Question

QUESTION 33 Average fixed cost always decreases. True False

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QUESTION 31

1. If a price ceiling is imposed below the equilibrium price then _____.

   	A.	the market can still reach equilibrium
   	B.	excess supply is created
   	C.	demand will decrease
   	D.	supply will increase
   	E.	excess demand is created

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QUESTION 29

1. A price floor on corn would have the effect of which of the following?

   	A.	Creating an excess supply regardless of the price.
   	B.	Creating an excess supply when the price floor is above the equilibrium price.
   	C.	Creating an excess demand when the price floor is below the equilibrium price.
   	D.	Creating an excess demand regardless of the price floor.

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   QUESTION 28

2. Which of the following is true regarding a demand curve?

   	A.	Only price is held constant.
   	B.	Income and price are held constant.
   	C.	Only non-price determinants are held constant.
   	D.	All determinants are held constant.

Answer 1

Question 33) answer-TRUE

Average fixed costs always decreases. Fixed cost is incurred on the use of fixed factors of production. They do not change with a change in the level of output. They remain constant. As output increases, average fixed cost ( AFC=TFC/Q) which is fixed cost per unit of output goes on decreasing. As output increases, fixed costs get distributed over larger and larger levels of output and hence average fixed cost goes on decreasing.

Question 31) answer- option E. Excess demand is created.

Price ceiling is the maximum legal price which the suppliers can charge for a particular good or service. When price ceiling is set below the equilibrium price, it will result in a situation of excess demand. At a lower price ( below the equilibrium price), buyers demand will increase and suppliers supply will decrease. Hence, a situation of excess demand will emerge in the market.

Option A is incorrect because when price ceiling is set below the equilibrium price, the suppliers cannot charge a price higher than the price ceiling and market cannot return to equilibrium.

Option B is incorrect because when price ceiling is set below the equilibrium price, at lower price suppliers are willing to supply less. On the other hand, at a lower price, buyers demand increases. Hence , shortage of goods or excess demand occurs. As quantity demanded increases and quantity supplied decreases, excess supply is not created but shortage of goods or excess demand is created.

Option C is incorrect because at a price below the equilibrium price, buyers demand increases and not decreases. At a lower price, buyers quantity demanded increases.

Option D is incorrect because at a price lower than the equilibrium price, suppliers supply will decrease and not increase. At a lower price, profit margin of supplier decreases and hence quantity supplied decreases.

Question 29) answer-option B. Creating an excess supply when the price floor is above the equilibrium price.

Price floor is the minimum price at which suppliers may sell a particular good or service. When price floor is set above the equilibrium price, at a higher price profit margin of supplier increase and hence quantity supplied by supplier increases. At a higher price the quantity demanded by buyers decreases. Hence, as a result a situation of excess supply occurs in the market.

Option A is incorrect because excess supply is created when price floor is set above the equilibrium price. If price floor is set below the equilibrium price, at a lower price there will emerge excess demand which will pull back the price back to equilibrium price.

Option C is incorrect because when price floor is set below the equilibrium price, at a lower price , quantity demanded by buyers increases and quantity supplied by supplier decreases. Hence situation of excess demand occurs but this causes the price to push back to equilibrium price which is higher than price floor.

Option D is incorrect because excess demand occurs when price floor is set below the equilibrium price. If price floor is set above the equilibrium price, excess supply occurs and not excess demand. Hence, price matters.

Question 28) answer- option C. Only non- price determinants are held constant.

A demand curve shows various quantities demanded of a commodity at various possible prices. Here quantity demanded increases or decreases as price changes. Hence, the determinant price is taken into consideration and all other non-price determinants are not considered. Non-price determinants i.e., determinants of a commodity other than the own price are held constant.

Option A is incorrect because a demand curve considers the determinant price. Price is not held constant.

Option B is incorrect because price is not held constant in a demand curve. Only non-price determinants such as income are held constant.

Option D is incorrect because all determinants are not held constant. Price is not held constant. A demand curve shows various quantities demanded of a commodity at various prices.