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PSEB SS Economics study materials
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PSEB SS Economics practice questions

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Question 1Microeconomics and Consumer Behaviour

In consumer theory, which statement best describes the law of diminishing marginal utility?

  1. As a consumer consumes more units of a good, total satisfaction always falls immediately.
  2. As a consumer consumes more units of a good in a given period, the additional satisfaction from each extra unit eventually falls. Correct answer.
  3. As income rises, the consumer spends a smaller share of income on food.
  4. As the price of a good falls, the consumer always buys less of it.

Explanation

The law concerns the change in satisfaction from successive units of the same good within a single period, holding other things constant. Marginal utility falls because the intensity of a particular want weakens as it is satisfied, even though total utility may still be rising.

Question 2Microeconomics and Consumer Behaviour

A consumer is in equilibrium when spending a fixed money income across several goods. Which condition expresses this equilibrium?

  1. Marginal utility per rupee spent is equal across all goods purchased. Correct answer.
  2. The price of each good is equal.
  3. Marginal utility of each good is zero.
  4. Total utility from each good is equal.

Explanation

The consumer allocates each rupee to the good giving the highest marginal utility per rupee until the ratios are equalised. At that point no reallocation can raise total utility, so equilibrium holds. Equality of total utilities or of prices is neither necessary nor sufficient.

Question 3Microeconomics and Consumer Behaviour

Total utility is at a maximum at the point where marginal utility is:

  1. negative
  2. equal to price
  3. zero Correct answer.
  4. positive and rising

Explanation

Total utility rises while marginal utility is positive and falls once marginal utility turns negative. The turning point, where total utility stops increasing, occurs exactly where marginal utility equals zero. This is why the total utility curve peaks at zero marginal utility.

Question 4Microeconomics and Consumer Behaviour

A consumer's marginal utility from the last unit of a good is 30 utils and its price is Rs 5. Marginal utility from the last unit of another good is 24 utils and its price is Rs 6. To increase total utility, the consumer should:

  1. buy more of the first good and less of the second Correct answer.
  2. buy equal quantities of both goods
  3. buy more of the second good and less of the first
  4. stop buying both goods

Explanation

Marginal utility per rupee is 6 for the first good (30/5) and 4 for the second (24/6). The first good gives more satisfaction per rupee, so shifting spending towards it raises total utility until the ratios equalise.

Question 5Microeconomics and Consumer Behaviour

An indifference curve shows combinations of two goods that:

  1. yield the same total utility to the consumer Correct answer.
  2. cost the consumer the same total amount
  3. contain the same quantity of each good
  4. give the consumer the same marginal utility from each good

Explanation

Every point on a single indifference curve represents a bundle giving the consumer an equal level of total satisfaction, so the consumer is indifferent among them. The curve is therefore a satisfaction contour, not a cost line.

Question 6Microeconomics and Consumer Behaviour

Indifference curves are convex to the origin because of:

  1. constant opportunity cost
  2. diminishing marginal rate of substitution Correct answer.
  3. increasing marginal rate of substitution
  4. the law of increasing returns

Explanation

As the consumer gives up more of one good, its marginal utility rises while the other good's marginal utility falls, so less of the second good is surrendered for each further unit of the first. This diminishing marginal rate of substitution makes the curve convex to the origin.

Question 7Microeconomics and Consumer Behaviour

Two indifference curves in the same map can never intersect because:

  1. the budget line is a straight line
  2. consumers always prefer more of both goods
  3. indifference curves are always parallel to the budget line
  4. each bundle must lie on exactly one satisfaction level, and intersection would make one bundle equal to two different utility levels Correct answer.

Explanation

If two curves crossed, the intersection point would belong to both, implying two different utility levels for the same bundle, which is a contradiction. Transitivity of preferences therefore rules out intersecting indifference curves.

Question 8Microeconomics and Consumer Behaviour

The slope of a budget line represents:

  1. the marginal rate of substitution at equilibrium
  2. the marginal utility of the good on the horizontal axis
  3. the consumer's total income
  4. the ratio of the prices of the two goods Correct answer.

