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BSEH SS Economics study materials
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BSEH SS Economics practice questions

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Question 1Introduction to Economics and Basic Concepts

In economics, the central problem of scarcity arises because:

  1. Some countries have larger populations than others
  2. Consumers frequently change their preferences from one product to another
  3. Human wants are unlimited while productive resources are limited and have alternative uses Correct answer.
  4. Governments always spend more money than they collect through taxation

Explanation

Scarcity is the fundamental economic condition in which unlimited human wants confront limited resources that can be used in alternative ways. Because resources are finite, choices must be made about what to produce, how to produce it, and for whom. Scarcity applies to every society, rich or poor.

Question 2Introduction to Economics and Basic Concepts

The opportunity cost of a decision is best described as:

  1. The value of the next best alternative forgone when a choice is made Correct answer.
  2. The sum of all benefits received from every available option
  3. The difference between the price charged and the cost of production
  4. The total money spent on the chosen alternative

Explanation

Opportunity cost measures the sacrifice involved in choosing one option over another, expressed as the value of the best alternative given up. It is not simply the money paid, because it also includes forgone benefits. This concept underlies every economic decision about allocating scarce resources.

Question 3Introduction to Economics and Basic Concepts

A production possibility frontier that is concave (bowed outward) from the origin illustrates:

  1. Constant opportunity cost along the entire curve
  2. Zero opportunity cost of producing either good
  3. Increasing opportunity cost as more of one good is produced Correct answer.
  4. That resources are perfectly interchangeable between uses

Explanation

A bowed-out PPF reflects the law of increasing opportunity cost: resources are not equally suited to producing both goods, so shifting more resources toward one good sacrifices ever larger amounts of the other. A straight-line PPF would instead indicate constant opportunity cost.

Question 4Introduction to Economics and Basic Concepts

A movement from a point inside a production possibility frontier to a point on the frontier represents:

  1. A reduction in the economy's stock of capital goods
  2. An improvement in productive efficiency using existing resources Correct answer.
  3. An unattainable combination of output for the economy
  4. An outward shift of the frontier caused by technological progress

Explanation

Points inside the frontier indicate that resources are unemployed or inefficiently used. Moving to the frontier means the economy is getting more output from the same resources, which is a gain in productive efficiency rather than growth of capacity.

Question 5Introduction to Economics and Basic Concepts

Which statement correctly distinguishes positive economics from normative economics?

  1. Positive economics prescribes what ought to be, while normative economics describes what is
  2. Positive economics deals with facts and testable relationships, while normative economics involves value judgments about what should be Correct answer.
  3. Positive economics relies on opinions, while normative economics relies on statistical data
  4. Positive economics applies only to microeconomic issues, while normative economics applies only to macroeconomic issues

Explanation

Positive economics concerns statements that can be verified or refuted with evidence, such as how a price rise affects quantity demanded. Normative economics involves judgments about desirability and policy goals, which cannot be settled purely by data. The distinction rests on testability, not on the branch of economics involved.

Question 6Introduction to Economics and Basic Concepts

The three fundamental questions every economic system must answer are:

  1. What to produce, how to produce it, and for whom to produce it Correct answer.
  2. Where to trade, with whom to trade, and at what exchange rate
  3. When to tax, whom to tax, and how much to tax
  4. How to save, how to invest, and how to borrow

Explanation

Because resources are scarce, every society must decide which goods and services to make, which techniques and inputs to use, and how output is distributed among members. Different economic systems answer these questions through markets, planning, or a mixture of both.

Question 7Introduction to Economics and Basic Concepts

In a pure market economy, the allocation of resources is primarily determined by:

  1. Custom and tradition inherited from earlier generations
  2. Decisions of trade unions and employer associations
  3. The interaction of supply and demand expressed through prices Correct answer.
  4. Central government planning directives

Explanation

In a market economy, prices act as signals that coordinate the independent decisions of buyers and sellers. Rising prices encourage more production and discourage consumption, guiding resources toward where they are most valued. Government planning and tradition play only a limited role in the pure market model.

Question 8Introduction to Economics and Basic Concepts

A country that relies mainly on inherited farming methods and family-based allocation of output is best described as having:

  1. A mixed economy
  2. A command economy
  3. A market economy
  4. A traditional economy Correct answer.

Explanation

Traditional economies allocate resources according to long-established customs and inherited practices, often centred on subsistence agriculture. Decisions about what to grow and how to share output follow precedent rather than prices or central directives.

