PGT Economics – Microeconomics Unit 1 Sample Paper with questions, options, and the

correct option ticked (✔):

Answer Key

1. The study of how unlimited wants can be fulfilled with limited resources is called:
A) Microeconomics
✔ B) Economics
C) Both A and B
D) Political Science

2. Microeconomics mainly studies:

A) The economy as a whole
✔ B) Individual firms or households
C) Government policies only
D) International trade only

3. Normative economics deals with:

A) Facts and data
✔ B) What ought to be
C) Only positive statements
D) Laws of demand and supply

4. Which is a feature of a capitalistic economy?

A) Government controls all production
✔ B) Private ownership of resources
C) No profit motive
D) Equal distribution of wealth

5. Positive economics deals with:

A) Opinions
B) Value judgments
✔ C) Facts and cause-effect relationships
D) Moral decisions

6. Mixed economy is a combination of:

A) Only socialism
B) Only capitalism
✔ C) Both capitalism and socialism
D) Only barter system

7. Opportunity cost means:

A) Cost of the best chosen option
✔ B) Cost of the second-best rejected option
C) Cost of raw materials
D) Cost of production

8. The slope of the Production Possibility Frontier (PPF) shows:

✔ A) Marginal Rate of Transformation
B) Marginal Utility
C) Total Cost
D) Average Revenue

9. Rotation of PPF happens due to:

A) Change in price
✔ B) Change in technology of one good
C) Change in income level
D) Change in consumer taste

10. The ordinal approach of utility was given by:

A) Alfred Marshall
B) Adam Smith
✔ C) Hicks
D) Pigou

11. Consumer equilibrium in indifference curve analysis occurs where:

A) IC = MU
✔ B) MRS = Price ratio
C) TU = Zero
D) Price = Zero

12. Indifference curves are L-shaped when goods are:

A) Perfect substitutes
✔ B) Perfect complements
C) Normal goods
D) Inferior goods
13. Rotation of the budget line occurs due to:
A) Change in income
✔ B) Change in price of one good
C) Change in taste
D) Change in population

14. Giffen goods violate:

A) Law of Supply
✔ B) Law of Demand
C) Law of Diminishing Returns
D) Law of Equi-Marginal Utility

15. Price effect consists of:

✔ A) Income effect and substitution effect
B) Only income effect
C) Only substitution effect
D) None of the above

16. Point of inflection in production function shows:

A) Start of increasing returns
✔ B) End of increasing returns
C) Start of constant returns
D) Start of decreasing returns

17. Income Consumption Curve bends backward when:

A) Both goods are normal
✔ B) One good is inferior
C) Both goods are inferior
D) None of the above

18. Price Consumption Curve slopes upward for:

✔ A) Giffen goods
B) Inferior goods
C) Luxury goods
D) Normal goods

19. Elasticity of substitution in Cobb-Douglas production function is:

✔ A) One
B) Less than one
C) More than one
D) Zero

20. Formula of arc elasticity of demand includes:

✔ A) Average price and average quantity
B) Only total revenue
C) Only marginal utility
D) None of these

21. When demand is inelastic, elasticity value is:

A) Greater than 1
B) Equal to 1
✔ C) Less than 1
D) Infinite

22. Revealed Preference Theory was developed by:

A) Hicks
✔ B) Samuelson
C) Pigou
D) Adam Smith

23. If two inputs are perfect substitutes, isoquant will be:

A) L-shaped
B) Convex
✔ C) Straight line
D) Horizontal line

24. Intercept of budget line shows:

A) Price ratio
✔ B) Quantity purchased when other good is zero
C) Total income
D) None of these

25. Dual and primal problem of isoquant-isocost framework is:

A) Output maximization
B) Cost minimization
✔ C) Either cost minimization or output maximization
D) None

26. Engel curve shows relationship between:

A) Price and quantity
✔ B) Income and quantity demanded
C) Price and utility
D) Cost and revenue

27. If C = 100 + 2Q then MC is:

A) 1
✔ B) 2
C) 0
D) None

28. Which cost curve is rectangular hyperbola?

✔ A) AFC
B) AVC
C) MC
D) AC

29. Long-run average cost curve is:

A) U-shaped
✔ B) Envelope-shaped
C) Straight line
D) Vertical

30. Constant returns to scale means:

A) Output changes more than input
B) Output changes less than input
✔ C) Output changes in same proportion as input
D) Output does not change

31. If cross-price elasticity is positive, goods are:

A) Complements
✔ B) Substitutes
C) Inferior
D) Giffen
32. Break-even point occurs when:
✔ A) Total revenue = Total cost
B) Marginal revenue = Marginal cost
C) Average revenue = Average cost
D) Only fixed cost is covered

33. Shutdown point is reached when:

A) Price = Average Fixed Cost
✔ B) Price = Average Variable Cost
C) Price = Average Total Cost
D) None

