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Economics multiple choice questions

A level

Different Market Structures Growth and Survival of Firms Differing Objectives of a Firm

Multiple Choice Questions and Answers

Why might a firm introduce a policy of price discrimination?

A to achieve allocative efficiency
B to achieve productive efficiency
C to avoid diseconomies of scale
D to turn consumer surplus into producer surplus

➡Answer D

By charging higher price from specific group of customers firms appropriate consumer surplus.

Which feature does a contestable market share with a perfectly competitive market?

A Firms must be price takers.
B Firms must operate on a small scale.
C There must be freedom of entry to and exit from the industry.
D There must be many firms in the industry.

➡Answer C

Both perfectly competitive market and contestable market share the feature of free entry and exit. Options A and D are true in perfect competition but not required in a contestable market. Option B is irrelevant

Which characteristic would make it easier for firms in an industry to collude?

A low barriers to entry
B a large number of firms
C rapid technological change
D product homogeneity

➡Answer D

Options A, B and C would make it difficult for firms to collude

What is a feature of monopolistic competition, but not of perfect competition?

A a small number of buyers
B product differentiation
C the existence of abnormal profits
D the existence of barriers to entry [J09/P3/Q9]

➡Answer B

Product homogeneity is an essential feature of a perfectly competitive market. Options A and D relate none of the two markets, whereas option C is true for both types of markets in the short run.

In which circumstance will a firm cease production in the short run?

A It makes a profit that is less than its total variable costs.
B It makes a profit that is less than its total fixed costs.
C Its average revenue is its average cost.
D Its average revenue is its average variable cost.

➡Answer D

In the short run a profit maximizing firm continues to produce as long as AR>AVC and ceases production only when it incurs loss on variable cost (AR<AVC).

What is an example of a wage differential that compensates for the disadvantages associated with particular jobs?

A male workers earning more than female workers in the same job
B the tendency for wage rates negotiated by trade unions to exceed those for non-unionised labour
C labourers on off-shore oil rigs earning more than those employed on-shore
D government office workers being paid more than private sector office workers

➡Answer C

Labourers on offshore oil rigs earning more due to the disadvantage associated with the job. In other options wage differential is not associated with the job.

A firm is engaging in price discrimination. In order to maximise profits, what should the firm do?

A charge a higher price to consumers earning higher incomes
B charge a higher price to consumers earning lower incomes
C charge a higher price to consumers whose demand for the product is price inelastic
D charge a higher price to consumers whose demand for the product is price elastic


➡Answer C

A higher price to consumer whose demand for the product is inelastic will increase the firm's revenue and profits. This rules out option D while A & B are irrelevant in the context of maximum profits.

A government imposes a maximum price for electricity. Which statement justifying this measure might be considered valid on economic grounds?

A It will encourage electricity suppliers to invest in additional capacity.
B It will increase the incentive for consumers to conserve energy.
C It will prevent the monopolistic exploitation of consumers.
D It will prevent the rationing of electricity through power cuts.

➡Answer C

The firm with monopolistic power lends to exploit consumer by charging a mgher price. Options A & B are contrary tc the likely impact while D is irrelevant

What will increase the likelihood that the firms in an industry will collude to maximise their joint profits?

A The industry consists of a large number of producers.
B The industry has many differentiated products.
C The industry is characterised by rapid technological change.
D There are significant barriers to prevent new firms entering the industry. [N11/P3/Q12]

➡Answer D

Significant barriers would help collusion to charge a higher price without a fear of losing market share to the new entrants. Other options would clearly make it difficult to form collusion.

In which market situation will a firm take account of the reactions of its competitors before deciding to cut its price?

A monopoly
B monopolistic competition
C oligopoly
D perfect competition [J13/P3/Q1]

➡Answer C

In an oligopolistic market a higher degree of interdependence -forces the firms to take account of reactions of rival firms

When is collusion likely to be successful in an oligopolistic market?

A Barriers to entry are relatively low.
B Firms have accurate information about each other’s output levels.
C There arc significant differences in the firms’ costs of production.
D There arc significant fluctuations in demand from one period to another. [N14/P3/Q12]

➡Answer B

Options A, C & D will make it difficult to collude.

A Policy of price discrimination makes the firm to earn higher profit by acquiring consumer surplus.

The firms in an industry all produce a homogeneous product, but each firm is able to influence the price it charges for its own product. In which market structure do the firms operate?
A perfect competition
B monopolistic competition
C oligopoly
D monopoly

➡Answer C

Firms in monopolistic competition sell only differentiated product while a monopolist sells a unique product. Also in this case the firms can influence market price, therefore, it rules out perfect competition.

What action by a firm is most likely to raise its dynamic efficiency?

A distributing all its current profit to its existing shareholders
B maximising the labour productivity of its current workers
C minimising the average cost of producing its current output
D retaining its current profit for product research and development

➡Answer D A firm is dynamically efficient if it conducts R & D

A firm estimates that, all else remaining unchanged, an increase in its output will result in a fall in its revenue. What can be concluded from this?

A The demand for the firm’s product is price-clastic.
B The demand for the firm’s product is price-inelastic.
C The supply of the firm's product is price-clastic.
D The supply of the firm’s product is price-inelastic.

➡Answer B

An increase in firm’s output implies a fall in its price and as a consequence if TR decreases then the firm is facing a relatively inelastic demand curve.

A firm wishes to eliminate competition and become a monopoly. What should it do?