Question 9Introduction to Economics and Basic Concepts

The circular flow of income model shows that households:

  1. Supply factors of production and receive factor incomes in return Correct answer.
  2. Purchase only capital goods from the government sector
  3. Pay taxes to firms and receive subsidies from firms
  4. Produce all final goods and sell them directly to firms

Explanation

In the basic circular flow, households own the factors of production and sell their services to firms, receiving wages, rent, interest, and profit as income. They then use that income to buy goods and services from firms. This two-way flow links production and consumption.

Question 10Introduction to Economics and Basic Concepts

In the circular flow model, an injection into the flow of income is represented by:

  1. Imports purchased from abroad
  2. Taxation collected by the government
  3. Household saving placed in a bank
  4. Investment spending by firms Correct answer.

Explanation

Injections add to the circular flow from outside the household-firm spending loop and include investment, government spending, and exports. Investment by firms increases aggregate demand and expands the flow of income. Saving, taxation, and imports are withdrawals instead.

Question 11Introduction to Economics and Basic Concepts

A firm earns total revenue of 50,000 units of currency and incurs explicit costs of 35,000. It also forgoes 8,000 in salary by not working elsewhere. Its economic profit is:

  1. 23,000
  2. 8,000
  3. 7,000 Correct answer.
  4. 15,000

Explanation

Economic profit equals total revenue minus both explicit and implicit costs. Here that is 50,000 minus 35,000 minus 8,000, giving 7,000. Accounting profit would be 15,000 because it ignores the forgone salary.

Question 12Introduction to Economics and Basic Concepts

The basic economic problem of 'for whom to produce' is primarily concerned with:

  1. Deciding the distribution of output among members of society Correct answer.
  2. Choosing whether to use labour-intensive or capital-intensive techniques
  3. Selecting the most technically efficient production method
  4. Determining which goods will be manufactured

Explanation

The distribution question asks how the total product is shared among individuals and groups, which depends on incomes and the ownership of factors of production. It is distinct from the output-mix question and the technique question.

Question 13Introduction to Economics and Basic Concepts

A production possibility frontier shifts outward when:

  1. The quality of labour improves through education and training Correct answer.
  2. The economy experiences a rise in unemployment of resources
  3. Consumers decide to buy more of one good and less of another
  4. The economy moves from an inefficient point to an efficient point

Explanation

Outward shifts of the frontier come from increases in the quantity or quality of productive resources or from technological improvement. Better-educated labour is more productive, expanding the economy's capacity to produce both goods. Movements along or toward the curve reflect efficiency changes rather than growth.

Question 14Introduction to Economics and Basic Concepts

An economy operating on its production possibility frontier decides to produce more capital goods and fewer consumer goods. The most likely long-run consequence is:

  1. A slower rate of future growth because fewer consumer goods are available now
  2. An immediate increase in consumer satisfaction with no effect on capacity
  3. A faster outward shift of the frontier in future periods because the capital stock grows Correct answer.
  4. No change in future productive capacity because the frontier is already fully used

Explanation

Capital goods are used to produce other goods, so devoting more current resources to them enlarges the future capital stock and shifts the frontier outward. The sacrifice of current consumption is the opportunity cost of this growth. This illustrates the trade-off between present and future consumption.

Question 15Introduction to Economics and Basic Concepts

Which situation best illustrates the economic idea of ceteris paribus?

  1. Assuming that all consumers behave identically in every market
  2. Concluding that a policy always works because it worked once before
  3. Analysing how a price change affects quantity demanded while holding income and tastes constant Correct answer.
  4. Comparing two economies with entirely different institutions

Explanation

Ceteris paribus means 'other things being equal' and allows economists to isolate the effect of one variable by holding other influences constant. It is a simplifying device for building testable relationships. It does not assume identical consumers or identical economies.

Question 16Introduction to Economics and Basic Concepts

A government decides to raise the tax on sugary drinks to reduce consumption. Which part of this statement is normative?

  1. Higher prices typically reduce the quantity demanded
  2. Reducing sugary drink consumption is a desirable social goal Correct answer.
  3. The tax is collected by retailers on behalf of the government
  4. The tax increases the price paid by consumers

Explanation

Normative statements express value judgments about what should be or what is desirable, and they cannot be proved true or false by evidence alone. Calling reduced consumption a desirable goal is such a judgment. The other statements are positive claims that can be tested against data.

Question 17Consumer Behaviour and Demand

According to the law of demand, what happens to the quantity demanded of a normal good when its own price rises, all other factors held constant?

