Role of Markets
1.
Perfectly competitive markets are characterised by:
a. strong barriers to entry and exit into the industry.
b. a large number of small producers.
c. firms selling a variety of quality products.
d. many different or homogeneous products.
2.
A perfectly competitive firm is a price taker which implies that it:
a. faces a demand curve that is perfectly elastic.
b. has a demand curve that is relatively inelastic.
c. would have a number of high barriers to entry.
d. can establish the level of its own prices.
3.
Under perfect competition, a firm is considered to be a price taker when:
a. establishing a price higher than the going price results in economic profit.
b. each firm’s product is seen as having significant differences.
c. setting a price above the market price results in zero sales.
d. each firm has a significant proportion of the market.
4.
In a perfectly competitive market firms:
a. produce a differentiated product with only a slight price advantage.
b. produce an identical or homogeneous product.
c. use advertising to gain more buyers from other competitors.
d. can enter free but exit is difficult due to capital costs.
5.
In a perfectly competitive market the market equilibrium price for a particular service is $60 per hour. If
one of the firms in this industry sells this service for $61/hr then they:
a. force their competitors to increase their price to $61/hr.
b. achieve $1 of additional profit for each service they provide.
c. achieve a higher maximum profit compared to their competitors.
d. risk selling no services as services from competitors are seen as being the same.
6.
A perfectly competitive firm always set the price:
a. equal to market cost of production.
b. below the equilibrium market price.
c. above the equilibrium market price.
d. equal to the equilibrium market price.
7.
In the short run, if a perfectly competitive firm is producing at a price above average total cost, its
economic profit must be:
a. positive.
b. zero.
c. negative.
d. normal.
8.
A perfectly competitive firm has control over:
a. the number of firms in the market.
b. quantity of goods and services to produce.
c. the market price at which to sell its output.
d. limited sections of the market.
9.
If perfectly competitive firms are making economic profits, we can expect to see:
a. some firms leave the industry.
b. the market price rise.
c. economic profits become zero.
d. market demand shift to the right.
Role of Markets
2
10. In a perfectly competitive market, firms will:
a. enter the industry in the long run.
b. earn normal profit in a long run.
c. earn economic profit in a long run.
d. leave the industry in the long run.
11. In the long run, perfectly competitive firms can:
a. not vary any inputs as they are constrained by fixed costs.
b. leave the industry if they earn lower than normal profit.
c. change their mode of production to become monopolistically competitive.
d. increase the market price to reach a profitable position.
12. A market is any situation where buyers and sellers are:
a. grouped together to transact the exchange of goods and services.
b. able to display output and transact sales of goods and services.
c. in sufficiently close contact to enable the exchange of goods and services.
d. able to acquire goods and services to satisfy their needs and wants.
13. Which of the following statements do not characterise perfect competition?
a. Many buyers and sellers ensure stability of prices.
b. Firms sell homogeneous or identical products.
c. There is a high degree of mobility of firms.
d. No individual seller can influence the market price.
14. Product differentiation is a characteristic most likely found in:
a. perfect competition.
b. monopolistic competition.
c. oligopoly.
d. monopoly.
15. The demand curve for a perfectly competitive firm is:
a. perfectly inelastic.
b. perfectly elastic.
c. highly income elastic.
d. relatively inelastic.
16. If a perfectly competitive firm lowered its price below market equilibrium then it:
a. would induce entry of new firms.
b. would acquire a larger share of the market.
c. would not be maximising profit.
d. would cause a price war before reaching a new equilibrium.
17. Firms who produce relatively homogeneous products and compete on product features such as visual
appeal, packaging and presentation as well as after sales service, but who avoid price competition is
typical of:
a. perfect competition.
b. monopolistic competition.
c. oligopoly.
d. monopoly.
18. Which of the following would be normally characteristic of a monopoly?
(i) There are no close substitutes.
(ii) A differentiated or standardised product exists.
(iii) Financial or technical barriers make entry difficult.
a.
b.
c.
d.
(i) and (ii) only.
(ii) and (iii) only.
(i) and (iii) only.
(i), (ii) and (iii).
Role of Markets
19. Which of the following is true for firms in monopolistic competition?
a. Entry is restricted to a few new firms.
b. Firms enter into collusive agreements to reduce competition.
c. Product differentiation allows some degree of price control.
d. Only one firm exists allowing it to become a price maker.