Explanation

The budget line's slope equals the negative of the price of the horizontal-axis good divided by the price of the vertical-axis good. It shows how many units of one good must be given up to buy one more unit of the other, given fixed income.

Question 9Microeconomics and Consumer Behaviour

A consumer's money income is Rs 200. Good X costs Rs 10 and good Y costs Rs 20. If the consumer spends all income, the budget line has intercepts of:

  1. 20 units of X and 10 units of Y Correct answer.
  2. 10 units of X and 20 units of Y
  3. 200 units of X and 200 units of Y
  4. 20 units of X and 20 units of Y

Explanation

Maximum X equals income divided by the price of X, giving 200/10 = 20 units. Maximum Y equals 200/20 = 10 units, so the intercepts are 20 on the X axis and 10 on the Y axis.

Question 10Microeconomics and Consumer Behaviour

Consumer equilibrium under the indifference curve approach occurs where the budget line:

  1. cuts the highest indifference curve at two points
  2. lies entirely above the indifference curve
  3. is parallel to the indifference curve
  4. is tangent to the highest attainable indifference curve Correct answer.

Explanation

The consumer reaches the highest indifference curve that the budget allows, which is the point where the line just touches that curve. At tangency the marginal rate of substitution equals the price ratio, so no affordable reallocation improves satisfaction.

Question 11Microeconomics and Consumer Behaviour

If a consumer's income rises while prices stay constant, the budget line:

  1. shifts outward parallel to its original position Correct answer.
  2. becomes steeper but keeps the same intercepts
  3. rotates inward around the vertical intercept
  4. shifts inward parallel to its original position

Explanation

A rise in money income raises the maximum affordable quantity of both goods proportionally. With prices unchanged, the slope is unaltered, so the line shifts outward in a parallel manner.

Question 12Microeconomics and Consumer Behaviour

A movement along a given demand curve for a good is caused by a change in:

  1. consumer tastes
  2. consumer income
  3. the price of the good itself Correct answer.
  4. the price of a substitute good

Explanation

A change in the good's own price changes the quantity demanded and is shown as movement along the existing demand curve. Changes in income, related-good prices, or tastes shift the whole curve instead.

Question 13Microeconomics and Consumer Behaviour

Which of the following would shift the demand curve for tea to the right?

  1. a rise in the price of sugar, a complement
  2. a rise in the price of coffee, a substitute Correct answer.
  3. a fall in the price of tea
  4. a fall in consumer incomes, if tea is a normal good

Explanation

Higher coffee prices make tea relatively cheaper, so consumers substitute towards tea and its demand rises at each price. This is a shift factor, distinct from a movement caused by tea's own price.

Question 14Microeconomics and Consumer Behaviour

The demand curve for a Giffen good slopes upward because:

  1. its marginal utility rises without limit
  2. consumers treat it as a luxury good
  3. the income effect of a price fall is negative and outweighs the substitution effect Correct answer.
  4. the substitution effect is always zero for such goods

Explanation

For a Giffen good, a price fall raises real income, and the strong negative income effect on this inferior staple outweighs the positive substitution effect. Quantity demanded therefore falls when price falls, giving an upward-sloping demand curve.

Question 15Microeconomics and Consumer Behaviour

A rightward shift of the market demand curve for a normal good can be caused by:

  1. a fall in the good's price
  2. a rise in the good's price
  3. a technological improvement in production
  4. an increase in the number of consumers in the market Correct answer.

Explanation

Market demand is the horizontal sum of individual demands, so more consumers raise quantity demanded at every price. This shifts the market demand curve to the right. Production technology affects supply, not demand.

Question 16Microeconomics and Consumer Behaviour

The price elasticity of demand is measured as:

  1. percentage change in quantity demanded divided by percentage change in price Correct answer.
  2. percentage change in price divided by percentage change in quantity
  3. change in price divided by change in quantity
  4. change in quantity divided by change in price

Explanation

Elasticity compares proportionate responses, so it uses percentage changes rather than absolute changes. This makes the measure unit-free and comparable across goods and currencies.