  1. It falls, because the substitution and income effects both work to reduce quantity demanded Correct answer.
  2. It rises, because consumers must spend more on the same units
  3. It rises initially and then falls, producing a backward-bending curve
  4. It stays unchanged, because price does not enter the demand function

Explanation

The law of demand states an inverse relationship between own price and quantity demanded when other determinants are fixed. A price rise makes the good relatively more expensive (substitution effect) and reduces real purchasing power (income effect), so quantity demanded falls.

Question 18Consumer Behaviour and Demand

A movement from one point to another along a single downward-sloping demand curve is best described as which of the following?

  1. A change in quantity demanded caused by a change in the good's own price Correct answer.
  2. A change in demand caused by a change in the price of a substitute
  3. A change in quantity demanded caused by a change in income
  4. A change in demand caused by a shift in consumer tastes

Explanation

A single demand curve holds all non-price determinants constant, so only the good's own price can move the consumer along it. That movement is a change in quantity demanded. Changes in income, tastes, or substitute prices shift the whole curve and are changes in demand.

Question 19Consumer Behaviour and Demand

A consumer's total utility rises from 40 to 52 utils when consumption increases from 4 to 5 units. What is the marginal utility of the fifth unit?

  1. 2.6 utils
  2. 13 utils
  3. 12 utils Correct answer.
  4. 52 utils

Explanation

Marginal utility is the change in total utility divided by the change in quantity. Here the change in total utility is 52 minus 40, which equals 12, and the change in quantity is one unit, so marginal utility is 12 utils.

Question 20Consumer Behaviour and Demand

Which statement correctly describes the relationship between total utility and marginal utility when total utility is at its maximum?

  1. Marginal utility is negative and falling
  2. Marginal utility is at its maximum simultaneously
  3. Marginal utility equals average utility
  4. Marginal utility is zero Correct answer.

Explanation

Total utility peaks where an additional unit adds nothing further, which means marginal utility is zero at that point. Beyond the peak, marginal utility becomes negative and total utility declines. Marginal utility reaches its own maximum well before total utility does.

Question 21Consumer Behaviour and Demand

A consumer spends the whole budget on two goods, X and Y. Utility is maximised when which condition holds?

  1. Total utility from X equals total utility from Y
  2. MUx equals MUy regardless of prices
  3. MUx divided by Px equals MUy divided by Py Correct answer.
  4. Px equals Py

Explanation

The equimarginal principle requires equal marginal utility per unit of money spent on each good. If MUx/Px exceeded MUy/Py, reallocating spending toward X would raise total utility. Only when the ratios are equal is no further gain from reallocation possible.

Question 22Consumer Behaviour and Demand

A consumer's indifference curve is convex to the origin. What does this shape reflect?

  1. An increasing marginal rate of substitution between the two goods
  2. A constant marginal rate of substitution between the two goods
  3. That the two goods are perfect substitutes
  4. A diminishing marginal rate of substitution between the two goods Correct answer.

Explanation

Convexity means the slope of the indifference curve becomes flatter as we move down it, so the consumer gives up fewer units of Y for each extra unit of X. This reflects a diminishing marginal rate of substitution, consistent with diminishing marginal utility.

Question 23Consumer Behaviour and Demand

Two goods are perfect complements consumed in fixed proportions. What is the shape of the indifference curves?

  1. L-shaped right angles Correct answer.
  2. Upward-sloping lines
  3. Straight downward-sloping lines
  4. Convex curves touching neither axis

Explanation

With fixed proportions, extra units of one good alone add no utility, so satisfaction rises only when both goods increase together. The indifference curves therefore take an L shape, with the corner lying on the ray of fixed proportions.

Question 24Consumer Behaviour and Demand

A consumer's income rises and she now buys less of a particular good. That good is best classified as which of the following?

  1. An inferior good Correct answer.
  2. A Giffen good only
  3. A normal good
  4. A luxury good

Explanation

An inferior good is one whose quantity demanded falls when income rises, because consumers switch toward preferred substitutes. A normal or luxury good would show rising consumption as income rises. Inferiority is defined by the direction of the income effect, not by price behaviour.

Question 25Consumer Behaviour and Demand

The price of tea falls, and as a result the demand curve for coffee shifts to the left. What does this indicate?

  1. Coffee has a vertical demand curve
  2. Coffee is an inferior good
  3. Tea and coffee are complements
  4. Tea and coffee are substitutes Correct answer.