20. A monopolistically competitive firm will usually face a:
a. highly elastic demand curve.
b. highly inelastic demand curve.
c. kinked demand curve.
d. relatively elastic demand curve.
21. Which of the following is a characteristic of the monopolistic competition market structure?
a. Many firms and a homogeneous product.
b. Few firms with almost identical products.
c. Many firms with differentiated products.
d. Few firms with differentiated products.
22. Product differentiation causes the demand curve for a monopolistically competitive firm’s product to
be:
a. perfectly elastic.
b. perfectly inelastic.
c. more inelastic than for a oligopoly.
d. more elastic than for a monopoly.
23. In monopolistic competition, the characteristic of ‘easy entry and exit’ implies that:
a. it is easy to make a profit.
b. it is easy to find an exit strategy if a product is unviable.
c. it is easy to become perfectly competitive if they choose to do so.
d. it does not have difficult barriers to entry as there are in monopoly.
24. In monopolistic competition, firms:
a. do not have any market power.
b. have a certain degree of market power.
c. achieve a balance between market power and market failure.
d. achieve almost full market power over consumers in the market.
25. A typical characteristic of monopolistic competition is that:
a. firms are price makers to a very limited extent.
b. firms produce a homogeneous product.
c. there are few firms in the industry.
d. there are many large firms in the industry.
26. Product differentiation refers to the attempt by:
a. firms to make their products look similar to other firms in the same industry.
b. firms to make essentially substitutable products look different in the minds of the consumers.
c. big firms have a clearly different approach to research and development.
d. larger firms to be different from a perfectly competitive market structure.
27. The main difference between perfect competition and monopolistic competition is that a:
a. monopolistically competitive firm can raise its price and still keep some customers.
b. monopolistically competitive firm is a price maker, the same as a perfectly competitive firm is a
price maker.
c. monopolistically competitive firm is a price taker, whereas a perfectly competitive firm is a price
maker.
d. monopolistically competitive firms that raise product prices it will lose all its customers.
28. Which of the following most accurately describes firms under monopolistic competition?
a. Firms compete using quality, location, advertising and price.
b. There is virtually no price or quality competition.
c. Firms do not compete using online advertising.
d. There is only one firm in the market so no competition exists.
3
Role of Markets
4
29. In the long run, a monopolistically competitive firm will operate:
a. at the level of output that allows the firm to earn negative economic profit.
b. at the level of output that allows the firm to earn economic profit.
c. at the level of output that allows the firm to earn zero economic profit.
d. at any level of output provided it is above average variable cost.
30. Normal profit is an amount of profit which:
a. will keep resources from being transferred to alternative uses.
b. allows further new investment in plant and equipment.
c. is the difference between total revenue and total costs.
d. can be expected from firms using all resources efficiently.
31. Competitive firms who use advertising and product differentiation do so in order to:
a. shift the demand curve to the left and make it more elastic.
b. shift the demand curve to the left and make it more inelastic.
c. shift the demand curve to the right and make it more elastic.
d. shift the demand curve to the right and make it more inelastic.
32. Advertising is a characteristic most likely found in:
a. monopolistic competition.
b. perfect competition.
c. oligopoly.
d. monopoly.
33. Oligopoly is a market situation with:
a. a number of large firms engaged in highly competitive behaviour.
b. a high degree of concentration leading to greater flexibility in prices.
c. a few large firms with considerable control on market prices.
d. one large firm dominating the market with complete price control.
34. Which of the following combinations of industries in Australia is closest to oligopoly?
a. Retail stores, service stations, brewing.
b. Motor vehicles, banks and brewing.
c. Retail stores, motor vehicles and banks.
d. Motor vehicles, service stations and banks.
35. Which of the following are close examples of monopolistically competitive firms in the Australian
economy?
a. footwear and clothing retailers.
b. fruit and vegetable retailers.
c. air and rail transport companies.
d. free to air and pay TV companies.
36. A monopoly is a market structure where:
a. there is a complete absence of barriers to entry.
b. a single firm dominates the market becoming a price leader.
c. a large supplier can achieve lower costs and charge higher prices.
d. one producer supplies the entire market.