Question 17Microeconomics and Consumer Behaviour

If the price of a good rises from Rs 10 to Rs 12 and quantity demanded falls from 100 to 80 units, using the percentage method the price elasticity of demand is:

  1. 1.0 Correct answer.
  2. 0.5
  3. 2.0
  4. 5.0

Explanation

Quantity falls by 20 percent and price rises by 20 percent, so elasticity is 20/20 = 1. Demand is therefore unit elastic at this point, meaning the proportionate responses are equal.

Question 18Microeconomics and Consumer Behaviour

When demand for a good is perfectly inelastic, its demand curve is:

  1. horizontal
  2. vertical Correct answer.
  3. upward sloping
  4. downward sloping at 45 degrees

Explanation

Perfectly inelastic demand means quantity demanded does not change at all when price changes, so the curve is a vertical line. Elasticity equals zero at every point on such a curve.

Question 19Microeconomics and Consumer Behaviour

A firm selling a good with inelastic demand raises its price. Total revenue will:

  1. fall to zero because demand is inelastic
  2. fall, because fewer units are sold
  3. remain unchanged, since price and quantity offset exactly
  4. rise, 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 quantity loss. Total revenue therefore increases when price is raised in this range.

Question 20Microeconomics and Consumer Behaviour

Demand for salt is generally less elastic than demand for a particular brand of soap because:

  1. salt is a luxury good
  2. salt is a necessity with few substitutes and a small share of income, while a brand faces close rivals Correct answer.
  3. salt has many close substitutes while soap brands have none
  4. soap is always cheaper than salt

Explanation

Elasticity is lower when a good is a necessity, has few substitutes, and takes a small share of the budget, all of which apply to salt. A single soap brand has many close substitutes, so its demand is more elastic.

Question 21Microeconomics and Consumer Behaviour

The income elasticity of demand for an inferior good is:

  1. zero
  2. positive but less than one
  3. greater than one
  4. negative Correct answer.

Explanation

For an inferior good, quantity demanded falls as income rises, so the income elasticity is negative. Normal goods have positive income elasticity, and luxuries have values above one.

Question 22Microeconomics and Consumer Behaviour

The cross elasticity of demand between two goods is negative. This indicates that the goods are:

  1. both inferior goods
  2. complements Correct answer.
  3. substitutes
  4. unrelated

Explanation

A negative cross elasticity means a rise in the price of one good reduces demand for the other, which happens when the goods are consumed together. Complements such as bread and butter show this pattern.

Question 23Microeconomics and Consumer Behaviour

A consumer spends her entire income on two goods. If the price of one good falls, the purchasing power of her money income rises. This is known as:

  1. the substitution effect
  2. the income effect Correct answer.
  3. the demonstration effect
  4. the snob effect

Explanation

A price fall leaves the consumer able to buy more of both goods with the same money income, equivalent to an increase in real income. This real-income change is the income effect of a price change.

Question 24Microeconomics and Consumer Behaviour

For a normal good, when its price falls, the substitution effect and the income effect:

  1. both reduce quantity demanded
  2. work in opposite directions
  3. cancel out exactly, leaving quantity unchanged
  4. both increase quantity demanded Correct answer.

Explanation

The substitution effect always raises quantity demanded when a good becomes cheaper relative to others. For a normal good, the income effect also raises quantity demanded because real income has risen, so the two reinforce each other.

Question 25Microeconomics and Consumer Behaviour

The utility approach and the indifference curve approach to consumer behaviour differ mainly in that the indifference curve approach:

  1. assumes prices never change
  2. assumes utility can be measured in utils
  3. ignores the consumer's budget
  4. requires no assumption about the measurability of utility Correct answer.

Explanation

The indifference curve approach uses ordinal utility, requiring only that consumers rank bundles, so cardinal measurement in utils is unnecessary. The utility approach assumes utility is measurable and additive.