Explanation

A fall in the price of tea reducing the demand for coffee means consumers switch toward tea and away from coffee. Goods that can replace one another in this way are substitutes, so the cross-price elasticity is positive.

Question 26Consumer Behaviour and Demand

A 10 per cent fall in the price of a good raises quantity demanded by 25 per cent. The price elasticity of demand, using the simple percentage method, is which of the following?

  1. 25
  2. 2.5 Correct answer.
  3. 0.4
  4. 0.25

Explanation

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, with the sign usually ignored. Dividing 25 by 10 gives 2.5, which is elastic because it exceeds one.

Question 27Consumer Behaviour and Demand

Demand for a good is perfectly inelastic. What does the demand curve look like?

  1. A vertical line at the fixed quantity Correct answer.
  2. A horizontal line at the prevailing price
  3. A 45-degree upward-sloping line
  4. A rectangular hyperbola

Explanation

Perfectly inelastic demand means quantity demanded does not change at all when price changes, so elasticity is zero. Plotted with price on the vertical axis, this appears as a vertical line at the fixed quantity.

Question 28Consumer Behaviour and Demand

Which factor is most likely to make the demand for a particular brand of soap more elastic?

  1. The soap is purchased very infrequently
  2. The soap is a small share of the household budget
  3. Consumers regard the soap as a strict necessity
  4. The brand has many close substitutes available Correct answer.

Explanation

Elasticity rises when close substitutes exist, because buyers can readily switch away from a price increase. Small budget shares, necessity status, and infrequent purchase all tend to make demand less elastic.

Question 29Consumer Behaviour and Demand

A seller faces inelastic demand for a product. According to the total revenue test, what happens to total revenue if the seller raises the price?

  1. Total revenue falls, because fewer units are sold
  2. Total revenue stays constant, because the loss in units offsets the price rise
  3. Total revenue changes unpredictably regardless of elasticity
  4. Total revenue rises, because the percentage fall in quantity is smaller than the percentage rise in price Correct answer.

Explanation

With inelastic demand, quantity falls proportionately less than price rises, so the price gain outweighs the loss in units sold. Total revenue therefore increases when price is raised. The total revenue test links this outcome directly to elasticity below one.

Question 30Consumer Behaviour and Demand

Income elasticity of demand for a good is negative. Which statement is consistent with this value?

  1. The good is a necessity with income elasticity between zero and one
  2. The good has perfectly elastic demand
  3. The good is inferior, with consumption falling as income rises Correct answer.
  4. The good is a luxury with income elasticity above one

Explanation

Income elasticity measures the responsiveness of quantity demanded to a change in income. A negative value means quantity demanded falls when income rises, which is the defining feature of an inferior good. Necessities and luxuries both have positive income elasticities.

Question 31Consumer Behaviour and Demand

The demand curve for a good shifts to the right. Which of the following could cause this shift?

  1. A rise in consumer incomes when the good is normal Correct answer.
  2. An improvement in production technology
  3. A fall in the price of the good itself
  4. A rise in the price of a complement

Explanation

A rise in income for a normal good increases demand at every price, shifting the curve rightward. The good's own price moves the consumer along the curve, while complement prices and technology affect other relationships.

Question 32Consumer Behaviour and Demand

A consumer's budget line rotates outward along the horizontal axis while the vertical intercept stays fixed. What change does this represent?

  1. An equal fall in the prices of both goods
  2. A fall in the price of the good on the horizontal axis Correct answer.
  3. A fall in income with prices unchanged
  4. A rise in the price of the good on the horizontal axis

Explanation

The vertical intercept equals income divided by the vertical-axis price, so an unchanged intercept with unchanged income means that price is constant. The horizontal intercept equals income divided by the horizontal-axis price, and its outward movement means that price has fallen.

Question 33Consumer Behaviour and Demand

At the consumer's optimum, the budget line is tangent to an indifference curve. What does the tangency condition imply?

  1. The consumer spends the entire budget on one good
  2. The marginal rate of substitution equals the ratio of the two prices Correct answer.
  3. Total utility is minimised subject to the budget
  4. The marginal rate of substitution exceeds the price ratio

Explanation

The slope of the indifference curve is the marginal rate of substitution, and the slope of the budget line is the price ratio. Tangency equates the two, meaning the rate at which the consumer is willing to trade one good for the other matches the rate at which the market allows it.

