MCQs:

1. 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

2. 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

3. 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

4. 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

Answer: B

5. 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

6. 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

7. A firm is engaging in price discrimination. In order to maximize 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

8. 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

9. What will increase the likelihood that the firms in an industry will collude to maximize their joint profits?
A) The industry consists of a large number of producers.
B) The industry has many differentiated products.
C) The industry is characterized by rapid technological change.
D) There are significant barriers to prevent new firms entering the industry.

Answer: D

10. 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 are significant differences in the firms’ costs of production.
D) There are significant fluctuations in demand from one period to another.

Answer: B

11. 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-elastic.
B) The demand for the firm’s product is price-inelastic.
C) The supply of the firm's product is price-elastic.
D) The supply of the firm’s product is price-inelastic.

Answer: B

12. A firm wishes to eliminate competition and become a monopoly. What should it do?
A) Maximize output
B) Maximize profit
C) Reduce prices
D) Reduce the number of its suppliers

Answer: C

13. The organizers 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

14. 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

15. 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

16. A firm maximizes its profits by maximizing 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.

Answer: C

17. 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

18. What would be a reason why small firms do not survive?
A) In certain industries, there are economies 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

19. 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

20. Which feature of the kinked demand curve model of price rigidity in oligopoly explains the phenomenon?
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