1Which of the following market structures is characterized by a very large number of firms selling a homogeneous product?
A.Monopoly
B.Oligopoly
C.Monopolistic Competition
D.Perfect Competition
Correct Answer: Perfect Competition
Explanation:Perfect competition is characterized by a large number of buyers and sellers, homogeneous products, perfect information, and free entry and exit.
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2In a perfectly competitive market, the demand curve facing an individual firm is:
A.Perfectly inelastic (vertical)
B.Perfectly elastic (horizontal)
C.Downward sloping
D.Kinked
Correct Answer: Perfectly elastic (horizontal)
Explanation:In perfect competition, the firm is a price taker. It can sell any quantity at the market price, making the demand curve perfectly elastic ().
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3The profit maximization condition for a firm in any market structure is:
A.
B.
C. and MC is rising
D.
Correct Answer: and MC is rising
Explanation:Profit is maximized where Marginal Revenue () equals Marginal Cost (), and the curve cuts the curve from below.
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4Under perfect competition, what is the relationship between Average Revenue (), Marginal Revenue (), and Price ()?
A.
B.
C.
D.
Correct Answer:
Explanation:Since the price is constant for a perfectly competitive firm, the revenue gained from selling one additional unit () is equal to the price () and the average revenue ().
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5In the short run, a perfectly competitive firm should shut down if:
A.Price is less than Average Total Cost ()
B.Price is less than Average Variable Cost ()
C.Price is less than Marginal Cost ()
D.Total Revenue is less than Total Cost
Correct Answer: Price is less than Average Variable Cost ()
Explanation:If the price cannot even cover the variable costs of production, the firm minimizes its losses by shutting down rather than operating.
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6Which market structure is characterized by a single seller selling a unique product with no close substitutes?
A.Monopolistic Competition
B.Oligopoly
C.Perfect Competition
D.Monopoly
Correct Answer: Monopoly
Explanation:A monopoly exists when there is only one provider of a good or service, and there are high barriers to entry preventing competitors from entering the market.
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7In a monopoly, the relationship between Price () and Marginal Revenue () is:
A.
B.
C.
D.
Correct Answer:
Explanation:Because a monopolist faces a downward-sloping demand curve, they must lower the price to sell an additional unit. This causes the Marginal Revenue to be lower than the Price.
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8The Lerner Index of monopoly power is calculated as:
A.
B.
C.
D.
Correct Answer:
Explanation:The Lerner Index measures the degree of monopoly power. It represents the markup of price over marginal cost as a proportion of the price. Under perfect competition, , so .
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9Which of the following is a characteristic of Monopolistic Competition?
A.Homogeneous products
B.Product differentiation
C.High barriers to entry
D.Single seller
Correct Answer: Product differentiation
Explanation:In monopolistic competition, many firms compete, but they sell products that are slightly differentiated (e.g., brand, quality, location), allowing them some price-setting power.
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10In the long run, firms in Monopolistic Competition earn:
A.Supernormal profits
B.Normal profits only
C.Economic losses
D.Infinite profits
Correct Answer: Normal profits only
Explanation:Due to free entry and exit, if firms are earning supernormal profits, new firms enter, increasing supply and driving down demand for individual firms until only normal profits () remain.
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11The concept of Excess Capacity is associated with which market structure?
A.Perfect Competition
B.Monopoly
C.Monopolistic Competition
D.Monopsony
Correct Answer: Monopolistic Competition
Explanation:In the long run, monopolistically competitive firms produce at a level of output where the Average Cost is tangent to the Demand curve, which is to the left of the minimum Average Cost. The difference between actual output and the output at minimum ATC is excess capacity.
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12Which market structure is defined by a few large sellers dominating the industry?
A.Monopoly
B.Oligopoly
C.Perfect Competition
D.Duopsony
Correct Answer: Oligopoly
Explanation:Oligopoly is characterized by a small number of large firms (e.g., the automobile or airline industries) where the actions of one firm significantly impact the others.
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13The Kinked Demand Curve hypothesis in Oligopoly is used to explain:
A.Price flexibility
B.Price rigidity (stickiness)
C.Cartel formation
D.Predatory pricing
Correct Answer: Price rigidity (stickiness)
Explanation:Paul Sweezy's kinked demand curve suggests that rivals will match price cuts but ignore price increases, leading to a sticky price at the 'kink' and a discontinuity in the MR curve.