37. Oligopolists tend to avoid price competition because:
a. they know the demand for their product is highly elastic.
b. other producers would likely follow leading to ruinous competition.
c. this would place all firms in a situation of less than normal profit.
d. new firms would enter taking advantage of cheaper prices.
38. Which of the following is considered the main obstacle to the entry of new firms in many Australian
industries?
a. Existing firms have well established market niches.
b. The large investment in capital required to compete effectively.
c. The bureaucratic red tape of government causing long delays.
d. The relatively small size of the domestic market.
Role of Markets
5
39. Australian manufacturing can be described as being highly `concentrated' implying that in some areas
of manufacturing:
a. a few large producers become more specialised in order to cut costs.
b. a significantly large percentage of the market is supplied by a few large producers.
c. there is a tendency for firms to cluster together in order to reap external economies of scale.
d. the use of capital equipment and technology is significant.
40. In the long-run, economic profits are achievable in:
a. perfect competition and monopolistic competition.
b. monopolistic competition and monopoly.
c. monopolistic competition and oligopoly.
d. oligopoly and monopoly.
41. A firm that is able to achieve a monopoly situation will be able to:
a. set both price and quantity for its output in the market.
b. set price or quantity with consumer demand establishing the other.
c. eliminate competitors who have been price cutting in the market.
d. maximise total revenue by lowering price and increasing sales.
42. A feature which is common to all imperfectly competitive firms is that:
a. product differentiation is used to varying degrees.
b. a degree of market control exists.
c. entry of new firms can be blocked.
d. excess profit is achievable in the long run.
43. Which of the following are key features of oligopoly?
(i) Mutual interdependence
(ii) Economies of scale
(iii) Easy exit from the industry
(iv) Non-price competition and price rigidity
a.
b.
c.
d.
(i), (ii) and (iii) only.
(ii), (iii) and (iv) only.
(i), (ii) and (iv) only.
(ii), (iii) and (iv) only.
44. The kinked demand curve for an oligopolist suggests that:
a. firms will not react to a competitors price increase but will respond to any price reduction.
b. firms react to a competitor's pricing by adjusting output and by using persuasive advertising.
c. a lower price can be established by the market leader and other firms will adjust to a new
equilibrium.
d. price competition between a few large firms will lead to improved economies of scale.
45. Monopoly can lead to an inefficient allocation of scarce resources since:
a. resources are always wasted in production due to a lack of competition.
b. a higher price will often result in an increase in the firms revenue, but a lack of supply to
consumers.
c. workers and management are under no pressure to perform at productivity levels achievable
under competition.
d. resources are only allocated to one large inefficient firm unable to achieve cost reductions.
46. An oligopoly is a market structure where:
a. several large firms eventually drive out smaller firms.
b. there are few firms selling either a homogeneous or differentiated product.
c. there are many small firms with no control over price.
d. there are many small firms.
47. Oligopoly is a market structure which typically exhibits:
a. significant barriers to entry and mutual interdependence between firms.
b. a differentiated product and independent decisions making.
c. some control over prices but less than in monopolistic competition.
d. barriers to leaving the industry and independent pricing decisions.
Role of Markets
6
48. When Telstra considers a price increase, it needs to consider how Optus might react. This situation is
called:
a. mutual collusion.
b. price leadership.
c. mutual interdependence.
d. oligopolistic competition.
49. An oligopoly is typically characterised by having:
a. a low-concentration ratio and a few large independent firms.
b. a high concentration ratio and two large independent firms.
c. a low-concentration ratio and a few large independent firms.
d. a high-concentration ratio and a few large independent firms.
50. Mutual interdependence in oligopoly generally means that:
a. firms work mutually and independently together to avoid market compeition.
b. firms often require the help of other firms to produce goods and services.
c. each firm is independent in producing their own goods and services.
d. firms consider the actions of the other firms when making strategic decisions.
51. In an oligopolistic market, the most typical barrier to entry is:
a. division of labour.
b. economies of scale.
c. ownership of labour resources.
d. ownership of patents.
52. A kinked demand curve is a visual demonstration showing that an oligopolist will likely:
a. follow price increases but not price reductions.
b. follow pricing guidelines established by the industry at the kink.
c. follow price reductions but not price increases.
d. follow cost increases in industry and raise prices to the kink.
