All Free Economics MCQs with Answers

• A. Interact only once and never meet again
• B. Can observe behaviour and punish future cheating
• C. Have no information about rivals' actions
• D. Always choose the lowest possible price independently

Explanation: Repeated interaction allows firms to reward cooperation and punish defection in later rounds.

• A. Has better information before buying the policy
• B. Changes behaviour after being insured
• C. Cannot obtain insurance because of high risk
• D. Selects a policy with the lowest premium

Explanation: Moral hazard is a post-contract problem in which protection from loss changes the insured person's behaviour.

• A. Make private marginal cost reflect external damage
• B. Raise output above the competitive level
• C. Remove all fixed costs from production
• D. Ensure that every firm earns positive profit

Explanation: A Pigouvian tax is set to reflect the marginal external cost imposed on others.

• A. Ratio of the consumer's income to wealth
• B. Ratio of the prices of the two goods
• C. Difference between the prices of the two goods
• D. Sum of the quantities of the two goods

Explanation: The budget line shows combinations that exhaust income, and its slope is determined by the relative prices of the two goods.

• A. Necessity good
• B. Inferior good
• C. Luxury good
• D. Complementary good

Explanation: An income elasticity greater than one means demand rises by a larger percentage than income.

• A. At its highest positive value
• B. Equal to the average product
• C. Equal to zero
• D. Greater than total product

Explanation: Marginal product measures the change in total product caused by one additional unit of input.

• A. Wages paid to employees
• B. Rent paid to a landlord
• C. Electricity purchased by the firm
• D. Income forgone by the owner's resources

Explanation: Economic cost includes both explicit payments and implicit opportunity costs.

• A. Average wage paid to workers
• B. Market price of the firm's output
• C. Average product of labour
• D. Firm's total fixed cost

Explanation: The value of marginal product equals the extra physical output from one more worker multiplied by the output price.

• A. Equal to average total cost
• B. Greater than average total cost
• C. Equal to total fixed cost
• D. Less than average variable cost

Explanation: When marginal cost is below average total cost, it pulls the average downward, and when it is above average total cost, it pushes the…

• A. Excess capacity and zero economic profit
• B. Allocative efficiency and maximum capacity
• C. Permanent losses and rising demand
• D. A horizontal market demand curve

Explanation: Free entry and exit remove economic profit in long-run monopolistic competition.

• A. Higher because private benefits are overstated
• B. Lower because social benefits exceed private benefits
• C. Equal because external effects are fully priced
• D. Lower because private benefits exceed social benefits

Explanation: With a positive consumption externality, benefits to others are not fully reflected in the buyer's private benefit.

• A. A lower price and a higher quantity
• B. A higher price and a lower quantity
• C. A higher price and a higher quantity
• D. An unchanged price and a lower quantity

Explanation: A decrease in supply shifts the supply curve to the left. With demand unchanged, buyers compete for fewer units, causing the equilibrium…

• A. Worker's average product
• B. Market wage rate
• C. Firm's average fixed cost
• D. Total revenue from output

Explanation: The firm compares the extra revenue generated by a worker with the extra wage cost of hiring that worker.

• A. Equilibrium price rises, but quantity is uncertain
• B. Equilibrium quantity rises, but price is uncertain
• C. Both equilibrium price and quantity rise
• D. Both equilibrium price and quantity fall

Explanation: A rightward demand shift raises price and quantity, while a leftward supply shift raises price but lowers quantity.

• A. Increase because quantity demanded rises
• B. Decrease because quantity rises proportionately less
• C. Remain unchanged because demand is inelastic
• D. First rise and then fall at every lower price

Explanation: With inelastic demand, the percentage increase in quantity demanded is smaller than the percentage decrease in price.

• A. Greater than average product
• B. Less than average product
• C. Equal to average product
• D. Equal to total product

Explanation: The marginal product curve intersects the average product curve at the maximum point of average product.

• A. Substitution effect is stronger than the income effect
• B. Positive income effect exceeds the substitution effect
• C. Negative income effect exceeds the substitution effect
• D. Demand curve shifts right after the price increase

Explanation: For a Giffen good, the negative income effect caused by the higher price is unusually strong and outweighs the substitution effect.

• A. Begins to experience diseconomies of scale
• B. Reaches the lowest point of long-run average cost
• C. Earns the highest possible short-run profit
• D. Has marginal cost equal to average fixed cost

Explanation: Minimum efficient scale is the lowest output at which long-run average cost is minimized.

• A. A temporary fall in consumer income
• B. A government-granted patent
• C. A rise in the firm's variable cost
• D. A change in the market equilibrium price

Explanation: A patent gives its holder exclusive legal rights to use or sell an invention for a specified period.

• A. Higher than producing them separately
• B. Equal to the cost of producing either product
• C. Lower than producing them separately
• D. Unaffected by the number of products

Explanation: Economies of scope occur when joint production is cheaper than separate production of the same quantities.