Question 26Microeconomics and Consumer Behaviour

A consumer's total utility from consuming five units of a good is 60 utils, and from four units it is 52 utils. What is the marginal utility of the fifth unit?

  1. 4 utils
  2. 12 utils
  3. 60 utils
  4. 8 utils Correct answer.

Explanation

Marginal utility is the addition to total utility from consuming one more unit, so it equals the change in total utility between successive quantities. Here the change is 60 minus 52, which gives 8 utils. Dividing total utility by quantity instead would give average utility, not marginal utility.

Question 27Microeconomics and Consumer Behaviour

When total utility is at its maximum, the marginal utility of the last unit consumed is:

  1. zero Correct answer.
  2. rising
  3. equal to total utility
  4. negative

Explanation

Total utility rises as long as marginal utility is positive and falls once marginal utility becomes negative, so the peak must occur where marginal utility is zero. This is the saturation point of the consumer. Beyond it, further consumption reduces total utility.

Question 28Microeconomics and Consumer Behaviour

A consumer buys only two goods, X and Y. The price of X is Rs 4 and the price of Y is Rs 2. At the chosen bundle, the marginal utility of X is 20 utils. For the consumer to be in equilibrium, the marginal utility of Y must be:

  1. 5 utils
  2. 40 utils
  3. 10 utils Correct answer.
  4. 20 utils

Explanation

The utility-maximising condition equates marginal utility per rupee across goods, so MUx/Px must equal MUy/Py. Here MUx/Px is 20 divided by 4, which is 5 utils per rupee. Multiplying by the price of Y gives 5 times 2, which is 10 utils.

Question 29Microeconomics and Consumer Behaviour

A consumer's indifference map shows bundles of rice and pulses. The marginal rate of substitution of rice for pulses falls continuously as more rice is substituted. This falling MRS is the reason that indifference curves are:

  1. parallel to each other
  2. convex to the origin Correct answer.
  3. upward sloping
  4. right-angled at the kink

Explanation

The marginal rate of substitution is the absolute slope of an indifference curve, and when it diminishes as the consumer moves along the curve the slope flattens. A continuously diminishing slope produces a curve that bows inward toward the origin, that is, a convex shape. This reflects the consumer's preference for balanced bundles.

Question 30Microeconomics and Consumer Behaviour

A consumer spends her whole income on two goods. The price of good X falls while the price of good Y and her money income are unchanged. The budget line will:

  1. rotate outward along the X-axis, pivoting on the Y-intercept Correct answer.
  2. rotate inward along the Y-axis, pivoting on the X-intercept
  3. shift outward parallel to itself
  4. shift inward parallel to itself

Explanation

A fall in the price of X raises the maximum quantity of X the consumer can afford while leaving the maximum affordable quantity of Y unchanged. The Y-intercept therefore stays fixed and the X-intercept moves to the right, which is an outward rotation about the Y-intercept. The slope becomes flatter, reflecting the lower relative price of X.

Question 31Microeconomics and Consumer Behaviour

A consumer's demand for a good is such that a 10 per cent fall in its price leaves the quantity demanded completely unchanged. The price elasticity of demand for this good is:

  1. infinity
  2. one
  3. greater than one
  4. zero Correct answer.

Explanation

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. A zero percentage change in quantity, whatever the price change, gives an elasticity of zero. Such demand is perfectly inelastic and its curve is vertical.

Question 32Microeconomics and Consumer Behaviour

A firm faces a straight-line downward-sloping demand curve and is currently selling at the midpoint of that curve. If it lowers its price slightly, total revenue will:

  1. remain unchanged, because elasticity is zero there
  2. fall, because demand is inelastic at the midpoint
  3. remain unchanged, because elasticity equals one at the midpoint Correct answer.
  4. rise, because demand is elastic above the midpoint

Explanation

On a linear demand curve, elasticity equals one exactly at the geometric midpoint, where marginal revenue is zero. A small price change in either direction therefore leaves total revenue essentially unchanged. Total revenue is at its maximum at this point.

