Question

Question 1 : Which of the following is a feature of models?

A. Models are as complex as the phenomenon being studied.

B. Models are the same as hypotheses.

C. Models are more complicated than real life phenomena.

D. Models help in making predictions for the future.

Question 2 : Which of the following is a feature of a perfectly competitive market?

A. There is only one seller of a commodity.

B. The government rations commodities.

C. The product of each seller differs marginally from its rival products.

D. Each seller is too small to influence the market price.

Question 3 : A seller who is a price-taker charges ________.

A. different prices to different buyers.

B. a price above the market price.

C. the market price.

D. a price below the market price.

Question 4 : The quantity demanded of a good is ________.

A. the amount of the good that sellers are willing to supply at a given market price

B. the amount of the good that buyers are willing to purchase at a given market price

C. always determined by government intervention

D. determined independently of the market price of the good

Question 5 : Which of the following is the best example of the Law of Supply?

A. When the market price of pens increased, sellers started supplying fewer pens.

B. When the market price of pens increased, sellers started supplying more pens.

C. When the cost of production of cotton increased, all suppliers' willingness to accept decreased.

D. When the cost of production of cotton fell, the market price of cotton also fell.

Answer 1

Solution:

Q1) Making or creating models is at the heart of study of economics. It is kind of a replica of real world, except it is a simpler version of the complex world (eliminate options (A) and (C)). Hypothesis is made to verify the strength of some statement, and yes model reflects it, as experimenting through a model helps us test the hypothesis. Making predictions is important feature and most basic reason behind formulation of the model is indeed making predictions. So, correct option is (D).

Q2) Perfectly competitive market, as the name suggests, is a market structure where the competition is very high. When there is such high competition, it clearly means there must be numerous number of players, that is huge number of sellers in the market. When the number of sellers is high, a single seller is relatively a small player in the market, thus do not have the power to influence the market price. So, correct option is (D).

Q3) A seller is a price taker when he/she do not have the power over prices in the market (thus, price taker, and not price maker). When a seller has no power over influencing the market price, it cannot charge price other than what is prevailing in the market; no power to set a higher price as then, no consumer buys from that particular seller due to availability of many other optional sellers and no incentive to set a lower price, as then huge losses are incurred. So, a price-taker seller charges the market price (again a feature of perfectly competitive market). So, the correct option is (C).

Q4) The quantity demanded of good talks about the demand side of the market (eliminating option A). It is a free market force, without government intervention (eliminating option C). We know that demand and supply cannot be independent of prices (eliminate option D, as they help to decide the desired quantity. So, correct option is (B).

Q5) Law of supply simply states that keeping other things constant, that is keeping other determinants of supply constant, there is positive relation between the price and quantity supplied of a good.

Options C and D talk about the cost of production change, which is determinant of supply other than price, so rejecting the option.

So, positive relation implies, both price and quantity sellers wish to sell move in same direction. Thus, correct option is (B).