Question 34Consumer Behaviour and Demand

A consumer buys only two goods, both normal. The price of good X falls. Decomposing the total effect using the Hicksian approach, which combination correctly describes the substitution and income effects on the quantity of X?

  1. Substitution effect increases X and income effect increases X Correct answer.
  2. Substitution effect decreases X and income effect increases X
  3. Substitution effect decreases X and income effect decreases X
  4. Substitution effect increases X and income effect decreases X

Explanation

When the price of X falls, X becomes relatively cheaper, so the substitution effect always raises the quantity of X demanded. The fall in price also raises real income, and for a normal good the income effect reinforces this by increasing quantity demanded further. Hence both effects work in the same direction.

Question 35Consumer Behaviour and Demand

A Giffen good is observed to have an upward-sloping demand curve. Which explanation is correct?

  1. The good has zero income elasticity by definition
  2. The substitution and income effects are both positive and reinforce each other
  3. The income effect is negative, large, and outweighs the positive substitution effect Correct answer.
  4. The substitution effect is negative and dominates the income effect

Explanation

For any price fall, the substitution effect is positive, but a strongly inferior good can have a negative income effect. In the Giffen case this negative income effect is large enough to outweigh the substitution effect, so quantity demanded falls when price falls, giving an upward-sloping demand curve.

Question 36Consumer Behaviour and Demand

A consumer derives utility from two goods according to diminishing marginal utility. As she consumes more of good X while holding Y constant, what happens to her marginal rate of substitution of X for Y?

  1. It stays constant, because preferences are stable
  2. It rises, because X becomes more valuable relative to Y
  3. It becomes negative, because total utility declines
  4. It falls, because the marginal utility of X declines while that of Y is unchanged Correct answer.

Explanation

The marginal rate of substitution equals the marginal utility of X divided by the marginal utility of Y. With diminishing marginal utility, MUx falls as more X is consumed while MUy stays fixed, so the ratio declines, giving a convex indifference curve.

Question 37Producer Behaviour and Supply

A firm's short-run production function is Q = 10L − L². What is the marginal product of labour when L = 4?

  1. 24
  2. 40
  3. 2 Correct answer.
  4. 6

Explanation

Marginal product is the derivative of total product with respect to labour: dQ/dL = 10 − 2L. Substituting L = 4 gives 10 − 8 = 2 units. Note that total product at L = 4 is 24, which is a different concept.

Question 38Producer Behaviour and Supply

Which statement correctly describes the relationship between average product and marginal product of labour?

  1. Average product cuts marginal product at the maximum of marginal product
  2. Marginal product cuts average product at the maximum of average product Correct answer.
  3. Average product is always greater than marginal product
  4. Marginal product is always rising when average product is rising

Explanation

The marginal curve intersects the average curve exactly at the average curve's maximum point. While marginal product exceeds average product, average product rises; when marginal product falls below it, average product falls. This is the standard average–marginal relationship.

Question 39Producer Behaviour and Supply

The law of variable proportions states that, with one input variable, marginal product eventually declines because:

  1. The variable factor becomes more productive as more is employed
  2. The fixed factor becomes increasingly scarce relative to the variable factor Correct answer.
  3. Total product begins to fall immediately from the first unit
  4. All factors of production are increased in the same proportion

Explanation

In the short run at least one factor is fixed, so adding more of the variable factor leaves each unit of it with less of the fixed factor to work with. This raises the fixed-factor-to-variable-factor scarcity and eventually pulls marginal product down. It is a short-run law that requires at least one fixed input.

Question 40Producer Behaviour and Supply

A production function exhibits increasing returns to scale when:

  1. Doubling all inputs more than doubles output Correct answer.
  2. Doubling all inputs exactly doubles output
  3. Output rises when only one input is doubled
  4. Doubling all inputs less than doubles output

Explanation

Returns to scale are judged by scaling all inputs together. If multiplying every input by a factor k multiplies output by more than k, the function shows increasing returns to scale. Changing only one input is a short-run question about marginal product, not returns to scale.

Question 41Producer Behaviour and Supply

Which pair of curves is U-shaped in the short-run cost diagram?

  1. Total fixed cost and average fixed cost
  2. Marginal cost and total fixed cost
  3. Average variable cost and average total cost Correct answer.
  4. Average fixed cost and marginal cost

Explanation

Both average variable cost and average total cost fall, reach a minimum, then rise, giving the familiar U shape driven by the law of variable proportions. Average fixed cost falls continuously and total fixed cost is a horizontal line, so neither is U-shaped.