Question 33Microeconomics and Consumer Behaviour

The income elasticity of demand for a good is estimated at minus 0.6. This value tells us that the good is:

  1. a luxury good
  2. a normal necessity
  3. an inferior good Correct answer.
  4. a complement to another good

Explanation

Income elasticity of demand 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. The magnitude 0.6 shows the response is less than proportionate, but the sign alone determines the classification.

Question 34Microeconomics and Consumer Behaviour

For a normal good, a fall in price produces a substitution effect and an income effect. Which statement correctly describes how these effects combine?

  1. Both effects lower the quantity demanded, so they work in the same direction
  2. The substitution effect raises quantity demanded while the income effect lowers it
  3. Both effects raise the quantity demanded, so they reinforce each other Correct answer.
  4. The substitution effect lowers quantity demanded while the income effect raises it

Explanation

When the price of a normal good falls, it becomes relatively cheaper, so the consumer substitutes toward it and quantity demanded rises. The fall in price also raises real income, and for a normal good this raises quantity demanded further. The two effects therefore work in the same direction and reinforce each other.

Question 35Producer Behaviour, Cost and Supply

In the short run, which factor of production is typically treated as fixed for a firm?

  1. The size of its factory building Correct answer.
  2. The quantity of raw materials used
  3. The amount of electricity consumed
  4. The number of workers hired

Explanation

The short run is defined as a period in which at least one factor of production cannot be varied. Capital items such as buildings and machinery are normally fixed, while labour and materials can be adjusted.

Question 36Producer Behaviour, Cost and Supply

A firm's total fixed cost is Rs 500 and total variable cost at 10 units is Rs 1,000. What is total cost at this output?

  1. Rs 500
  2. Rs 1,000
  3. Rs 100
  4. Rs 1,500 Correct answer.

Explanation

Total cost equals total fixed cost plus total variable cost at every level of output. Adding Rs 500 and Rs 1,000 gives Rs 1,500.

Question 37Producer Behaviour, Cost and Supply

The law of variable proportions states that, as more units of a variable factor are added to fixed factors, marginal product eventually:

  1. remains constant
  2. becomes negative from the first unit
  3. declines Correct answer.
  4. rises continuously

Explanation

The law describes three stages: increasing returns, diminishing returns and negative returns. The essential prediction is that marginal product eventually falls as the variable factor is added to a fixed factor.

Question 38Producer Behaviour, Cost and Supply

Average fixed cost at any given output is calculated by dividing total fixed cost by:

  1. marginal cost
  2. the price of the good
  3. the quantity of output Correct answer.
  4. total variable cost

Explanation

Average fixed cost equals total fixed cost divided by the number of units produced. Because the numerator is constant, average fixed cost falls continuously as output rises.

Question 39Producer Behaviour, Cost and Supply

Which market structure is assumed when economists draw a firm's supply curve from its marginal cost curve in a perfectly competitive market?

  1. Perfect competition Correct answer.
  2. Monopolistic competition
  3. Oligopoly
  4. Monopoly

Explanation

In perfect competition the firm is a price taker, so price equals marginal revenue. The firm supplies where marginal cost equals price, which allows the marginal cost curve above average variable cost to serve as the supply curve.

Question 40Producer Behaviour, Cost and Supply

A firm's production function shows the relationship between:

  1. inputs used and maximum output produced Correct answer.
  2. cost and revenue
  3. price and quantity demanded
  4. profit and output

Explanation

A production function is a technical relationship describing the maximum output obtainable from given quantities of inputs with existing technology. It is not a market or revenue relationship.

Question 41Producer Behaviour, Cost and Supply

If a firm's marginal cost is below its average total cost, then average total cost must be:

  1. equal to marginal cost
  2. at its minimum
  3. rising
  4. falling Correct answer.

Explanation

Marginal cost pulls average cost in its own direction. When marginal cost lies below average total cost, each extra unit costs less than the average, so the average is being pulled down.

