Economic Curves — Set 3

Correct Answer: B. Long Run Average Cost Curve

The Long Run Average Cost (LRAC) curve is known as the 'Envelope Curve' because it wraps around all short-run cost curves. In the long run, firms can choose the most efficient scale of operation. It helps in identifying economies and diseconomies of scale.

Correct Answer: D. Minimum Cost

The MC curve always cuts the ATC and AVC curves at their lowest points. When MC is below average cost, the average falls; when MC is above average cost, the average rises. This intersection marks the most technically efficient scale of production.

Correct Answer: A. Lorenz Curve

The Lorenz Curve is versatile and can represent the distribution of any asset, including land ownership, within a population. It is a vital tool for geographers and economists to study land reforms. A highly bowed curve indicates severe concentration of land in few hands.

Correct Answer: B. Phillips Curve

The Misery Index is the sum of the inflation rate and the unemployment rate, both of which are the axes of the Phillips Curve. It is used as a simple measure of the economic health of an average citizen. High values on this index indicate significant economic distress.

Correct Answer: B. Oligopoly

The Kinked Demand Curve model explains why prices remain stable in an oligopoly despite cost changes. It assumes that rivals will follow price cuts but not price increases. This leads to a 'kink' at the prevailing market price level.

Correct Answer: A. Pareto Efficiency

The correct answer is 'Pareto Efficiency'. The Contract Curve connects all points where the indifference curves of two consumers are tangent to each other. At these points, no one can be made better off without making someone else worse off. It represents all possible efficient allocations in an economy.

Correct Answer: C. Indifference Curve

Using indifference curves and budget lines, economists can decompose a price change into income and substitution effects. The substitution effect is always negative, favoring the cheaper good. The income effect depends on whether the good is normal or inferior.

Correct Answer: C. Straight line from the origin

In perfect competition, the price is constant regardless of output, so total revenue increases proportionally with quantity. This results in a linear TR curve starting from the origin with a constant slope. The slope of this line is equal to the market price.

Correct Answer: B. Zero

The correct answer is 'Zero'. A vertical supply curve represents perfectly inelastic supply, meaning quantity supplied remains constant regardless of price. This often happens in the very short run or for unique items like land or rare art. Producers cannot increase supply even if prices skyrocket.

Correct Answer: A. Unit Cost and Cumulative Output

The Learning Curve suggests that as a firm gains experience (cumulative output), the average cost per unit decreases. This is due to workers becoming more proficient and processes becoming more efficient. It is a key concept in strategic management and long-term planning.