Question 42Producer Behaviour and Supply

Total cost at 5 units of output is ₹130 and total fixed cost is ₹50. What is the average variable cost at 5 units?

  1. ₹16 Correct answer.
  2. ₹36
  3. ₹10
  4. ₹26

Explanation

Total variable cost equals total cost minus total fixed cost, so TVC = 130 − 50 = ₹80. Average variable cost is TVC divided by output: 80 ÷ 5 = ₹16. Dividing total cost by output would instead give average total cost of ₹26.

Question 43Producer Behaviour and Supply

The vertical distance between the total cost curve and the total variable cost curve at any output level equals:

  1. Average total cost
  2. Total fixed cost Correct answer.
  3. Marginal cost
  4. Average fixed cost

Explanation

Total cost is the sum of total variable cost and total fixed cost, so TC − TVC = TFC at every level of output. Because fixed cost does not vary with output, the gap between the two curves stays constant. Marginal and average costs are per-unit measures, not the gap between these totals.

Question 44Producer Behaviour and Supply

When marginal cost is below average total cost, average total cost must be:

  1. Constant
  2. Falling Correct answer.
  3. At its minimum
  4. Rising

Explanation

Average total cost falls whenever the marginal unit costs less than the current average, pulling the average down. Once marginal cost rises above average total cost, the average begins to rise. The minimum of average total cost occurs exactly where marginal cost equals it.

Question 45Producer Behaviour and Supply

A firm's total revenue is ₹900 when it sells 60 units. What is the average revenue?

  1. ₹15 Correct answer.
  2. ₹960
  3. ₹54,000
  4. ₹840

Explanation

Average revenue equals total revenue divided by quantity sold: 900 ÷ 60 = ₹15. Under perfect competition average revenue also equals the market price, since each unit sells at the same price. Multiplying the two figures instead of dividing gives the distractor ₹54,000.

Question 46Producer Behaviour and Supply

For a perfectly competitive firm, the average revenue curve is:

  1. U-shaped like average total cost
  2. Upward sloping to the right
  3. A horizontal line at the market price Correct answer.
  4. Downward sloping and steeper than the demand curve

Explanation

A price-taking firm sells every unit at the same market price, so average revenue equals price at all quantities and graphs as a horizontal line. This line is also the firm's marginal revenue and its perceived demand curve. Only a firm facing a downward-sloping demand curve has a falling average revenue curve.

Question 47Producer Behaviour and Supply

A firm's supply curve in a competitive market is the portion of its marginal cost curve:

  1. Above the minimum of average total cost
  2. Above the minimum of average variable cost Correct answer.
  3. Along the entire marginal cost curve
  4. Below the minimum of average variable cost

Explanation

A competitive firm supplies where price equals marginal cost, provided price covers average variable cost. If price falls below minimum average variable cost, the firm shuts down and supplies nothing. Hence the supply curve is the marginal cost curve above the shutdown point.

Question 48Producer Behaviour and Supply

Which of the following causes a rightward shift of the market supply curve for a good?

  1. A decrease in the number of sellers
  2. An increase in consumer income
  3. A fall in the price of an input used to produce the good Correct answer.
  4. A rise in the price of the good itself

Explanation

A fall in input prices lowers production costs, so sellers are willing to offer more at each price and the supply curve shifts right. A change in the good's own price moves the firm along the existing supply curve rather than shifting it. Consumer income affects demand, not supply.

Question 49Producer Behaviour and Supply

A movement upward along a single supply curve is caused by:

  1. A rise in the price of a substitute in production
  2. A fall in the price of the good
  3. An improvement in production technology
  4. A rise in the price of the good Correct answer.

Explanation

A change in the good's own price produces a change in quantity supplied, shown as movement along a given supply curve. Higher prices bring forth a larger quantity supplied. Technology and input prices shift the whole curve instead.

Question 50Producer Behaviour and Supply

The supply curve of a firm in a perfectly competitive market in the long run is horizontal at the minimum of long-run average cost because:

  1. Firms always earn positive economic profit
  2. Free entry and exit drive price to the minimum average cost Correct answer.
  3. Marginal cost is constant at every output level
  4. Fixed costs are zero in the long run

Explanation

With free entry and exit, positive profits attract entrants until price falls to minimum long-run average cost, and losses drive exits until price recovers to that level. The long-run supply curve is therefore horizontal at the minimum of long-run average cost. Economic profit is zero in this long-run equilibrium.