53. Using the kinked demand model, if one firm raises its price, then other firms will:
a. react to the increase by also raising their prices.
b. not follow their action with similar price increases.
c. increase their product differentiation and advertising spending.
d. allow other firms to enter the market in order to drive prices back to the kink.
54. Which of the following describes a situation in which a group of firms agree to control prices and
output of a product?
a. Collective competition.
b. Cartel.
c. Oligopoly.
d. Controlled distribution.
55. The cartel is a group of firms:
a. legally colluding on cartage and handling for their products.
b. that engage in price support when the market is too competitive.
c. that formally agreeing to control their price and output.
d. are legally supported by government to control the price and output.
56. The demand curve for a typical monopolist is:
a. generally highly elastic.
b. less than the market demand curve.
c. generally below the average cost curve.
d. the demand curve for the industry.
57. An industry that keeps total costs to a minimum because only one firm supplies the whole market is
called:
a. a natural monopoly.
b. a structural monopoly.
c. an oligopoly.
d. a limited monopoly.
Role of Markets
7
58. A firm that owns vital or essential resources is likely to be:
a. monopolistically competitive.
b. an oligopoly.
c. a monopoly.
d. perfectly competitive.
59. The monopolist is able to choose:
a. any price for its product.
b. price or quantity to produce.
c. both price and quantity to produce.
d. the slope of the demand curve.
60. Firms employ price discrimination because:
a. they want to favour one group of consumers over another.
b. it prevents predatory pricing in parts of the existing market.
c. some consumers have higher costs than others.
d. it increases profits by targeting segments of the market.
61. Price discrimination is typically criticised beacause it appears to:
a. cost some people more for similar goods or services.
b. make monopolistic competition the only possibility.
c. further reduce a monopolist’s profits.
d. cost some people more for the same good or service.
62. Telstra and Optus generally offer alternative pricing plans to consumers, who can then select an plan
one that best suits them. This is an example of:
a. price discrimination.
b. perfect competition.
c. predatory pricing.
d. monopolistic pricing.
63. A Monopoly will ‘misallocate’ resources when:
a. it produces a lower output at a lower price when compared to perfect competition.
b. price is equal to the marginal cost.
c. they produce a lower output at a higher price compared to perfect competition.
d. the marginal revenue is equal to the marginal cost of the last unit produced.
64. An argument typically used to support the case for a monopoly existing in an economy is that they:
a. can use some profits in research and development increasing technological change.
b. save scarce resources by producing less output compared to other market forms.
c. charge a price in excess of the gernally accepted equilibrium market price.
d. distribute income from firms to govenment through increased taxation.
65. An engineer left his $150 000-a-year position in an engineering firm to work full-time in his own
consulting business. In the first year, he had total revenue of $300 000 and business expenses of
$200 000 in which case he had:
a. a zero economic profit.
b. an accounting loss but not an economic loss.
c. an economic profit.
d. an economic loss.
66. An engineer left his $150 000-a-year position in an engineering firm to work full-time in his own
consulting business. In the second year, he had total revenue of $400 000 and business expenses of
$200 000 in which case he had:
a. an economic profit equal to zero.
b. an accounting loss of $50,000, but not an economic loss.
c. an economic profit of 50,000.
d. an economic loss of 50,000.
Role of Markets
8
67. Assume that a fencing company has total revenue of $2 million, explicit costs of $1 million and implicit
costs of $100,000. This company’s economic profit is:
a. $1.1 million.
b. $1 million.
c. $900,000.
d. $1.9 million.
68. Implicit costs are defined as :
a. labour and raw material costs to the firm.
b. the opportunity costs of using resources owned by the firm.
c. payments from owners of a firm for labour and capital.
d. the opportunity costs of using another firm’s resources.
69. The short run is a period of time in which:
a. production occurs over the period of one year.
b. that is long enough to permit changes in the firm’s plant size.
c. at least one factor input is fixed during the production process.
d. production occurs generally between six months and one year.
70. Dominos Pizza finds orders expand rapidly over the winter period, but it does not have enough time to
expand its pizza ovens or other equipment. Dominos is therefore operating:
a. with fixed cost on operating equipment.
b. in the short run.
c. at an economic loss.
d. with a net profit constraint.