Question 42Producer Behaviour, Cost and Supply

A firm's total revenue rises from Rs 800 to Rs 950 when output increases from 10 to 12 units. What is marginal revenue?

  1. Rs 12.50
  2. Rs 75 Correct answer.
  3. Rs 950
  4. Rs 150

Explanation

Marginal revenue is the change in total revenue divided by the change in output. The revenue change is Rs 150 over 2 extra units, giving Rs 75 per unit.

Question 43Producer Behaviour, Cost and Supply

Which statement best describes the relationship between a firm's marginal cost curve and its average variable cost curve?

  1. Marginal cost is always falling when average variable cost falls
  2. Average variable cost always lies above marginal cost
  3. The two curves never intersect
  4. Marginal cost cuts average variable cost at the latter's minimum point Correct answer.

Explanation

Marginal cost intersects both average variable cost and average total cost at their respective minimum points. Below the intersection marginal cost is lower and pulls average variable cost down; above it marginal cost is higher and pushes it up.

Question 44Producer Behaviour, Cost and Supply

Why does the short-run average total cost curve have a U shape?

  1. Because average fixed cost falls while average variable cost eventually rises Correct answer.
  2. Because fixed costs rise with output
  3. Because total revenue eventually declines
  4. Because marginal cost is constant at all outputs

Explanation

Average total cost combines average fixed cost, which always falls as output spreads fixed cost, and average variable cost, which falls then rises because of diminishing returns. The U shape reflects these two opposing forces.

Question 45Producer Behaviour, Cost and Supply

A firm operates in the short run with total fixed cost of Rs 300. At 5 units, total cost is Rs 800. What is average variable cost at this output?

  1. Rs 160
  2. Rs 500
  3. Rs 60
  4. Rs 100 Correct answer.

Explanation

Total variable cost is total cost minus total fixed cost, which is Rs 500. Dividing Rs 500 by 5 units gives average variable cost of Rs 100.

Question 46Producer Behaviour, Cost and Supply

When a firm's marginal product of labour is rising, its marginal cost of output is:

  1. falling Correct answer.
  2. zero
  3. rising
  4. constant

Explanation

Marginal cost equals the wage divided by the marginal product of labour when labour is the only variable input. If marginal product rises, each extra worker adds more output, so the cost of each extra unit falls.

Question 47Producer Behaviour, Cost and Supply

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

  1. above average revenue
  2. below average fixed cost
  3. above average variable cost Correct answer.
  4. below average variable cost

Explanation

A competitive firm supplies only when price covers average variable cost, otherwise it shuts down. The relevant supply curve is therefore the marginal cost curve above the minimum of average variable cost.

Question 48Producer Behaviour, Cost and Supply

The vertical distance between a firm's average total cost curve and its average variable cost curve at any output equals:

  1. marginal revenue
  2. average fixed cost Correct answer.
  3. total fixed cost
  4. marginal cost

Explanation

Average total cost equals average fixed cost plus average variable cost, so the gap between the two curves is average fixed cost. This gap narrows as output rises because fixed cost is spread over more units.

Question 49Producer Behaviour, Cost and Supply

A firm's production data show total product of 40 units with 4 workers and 52 units with 5 workers. What is the marginal product of the fifth worker?

  1. 12 units Correct answer.
  2. 10 units
  3. 52 units
  4. 8 units

Explanation

Marginal product is the change in total product divided by the change in the number of workers. Output rises by 12 units when one extra worker is hired, so the marginal product is 12 units.

Question 50Producer Behaviour, Cost and Supply

Which of the following would shift a firm's short-run supply curve to the right?

  1. A rise in the market price of the good
  2. An increase in the wage rate paid to workers
  3. An increase in the firm's fixed cost
  4. A fall in the price of a key raw material Correct answer.

Explanation

A fall in the price of a variable input lowers marginal cost at every output, so the firm is willing to supply more at each price and the supply curve shifts right. A change in the good's own price moves the firm along its supply curve instead.