Question 1

Which of the following best describes the 'invisible hand' as introduced by Adam Smith?

Accepted Answer

A mechanism by which self-interested individuals in a perfectly competitive market unintentionally promote the well-being of society as a whole.

Question 2

In a perfectly competitive market, what condition must be met at equilibrium?

Accepted Answer

Supply equals demand.

Question 3

Suppose the reservation values for buyers are $$70, 60$$, $$50, 40$$, $$30, 20$$, and $$10, and for sellers are 10$$, $$20, 30$$, $$40, 50$$, $$60, and 70. If $$the market price is set at $40, how many units will be traded?

Accepted Answer

$$4$$

Question 4

Given the same reservation values as above, what is the total consumer surplus if the equilibrium price is $40?

Accepted Answer

$$CS = (70-40) + (60-40) + (50-40) + (40-40) = 30 + 20 + 10 + 0 = 60$$

Question 5

Which of the following statements about Pareto efficiency is correct?

Accepted Answer

A Pareto efficient allocation is one where no individual can be made better off without making someone else worse off.

Question 6

If a government imposes a price ceiling below the equilibrium price in a perfectly competitive market, what is the most likely outcome?

Accepted Answer

A shortage of goods.

Question 7

In the context of international trade, if the world price ($$P_{world}) is $$higher than the autarky price ($$P^*) in a $$country, what will happen when the country opens up to trade?

Accepted Answer

The country will export the good.

Question 8

Suppose Denmark opens up to trade and the world price of tennis shoes is below the domestic autarky price. What is the effect on consumer and producer surplus?

Accepted Answer

Consumer surplus increases, producer surplus decreases.

Question 9

What is the deadweight loss in a market with a binding price control, and how is it represented graphically?

Accepted Answer

It is the area representing the loss in total surplus due to trades that no longer occur, typically shown as the area between the supply and demand curves between the controlled quantity and the equilibrium quantity.

Question 10

Which of the following is a key assumption for the invisible hand to work efficiently in a market?

Accepted Answer

All agents have perfect information and act as price takers.

Question 11

If a market is characterized by positive economic profits, what is the expected long-run effect in a perfectly competitive industry?

Accepted Answer

New firms will enter the market, increasing supply and driving profits to zero.

Question 12

A study in Kerala, India, found that the introduction of mobile phones among fishermen led to which of the following outcomes?

Accepted Answer

Reduced price dispersion and elimination of waste.

Question 13

Suppose a country imposes a tariff on imported goods. What is the most likely effect on total economic surplus in that country?

Accepted Answer

Total economic surplus decreases due to deadweight loss.

Question 14

Which of the following best explains why market prices act as signals in a perfectly competitive market?

Accepted Answer

They indicate to firms and consumers where resources are most valued, guiding production and consumption decisions.

Question 15

If a market is not perfectly competitive due to the presence of a monopoly, which of the following is most likely to occur?

Accepted Answer

There will be a deadweight loss due to reduced output and higher prices.

Question 16

Which of the following is NOT a necessary condition for perfect competition?

Accepted Answer

Barriers to entry.

Question 17

Suppose the government sets a minimum price (price floor) above the equilibrium price in a competitive market. What is the likely result?

Accepted Answer

A surplus will occur.

Question 18

In the iPhone example, if the equilibrium price is $40 and 4 units are traded, what is the total producer surplus?

Accepted Answer

$$PS = (40-10) + (40-20) + (40-30) + (40-40) = 30 + 20 + 10 + 0 = 60$$

Question 19

Which of the following is a real-world example of how improved information can increase market efficiency?

Accepted Answer

The introduction of mobile phones among fishermen in Kerala, which reduced price dispersion and waste.

Principles of Microeconomics: Competition, the Invisible Hand, and Market Efficiency

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