71. The long run is a period of time that is:
a. long enough to permit changes in all the firm’s inputs.
b. too short to change the size of a firm’s plant and equipment.
c. beyond one year and allows expansion of the firm’s capital.
d. greater than five years as planning usually requires this time frame.
72. A plastics firm can produce 5000 water bottles per week with four workers and 5,600 water bottles
with five workers. The marginal product of the fifth worker is:
a. 500 water bottles.
b. 600 water bottles.
c. 560 water bottles.
d. 400 water bottles.
73. Marginal product measures the change in:
a. marginal cost brought about by changing production by one unit.
b. production at the margin for an increase in output.
c. the firm’s output brought about by employing one additional unit of input.
d. a marginal revenue variation from a change in output.
74. A fixed input is any resource which does not:
a. change during a specific time.
b. change during the long run period.
c. change at all until the firm closes down.
d. change at any time during production.
75. Which of the following statements is true?
a. The law of diminishing returns shows that the addition of fewer variable factors will improve the
marginal product.
b. The law of diminishing returns shows that the addition of an extra labour will increase the
marginal product.
c. The law of diminishing returns shows that the addition of an extra unit of a capital will reduce the
marginal product.
d. The law of diminishing returns shows that the addition of an extra unit of a variable factor will
reduce the marginal product.
Role of Markets
9
Questions 76 and 77 refer to the following schedule
Production of Subway rolls
Workers
0
1
2
3
4
5
# of rolls
0
3
8
12
15
17
76. The above schedule show the change in the production of Subway rolls as additional workers are
hired. The marginal product of the third worker is:
a. 4
b. 12
c. 5
d. 6
77. The above schedule shows the change in the production of Subway rolls as additional workers are
employed. The marginal product of labour begins to fall after the _____ worker.
a. first worker is employed.
b. second worker is employed.
c. third worker is employed.
d. fourth worked is employed.
Questions 78 and 79 refer to the following schedule
Production of Milk (per thousand litres)
Labour
0
1
2
3
4
5
Total Product
0
9
19
28
35
41
78. The marginal returns per thousand litres of milk are the greatest when the _____ worker is employed.
a. first.
b. second.
c. third.
d. fourth.
79. The marginal product of the fourth worker in this industry is:
a. 15 thousand litres.
b. 30 thousand litres.
c. 35 thousand litres.
d.
7 thousand litres.
80. Marginal cost is defined as the increase in total cost resulting from an increase in:
a. total daily output of the firm.
b. one unit of output.
c. extra fixed costs whe the firm expands.
d. one unit of capital or machinery.
Role of Markets
10
81. Marginal cost is the change in:
a. total variable cost as the quantity of output changes by one unit of output.
b. total cost as the quantity changes by a number of units.
c. average explicit cost as the quantity changes by an inplied amount.
d. total fixed cost as the quantity changes by one unit of output.
82. Which of the following statements is true?
a. TC = TFC – TVC.
b. TFC = TC – TVC.
c. AFC = TC / TFC.
d. TFC = ATC + TVC.
83. Which of the following is true if the average variable cost curve is increasing?
a. Average fixed cost is increasing.
b. Marginal cost is falling.
c. Fixed cost is constant.
d. Marginal cost is rising.
84. Total fixed costs are costs that:
a. vary as output varies but at a fixed rate.
b. are fixed as a proportion of about input.
c. do not vary with the level of output.
d. are constant in the short run.
85. Average total cost is:
a. average fixed cost added to average variable cost.
b. total fixed cost divided by wages for the average worker.
c. total marginal cost added to totoal variable cost.
d. average fixed cost added to total variable cost.
Questions 86 to 89 refer to the following schedule
Cost schedules for Chang Su chinese restaurant
Output
quantity
0
1
2
3
4
5
Total fixed
cost ($)
250
250
250
250
250
250
Total variable
cost ($)
0
60
95
120
141
165
86. The total cost of producing three units of output at Chang Su restaurant is:
a. $370
b. $270
c. $120
d. $391
87. The average fixed cost of producing the fourth unit of output at Chang Su restaurant is:
a. $32.25
b. $97.75
c. $62.50
d. $141
88. The marginal cost of producing the fourth unit of output at Chang Su restaurant is:
a. $35
b. $60
c. $41
d. $21
Role of Markets
11
89. The average total cost of producing 3 units at Chang Su restaurant is:
a. $123.30
b. $370
c. $120.50
d. $67.35
Questions 90 and 91 refer to the following schedule
Short-run cost curves schedule for Paul’s Burgers
Burgers (per hour)
TVC ($)
TC ($)
0
10
20
30
40
50
0
55
86
135
195
270
30
85
116
165
225
300
90. The fixed cost for Paul’s Burgers is equal to:
a. $50
b. $20
c. $30
d. $100
91. The marginal cost of producing the fourth batch of 10 burgers at Paul’s Burgers is equal to:
a. $60
b. $65
c. $195
d. $220
92. Diminishing returns will start to occur at output levels beyond the point where:
a. both marginal product and marginal cost are at a maximum.