A maximise output
B maximise profit
C reduce prices
D reduce the number of its suppliers [J16/P3/QJ1]

➡Answer C

It will enable the firm to drive its competitors out of the market.

The organisers of a major sporting event produce official souvenir products. Cheaper unofficial souvenirs are also produced by street traders who sell them to people walking to the event. Of what is this an example?

A a contestable market
B perfect competition
C price discrimination
D price leadership

➡Answer A

A contestable market is characterized by costless entry and exit. This is indicated by many street traders entering the market. Perfect competition is ruled out because the traders are selling souvenirs cheaper than the organizers

Which condition must apply before a market can be regarded as perfectly contestable?

A All firms in the industry are price takers.
B All firms in the industry produce an identical product.
C There are a large number of firms in the industry.
D There are zero costs of entry to, and exit from, the industry.
➡Answer A

A contestable market is characterised by costless entry and exit

A firm estimates that, all else remaining unchanged, an increase in its output will result in an equal proportionate increase in its revenue. What can be concluded from this?

A The demand curve for the firm’s product is horizontal.
B The firm operates in a monopolistically competitive market.
C The price elasticity of demand for the firm’s product is -1
D The supply of the firm’s product is perfectly inelastic.

➡Answer A

Since the additional output can be sold at the same price, therefore, it will result in the same proportionate increase in revenue. Option B is incorrect because PED varies throughout its demand curve that brings proportionately different changes in revenue.

What could be a reason for the existence of small firms in various industries?

A a low minimum efficient scale of production
B greater scope for specialisation and division of labour
C the need to diversify in order to reduce risk
D the principal-agent problem [J17/P3/Q9]

➡Answer A

After a firm reaches MES its LRAC stops falling any further. So MES indicates the ‘
lowest possible per unit cost and increase, in the size of the firm beyond MES may result in a rising per unit cost. Low MES of production will, therefore, restrict the firms to remain small.

Increased advertising by a firm in an imperfectly competitive industry leads to an increase in demand for the industry’s product but a fall in the firm’s profits. What could help to explain this?

A Production is subject to diseconomies of scale.
B Rival firms respond by increasing their advertising outlays.
C The demand for the industry’s product is price-inelastic.
D The increase in demand for the firm’s output is entirely at the expense of other firms.

➡Answer B

It will increase the firm's cost but response by the rival firms will make it ineffective. All other options are likely to increase firm’s profits.

An industry consists of a dominant firm, which acts as a price leader, and a large number of small firms. Which statement about the profit maximising output of the small firms is correct?

A Average cost is equal to average revenue.
B Average cost is minimised.
C Marginal cost is equal to price.
D Marginal revenue is zero. [N17/P37Q11]

➡Answer C

All other firms become price takers and in that case they have their P = AR = MR. therefore MC = MR implies P = MC

What explains the kinked demand curve model of price rigidity in oligopoly?

A collusion between all firms in the industry in the setting of prices
B the assumption that a single firm acts as price leader for all firms in the industry
C the individual firm’s expectations about other firms’ responses to its price changes
D the presence of barriers to the entry of new firms into the industry

➡Answer C
Because of this the firm maintains its price that produces a kinked demand curve. In other cases price may change.

Which feature of production would make it more likely that an industry is a contestable market?

A advertising has established consumer loyalty
B all firms in the industry share research and development
C low fixed costs
D market rivals aim to reduce product differentiation

➡Answer C

What must be found in two markets for price discrimination to be profitable?

A different price elasticities of demand
B different price elasticities of supply
C different producers
D different products


➡Answer A
It allows the firm to increase TR by charging a lower price in the market where PED > 1 and by charging a higher price in the market where PED < 1. Thus increase in firm’s TR from both markets is likely to increase firm's profits. All other options are irrelevant in the context cl price discrimination.

A firm maximises its profits by maximising its total revenue. What does this imply?
A Average fixed cost is zero.
B Average revenue is equal to average cost.
C Marginal cost is zero.
D Marginal revenue is greater than marginal cost. [N18/P3/Q8]

➡Answer C

A firm maximizes TR when its MR = 0 and it maximizes profit when its MC = MR. thus both could only be achieved at the same level of output when the firm's MC = 0.

Technological change reduces the minimum efficient scale of production in an industry. What is likely to result?
A increased number of firms and increased size of firms
B increased number of firms and reduced size of firms
C reduced number of firms and increased size of firms
D reduced number of firms and reduced size of firms

➡Answer B

After MES the firm’s LRAC stops falling any further. It therefore suggests optimum size of a firm in the long run. With a reduction in MES the optimum size of all the firms will now be on a lower level of output.

What would be a reason why small firms do not survive?

A In certain industries, there are economics of scale.
B Small firms often supply personal services to consumers.
C Small firms often supply products, the size of the market for which is limited.
D Small owner-managed firms involve less risk.

➡Answer A

Economics of scale allow some of the existing firms to grow large and produce at a relatively lower per unit cost than the smaller firms who are then competed away by the large firms. Other options suggest the valid reasons for survival of small firms.

What is the implication of a dominant oligopoly following a limit pricing policy?
A The industry will be restricted to a target number of firms.
B The industry will contract as rival oligopolists are eliminated.
C The oligopolist will achieve a satisficing level of profit.
D The oligopolist will sacrifice short-term profit for long-term profit.


➡Answer D

It means that the dominant oligopolist would reduce its price m the short run to a level where it may survive even by incurring short term loss but its weak competitors would be driven out from the industry. The oligopolist then would raise its price to a level where it earns higher long run profits

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