34. Elasticity of demand for gold or diamond is:

A) Relatively elastic
✔ B) Relatively inelastic
C) Perfectly elastic
D) Perfectly inelastic

35. Demand curve parallel to price axis means elasticity is:

A) Zero
✔ B) Infinite
C) One
D) Less than one

36. Revealed Preference Theory was introduced by:

A) Marshall
✔ B) Samuelson
C) Pigou
D) Hicks

37. Income elasticity of demand measures:

✔ A) % change in quantity / % change in income
B) % change in price / % change in quantity
C) MU / Price
D) None

38. When average cost is minimum, marginal cost is:

A) Greater than AC
✔ B) Equal to AC
C) Less than AC
D) Infinite

39. In the long run:

A) Some costs are fixed
✔ B) No fixed cost
C) No variable cost
D) None

40. If total cost is increasing at an increasing rate, marginal cost is:

A) Constant
B) Decreasing
✔ C) Increasing
D) Zero

41. If marginal revenue is negative, average revenue will be:

A) Negative
✔ B) Decreasing but positive
C) Increasing
D) Constant

42. Income consumption curve shows:

A) Price and quantity demanded
✔ B) Consumer equilibrium at different incomes
C) Only substitution effect
D) None

43. Concept of equivalent variation was given by:

✔ A) Hicks
B) Samuelson
C) Marshall
D) Pigou

44. Compensating variation ensures consumer:

A) Can move to a higher IC
✔ B) Can return to original IC
C) Can reduce consumption
D) None

45. Veblen effect shows:

A) Goods are bought less if price rises
✔ B) Goods are judged by higher price as higher quality
C) Goods have negative demand
D) None

46. Elasticity of substitution in CES production function is:

✔ A) Constant
B) Increasing
C) Decreasing
D) Zero

47. Father of Economics is:

A) Hicks
✔ B) Adam Smith
C) Samuelson
D) Marshall

48. In Lagrangian function, value of lambda shows:

✔ A) Marginal utility of income
B) Total utility
C) Price ratio
D) None

49. Slope of indifference curve is:

A) MRT
✔ B) MRS
C) MPC
D) MU

50. Second-order condition for consumer equilibrium is:

A) IC should be concave
✔ B) IC should be convex
C) Budget line should be vertical
D) MU = Price
51. Two indifference curves cannot intersect because:
✔ A) Of transitivity of preferences
B) Of convexity
C) Of homogeneity
D) None

52. When marginal utility is positive but decreasing, total utility is:
A) Decreasing
B) Constant
✔ C) Increasing
D) Negative

53. Isoquant curve shows combination of:

A) Two goods
✔ B) Two inputs
C) Price and cost
D) Demand and supply

54. Slope of isocost line shows:

✔ A) Ratio of two input prices
B) Output per unit input
C) Marginal utility
D) None

55. Expansion path is the locus of:

A) Consumer equilibrium points
✔ B) Producer equilibrium points
C) Budget intercepts
D) Marginal revenues

56. Economic zone in production is found:

✔ A) Between two ridge lines
B) Beyond ridge line
C) Below isoquant
D) None
57. Marginal product beyond ridge line is:
A) Positive
✔ B) Zero or negative
C) Increasing
D) None

58. Law of variable proportion applies to:

✔ A) Short run with one variable input
B) Long run
C) Fixed scale production
D) None

59. Unitary elastic demand means elasticity value is:

A) Zero
✔ B) One
C) More than one
D) Less than one

60. Cardinal approach of utility was given by:

✔ A) Marshall
B) Hicks
C) Pigou
D) Samuelson

61. Any point beyond PPF is:

A) Attainable
✔ B) Unattainable
C) Efficient
D) None

62. PPF will be straight line when:

A) MRT is increasing
B) MRT is decreasing
✔ C) MRT is constant
D) None

63. PPF shifts when:

A) Resources increase
B) Technology improves
✔ C) Both A and B
D) None

64. Central problems of an economy are:

✔ A) What, how, and for whom to produce
B) Only what to produce
C) Only how to produce
D) None

65. Difference between price and value is due to:

✔ A) Utility and scarcity
B) Demand and supply only
C) Cost of production
D) None

66. Scarcity is:

✔ A) A key problem in economics
B) A temporary issue
C) Never related to choice
D) None

67. Indifference curve is straight downward sloping line when:

✔ A) Goods are perfect substitutes
B) Goods are perfect complements
C) One good is inferior
D) None

68. Substitution effect is related to:

✔ A) Change in price
B) Change in income
C) Change in taste
D) None

69. Increasing returns to scale means:

✔ A) Output increases more than inputs
B) Output increases less than inputs
C) Output increases equally with inputs
D) None

70. In Cobb-Douglas production function, if α + β > 1, it shows:

✔ A) Increasing returns to scale
B) Decreasing returns to scale
C) Constant returns to scale
D) None