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14In the Kinked Demand Curve model, the segment of the demand curve above the current price is:
A.Relatively inelastic
B.Relatively elastic
C.Perfectly inelastic
D.Unitary elastic
Correct Answer: Relatively elastic
Explanation:Above the current price, demand is elastic because if a firm raises its price, competitors will not follow, causing the firm to lose a large market share.
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15A Cartel (e.g., OPEC) is most likely to form in which market structure?
A.Perfect Competition
B.Monopolistic Competition
C.Oligopoly
D.Monopoly
Correct Answer: Oligopoly
Explanation:In an oligopoly, firms may collude to restrict output and raise prices to maximize joint profits, effectively acting like a monopoly. This formal agreement is a cartel.
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16Which pricing strategy involves charging a very high initial price for a new, innovative product and lowering it over time?
A.Penetration Pricing
B.Price Skimming
C.Predatory Pricing
D.Limit Pricing
Correct Answer: Price Skimming
Explanation:Price Skimming allows a firm to capture consumer surplus from early adopters willing to pay a premium before lowering the price to attract more price-sensitive customers.
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17Third-degree price discrimination occurs when a monopolist charges different prices based on:
A.Quantity purchased
B.Individual negotiation
C.Different market segments with different price elasticities
D.Cost of production differences
Correct Answer: Different market segments with different price elasticities
Explanation:Third-degree price discrimination involves separating consumers into groups (e.g., students vs. adults, domestic vs. international) based on their price elasticity of demand.
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18Allocative efficiency is achieved when:
A.
B.
C.
D.
Correct Answer:
Explanation:Allocative efficiency occurs when resources are distributed according to consumer preferences, meaning the price consumers are willing to pay equals the marginal cost of production ().
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19Which market structure achieves both productive and allocative efficiency in the long run?
A.Monopoly
B.Oligopoly
C.Monopolistic Competition
D.Perfect Competition
Correct Answer: Perfect Competition
Explanation:Only in perfect competition does the long-run equilibrium occur at the minimum of the Average Total Cost curve (Productive Efficiency) and where (Allocative Efficiency).
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20What is the shape of the Total Revenue () curve under Perfect Competition?
A.Inverted U-shape
B.Horizontal line
C.Straight upward sloping line from the origin
D.Vertical line
Correct Answer: Straight upward sloping line from the origin
Explanation:Since price is constant, Total Revenue () increases at a constant rate as quantity increases, resulting in a straight line passing through the origin.
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21The deadweight loss in a monopoly arises because:
A.The monopolist produces more than the socially optimal level
B.The monopolist produces less than the socially optimal level
C.The monopolist charges a price equal to Marginal Cost
D.The monopolist incurs high advertising costs
Correct Answer: The monopolist produces less than the socially optimal level
Explanation:Monopolists restrict output to raise prices (). This results in a loss of total welfare (consumer + producer surplus) known as deadweight loss.
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22A Natural Monopoly generally arises due to:
A.Legal restrictions
B.Control of resources
C.Significant economies of scale over a large range of output
D.Collusion among firms
Correct Answer: Significant economies of scale over a large range of output
Explanation:A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms, usually due to high fixed infrastructure costs and falling long-run average costs.
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23In Game Theory (Oligopoly), a Nash Equilibrium is reached when:
A.All firms cooperate to maximize joint profits
B.No player has an incentive to deviate from their strategy, given the opponent's strategy
C.One firm dominates the entire market
D.Firms continuously change prices
Correct Answer: No player has an incentive to deviate from their strategy, given the opponent's strategy
Explanation:Nash Equilibrium is a concept where every player makes the best decision they can, taking into account the decisions of the others, and has no regret or reason to change.
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24Selling costs (advertising expenses) are most significant in:
A.Perfect Competition
B.Monopoly
C.Monopolistic Competition
D.Perfect Oligopsony
Correct Answer: Monopolistic Competition
Explanation:Since products are differentiated and close substitutes exist, firms in monopolistic competition spend heavily on advertising to highlight differences and attract customers.
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25The supply curve of a monopolist:
A.Is the rising portion of the MC curve
B.Is the rising portion of the AC curve
C.Is the same as the Demand curve
D.Does not exist
Correct Answer: Does not exist
Explanation:There is no unique supply curve in a monopoly. The same quantity can be sold at different prices depending on the elasticity of demand, so there is no one-to-one relationship between price and quantity supplied.
