development, and contractions.

Additional Information

• The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services.
• The production possibility curve represents graphically alternative production possibilities open to an economy.
• The productive resources of the community can be used for the production of various alternative goods.
• In other words, the production possibility curve can be defined as a graph that represents different combinations of quantities of two goods that can be produced by an economy under the condition of limited available resources. It is also known as the production possibility frontier(PPFs) or transformation curve.
• The PPCs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions.
• In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods (Wheat & Cloth) which the economy can produce with a given amount of resources.

• The Curve shows all of the possible combinations of 2 goods or services that can be produced within a specified time with all its resources fully and efficiently employed.
• The economy can produce at any combination on or inside the curve (C and H).
• Point outside the curve is not attainable (F).