Economics Test - 35

(A) Profit maximisation condition: A firm maximizes profit when it produces where revenue covers costs and MR = MC, but in context, it continues producing if Price ≥ AVC. Matches with (III).

(B) Marginal Revenue = Marginal Cost: The golden rule of profit maximization is where MR = MC. Matches with (II).

(C) Shutdown Point: In the short run, a firm shuts down if Price < AVC (cannot cover variable costs). Matches with (I).

(D) Break-even Point: Occurs when Price = Average Total Cost (ATC), earning zero economic profit (normal profit). Matches with (IV).

The correct pairing is (A) - (III), (B) - (II), (C) - (I), (D) - (IV), which corresponds to option (b).

(A) Technological progress: Improves efficiency, increasing supply (shifts right). Matches with (I).

(B) Increase in input prices: Raises production costs, reducing supply (shifts left). Matches with (II).

(C) Unit tax imposition: Increases costs per unit, reducing supply (shifts left). Matches with (III).

(D) Entry of new firms: Increases market supply, shifting the supply curve right. Matches with (IV).

The correct pairing is (A) - (I), (B) - (II), (C) - (III), (D) - (IV), which corresponds to option (a).

(A) is incorrect as no individual has unlimited resources.

(B) is correct, as scarcity forces individuals to prioritize their needs.

(C) is correct because all individuals face scarcity.

(D) is incorrect since scarcity directly impacts the allocation of resources.

The household sector significantly contributes to the economy through various means:

• Providing labour: Households supply workers to firms and the government.
• Earning wages: Individuals receive income from their jobs, which supports their spending.
• Consuming goods: Households purchase products and services, driving market demand.
• Paying taxes: Households contribute to government revenue, which funds public services.
• Saving: Households save money, which can be invested in the economy.

Overall, the household sector is essential for maintaining economic activity and growth.

The correct answer is D: Which are for final consumption.

Final goods, also known as consumer goods or finished goods, are goods that are produced for the purpose of being consumed by households or final users. They are the end products of the production process, and are not used as inputs in the production of other goods or services. Final goods include both durable goods, such as appliances and furniture, and nondurable goods, such as food and clothing.

Intermediate goods, on the other hand, are goods that are used as inputs in the production of other goods or services. They are typically not sold directly to households or final consumers, but rather are used as inputs in the production process by firms. Intermediate goods include raw materials, components, and partially finished goods that are used in the production of final goods.

Final goods are typically not meant for resale or for long-term use, as they are consumed or used up by households or final users. Capital goods, such as machinery and equipment, are typically meant for long-term use, as they are not consumed or used up in the production process but rather are used over a period of time to produce other goods and services.

The most important function of a commercial bank is the creation of credit.

Therefore, money supplied by commercial banks is called credit money. Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public.

The coefficient (1-b) is also known as MPS (Marginal Propensity to Save).

Explanation:

- The coefficient (1-b) represents the Marginal Propensity to Save (MPS), which is the proportion of additional income that individuals save rather than spend.

- MPS is an important concept in economics as it helps determine the relationship between changes in income and changes in consumption and saving.

- The MPS can be calculated by subtracting the Marginal Propensity to Consume (MPC) from 1. The MPC represents the proportion of additional income that individuals spend rather than save.

- In this case, the coefficient (1-b) is equivalent to the MPS because it represents the proportion of income that is saved.

- This means that for every additional unit of income, (1-b) is saved and b is consumed.

- The MPS is an important component of Keynesian economics and is used to analyze the multiplier effect and the determinants of aggregate demand.

- By understanding the MPS, economists can make predictions about the impact of changes in income on saving and spending behavior in the economy.

In summary, the coefficient (1-b) is known as the Marginal Propensity to Save (MPS) and represents the proportion of additional income that individuals save rather than spend.

Prevents Speculation in foreign exchange market: Another important merit of fixed exchange rate system is that it does away with speculation in foreign exchange markets. The advocates of fixed exchange rate system points out that the flexible and unstable exchange rate encourages speculation in foreign exchange market.

Macroeconomic analysis often simplifies the complex reality by focusing on a single imaginary commodity as a representative of the entire economy's goods and services, allowing for generalized analysis of economic trends.

Circular Income Flow in a Two Sector Economy:

In the diagram, the upper loop illustrates the flow of resources such as land, capital, and entrepreneurial ability from households to firms.

The flow of money occurs from firms to households as factor payments, which include wages, rent, interest, and profits, as indicated by the direction of the arrows.

The lower part of the diagram shows how money flows from households back to firms in the form of consumption expenditure for goods and services produced by the firms.

This creates a continuous circular flow of money or income, highlighting the interdependence of households and firms in the economy.

Answer: C.