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26Which model of oligopoly assumes that firms compete on output (quantity) rather than price?
A.Bertrand Model
B.Cournot Model
C.Sweezy Model
D.Edgeworth Model
Correct Answer: Cournot Model
Explanation:The Cournot model describes an industry structure where rival firms simultaneously choose the quantity of output to produce.
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27In the long run, the price () in Monopolistic Competition is:
A.
B.
C. and
D.
Correct Answer: and
Explanation:Firms earn normal profits (), but due to market power (downward demand), . Thus, price exceeds marginal cost.
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28The practice of charging a low price to drive competitors out of the market is known as:
A.Penetration Pricing
B.Predatory Pricing
C.Limit Pricing
D.Peak-load Pricing
Correct Answer: Predatory Pricing
Explanation:Predatory pricing is an illegal strategy where a firm sets prices very low (often below cost) to eliminate competition, intending to raise prices later.
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29Under perfect competition, the industry demand curve is:
A.Perfectly elastic
B.Perfectly inelastic
C.Downward sloping
D.Upward sloping
Correct Answer: Downward sloping
Explanation:While the individual firm's demand curve is perfectly elastic (horizontal), the market/industry demand curve is downward sloping (law of demand).
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30Cross-elasticity of demand for the product of a monopolist is:
A.Infinity
B.Very high
C.Zero or very low
D.Negative
Correct Answer: Zero or very low
Explanation:Since a pure monopoly has no close substitutes, changes in the price of other goods have little to no effect on the demand for the monopoly's product.
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31Which of the following is NOT a barrier to entry?
A.Patents and copyrights
B.Economies of scale
C.Ownership of a key resource
D.U-shaped average cost curve
Correct Answer: U-shaped average cost curve
Explanation:A U-shaped AC curve is a standard cost behavior for most firms and does not inherently prevent entry. The other options represent structural or legal barriers.
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32In the Bertrand model of oligopoly, firms compete by setting:
A.Quantities
B.Prices
C.Advertising budgets
D.Quality standards
Correct Answer: Prices
Explanation:The Bertrand model assumes firms compete on price. If products are homogeneous, this competition drives prices down to the level of marginal cost ().
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33What is Penetration Pricing?
A.Setting a high price to signal quality
B.Setting a low initial price to gain market share quickly
C.Charging different prices to different customers
D.Pricing based on the competitor's price
Correct Answer: Setting a low initial price to gain market share quickly
Explanation:Penetration pricing involves setting a low price when entering a market to attract a large number of buyers and win market share.
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34Under which market structure is the firm a 'Price Maker'?
A.Perfect Competition only
B.Perfect Competition and Monopolistic Competition
C.Monopoly, Oligopoly, and Monopolistic Competition
D.None of the above
Correct Answer: Monopoly, Oligopoly, and Monopolistic Competition
Explanation:In imperfect markets (Monopoly, Oligopoly, Monopolistic Competition), firms face downward-sloping demand curves and have some degree of control over the price.
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35If a monopolist engages in First-Degree Price Discrimination, the Consumer Surplus will be:
A.Maximized
B.Zero
C.Equal to Producer Surplus
D.Unchanged
Correct Answer: Zero
Explanation:In first-degree (perfect) price discrimination, the monopolist charges every consumer the maximum price they are willing to pay, thereby extracting the entire consumer surplus.
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36Barometric Price Leadership occurs when:
A.The largest firm sets the price
B.A firm with the lowest cost sets the price
C.A firm that best reflects market conditions sets the price
D.The government sets the price
Correct Answer: A firm that best reflects market conditions sets the price
Explanation:In barometric price leadership, a firm (not necessarily the dominant one) acts as a barometer for market conditions, and others follow its price changes assuming it knows the market best.
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37The break-even point for a firm occurs when:
A.
B.
C.
D.
Correct Answer:
Explanation:The break-even point is the level of production where Total Revenue equals Total Cost, resulting in zero economic profit (normal profit).
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38Which curve cuts the Average Cost (AC) curve at its minimum point?
A.The Demand Curve
B.The Marginal Revenue (MR) Curve
C.The Marginal Cost (MC) Curve
D.The Average Variable Cost (AVC) Curve
Correct Answer: The Marginal Cost (MC) Curve
Explanation:Mathematically, when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. Therefore, MC must cross AC at its minimum.
