Economics MCQs
Topic Notes: Economics
MCQs and preparation resources for competitive exams, covering important concepts, past papers, and detailed explanations.
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
1
What is a significant difficulty encountered when performing cost-benefit analysis for public goods?
Answer:
Respondents to naires have little incentive to tell the truth
Cost-benefit analysis relies on accurate valuation of benefits. For public goods, individuals often have an incentive to free-ride or misrepresent their true willingness to pay in surveys (contingent valuation). This strategic behavior makes it difficult for analysts to aggregate individual preferences accurately, leading to potential inaccuracies in the overall assessment of the project's net social benefit.
2
What term describes market prices that have been adjusted to account for the differences between private and social cost-benefit calculations?
Answer:
shadow prices
Shadow prices are the imputed or estimated prices used in cost-benefit analysis when market prices do not accurately reflect the true opportunity cost or social value of a resource. They are essential for evaluating public projects where externalities or market imperfections exist, ensuring that social welfare is correctly accounted for in the decision-making process.
3
If a project generates a net income of $200 annually for 4 years and nothing thereafter, with a 5 percent discount rate, what is the present value of the total income stream?
Answer:
more than zero but less than 800
The present value of a future income stream is calculated by discounting each annual payment back to the present. Since the discount rate is positive (5 percent), each $200 payment received in the future is worth less than $200 today. Therefore, the sum of these discounted values must be less than the nominal sum of $800, but still greater than zero.