b. marginal product is at a maximum and marginal cost at a minimum.
c. both marginal product and marginal cost are at a minimum.
d. marginal product is at a minimum and marginal cost at a maximum.
93. Marginal cost initially decreases because:
a. marginal product is decreasing during these first few unit of output.
b. additional workers encourage a wider skill base adding to productivity.
c. of the specialisation of labour improving marginal product.
d. the extra cost of producing one more unit of output increases.
94. Long-run diseconomies of scale occur when the long-run average cost curve:
a. begins to rises beyond the technical optimum.
b. remains constant over the long run.
c. falls beyond the technical optimum.
d. intersects the long run marginal cost curve at its minimum point.
95. Economies of scale are generally achieved by:
a. purchasing raw material in bulk.
b. greater efficiency of capital.
c. smaller plant sizes.
d. improved training for workers.
96. The decreasing part of a firm’s long-run average cost curve is said to be caused by:
a. diminishing returns to scale.
b. increasing marginal cost.
c. diseconomies of scale.
d. economies of scale.
Role of Markets
12
97. The main source of diseconomies of scale appears to be:
a. division of labour causing fall in productivity in the long run.
b. a firm’s lack of expansion into technologically innovative capital.
c. difficulties of managing very large scale firms.
d. rapid demand for the firm’s product leading to disequilibrium conditions.
98.
The law of diminishing returns is based on the assumption that:
a. one or more of the factor inputs is fixed.
b. the marginal physical product increased proportionally.
c. firms are unable to vary all factor inputs in the long run.
d. the scale of operations remains constant in the short run.
Questions 99 and 100 are based on the following table.
(Assume a farm with only two inputs - labour and capital)
LABOUR
99.
CAPITAL
TOTAL OUTPUT
(1000 Kilograms)
1
1
10
2
1
22
3
1
36
4
1
51
5
1
64
6
1
75
The marginal product of a second unit of labour being employed is:
a. 10,000 kilograms.
b. 32,000 kilograms.
c. 12,000 kilograms.
d. 22,000 kilograms.
100. The law of diminishing returns is evident after the employment of:
a. second unit of labour.
b. third unit of labour.
c. fourth unit of labour.
d. fifth unit of labour.
101. Economies of scale refer to any:
a. cost reductions which arise from increases in labour productivity.
b. increase in the size or capacity of the firm due to investment.
c. increase in profit levels associated with inefficiencies in management.
d. lowering of average unit costs due to increased plant capacity.
102. Which of the following are regarded as economies of scale?
a. Improved transport facilities are provided by government.
b. Firms providing raw materials are located close to industry.
c. Management make changes to production reducing unit costs.
d. Improved financial services are more readily available.
Role of Markets
13
103. Which of the following statements is an example of an economy of scale?
a. A large retail chain achieves a greater return for shareholders.
b. Management relocates key staff to other sections of the firm.
c. An efficient transport service is introduced in a light industrial area.
d. New capital equipment is introduced raising labour productivity.
104. The short-run period will vary considerably depending on the time necessary for:
a. the firm to be able to change all factor inputs.
b. the firm to respond to changes in consumer demand.
c. supply adjustments to be made in the factor market.
d. the inventory cycle to allow an adjustment in stocks.
105. An individual concentrating on one productive process rather than producing a range of goods and
services is referred to as:
a. concentration.
b. diversification.
c. Integration.
d. specialisation.
106. Which of the following is considered an advantage of specialisation?
a. A wider diversity of goods and services.
b. Increased competition between firms.
c. Decreased interdependence between workers.
d. Lower costs of production due to improved efficiency.