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39In the Prisoner's Dilemma matrix commonly applied to Oligopolies, the dominant strategy for both firms usually leads to:
A.The best possible joint outcome (cooperation)
B.A suboptimal outcome for both (non-cooperation)
C.One firm winning and one losing
D.Zero profit for both
Correct Answer: A suboptimal outcome for both (non-cooperation)
Explanation:In the Prisoner's Dilemma, individual incentives to cheat (confess/lower price) lead both parties to a worse outcome than if they had cooperated.
Explanation:Peak-load pricing involves charging higher prices during periods of high demand (peak times) and lower prices during off-peak times to manage capacity, common in utilities.
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41If the demand curve is linear and downward sloping, at the midpoint of the curve, the price elasticity of demand is:
A.
B.
C.$1$ (Unitary)
D.
Correct Answer: $1$ (Unitary)
Explanation:On a linear demand curve, elasticity is unitary at the midpoint. Above the midpoint, it is elastic (), and below the midpoint, it is inelastic ().
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42Monopsony is a market condition where there is:
A.One seller
B.One buyer
C.Few sellers
D.Few buyers
Correct Answer: One buyer
Explanation:A Monopsony is a market structure with a single buyer who substantially controls the market (e.g., the government buying military equipment or a single employer in a small town).
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43The assumption of 'Product Homogeneity' implies that:
A.Buyers prefer products from specific sellers
B.Products are identical in the eyes of the consumer
C.Products are distinct but serve the same purpose
D.Sellers can charge different prices
Correct Answer: Products are identical in the eyes of the consumer
Explanation:Homogeneity means goods are perfect substitutes. Consumers are indifferent between the products of different firms, leading to a single market price.
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44In a Sweezy Oligopoly model (Kinked Demand), the Marginal Revenue curve has a:
A.Horizontal segment
B.Vertical gap (discontinuity)
C.Upward slope
D.Constant value
Correct Answer: Vertical gap (discontinuity)
Explanation:Because the demand curve has a kink (change in slope), the derived Marginal Revenue curve is discontinuous (has a vertical gap) directly below the kink.
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45Cost-Plus Pricing (Mark-up Pricing) is determined by:
A.
B.
C.
D.
Correct Answer:
Explanation:Cost-plus pricing involves adding a standard markup percentage to the average cost (usually average variable cost or average total cost) to determine the selling price.
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46Which of the following creates a Deadweight Loss?
A.Perfect Competition
B.First-degree Price Discrimination
C.Monopoly charging a single price
D.None of the above
Correct Answer: Monopoly charging a single price
Explanation:A single-price monopoly produces less output than the competitive equilibrium (), resulting in a loss of total surplus (deadweight loss). Perfect discrimination and perfect competition do not create deadweight loss.
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47Interdependence between firms is the hallmark of:
A.Perfect Competition
B.Monopolistic Competition
C.Oligopoly
D.Monopoly
Correct Answer: Oligopoly
Explanation:Only in oligopoly are firms few enough that the decision of one firm (e.g., changing price or output) directly affects the profits and strategies of rival firms.
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48If a perfect competitor increases their price above the market price, their Total Revenue will:
A.Increase slightly
B.Remain the same
C.Fall to zero
D.Double
Correct Answer: Fall to zero
Explanation:Because demand is perfectly elastic and products are homogeneous, if a firm raises its price even slightly above the market price, consumers will shift entirely to competitors.
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49Two-part tariff pricing involves:
A.Charging a high price in the morning and low in the evening
B.Charging a fixed lump-sum fee plus a per-unit usage fee
C.Bundling two products together
D.Charging two different customers different prices
Correct Answer: Charging a fixed lump-sum fee plus a per-unit usage fee
Explanation:A two-part tariff consists of a fixed entry fee (capturing consumer surplus) and a marginal variable fee (e.g., an amusement park entry fee plus a cost per ride).
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50In the long run, the supply curve for a Constant Cost Industry in perfect competition is:
A.Upward sloping
B.Downward sloping
C.Horizontal (Perfectly elastic)
D.Vertical
Correct Answer: Horizontal (Perfectly elastic)
Explanation:In a constant cost industry, the entry of new firms does not affect input prices. Therefore, the long-run supply curve is horizontal at the level of minimum average cost.
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