Price Determination In Market: Quiz!

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• 1.

In the table below what will be equilibrium market price?   Price Demand(tonnes per annum) Supply(tonnes per annum) 1 1000 400 2 900 500 3 800 600 4 700 700 5 600 800 6 500 900 7 400 1000 8 300 1100

• A.

Rs.2

• B.

Rs.3

• C.

Rs.4

• D.

Rs.5

C. Rs.4
Explanation
The equilibrium market price will be Rs.4 because at this price, the quantity demanded and quantity supplied are equal. This can be seen from the table where at a price of Rs.4, the demand is 700 tonnes and the supply is also 700 tonnes. At any other price, there will be either excess demand or excess supply, leading to a shift in the market towards the equilibrium price of Rs.4.

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• 2.

Assume that when the price is RS.20, the quantity demanded is 9 units, and when the price is Rs.19, the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

• A.

Rs.20

• B.

Rs.19

• C.

Rs.10

• D.

Rs.1

C. Rs.10
Explanation
The marginal revenue resulting from an increase in output from 9 units to 10 units is Rs.10. This can be determined by calculating the change in total revenue when the quantity increases by one unit. In this case, when the price is Rs.20 and the quantity demanded is 9 units, the total revenue is Rs.180 (20 * 9). When the price is Rs.19 and the quantity demanded is 10 units, the total revenue is Rs.190 (19 * 10). The change in total revenue is Rs.10 (190 - 180), which represents the marginal revenue.

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• 3.

Assume that when the price is Rs. 20, the quantity demanded is 15 units, and when the price is Rs. 18, the quantity demanded is 16 units. Based on this information, what is the marginal revenue resulting from an increase in output from 15 units to 16 units?

• A.

Rs.18

• B.

Rs.16

• C.

Rs.12

• D.

Rs.28

C. Rs.12
Explanation
The marginal revenue resulting from an increase in output from 15 units to 16 units is Rs. 12. This can be determined by calculating the change in total revenue when the quantity increases by one unit. In this case, the price decreases from Rs. 20 to Rs. 18, resulting in a decrease in total revenue of Rs. 2. Therefore, the marginal revenue is equal to the decrease in total revenue, which is Rs. 2.

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• 4.

Suppose a firm is producing a level of output such that MR > MC. What should be a firm do to maximize its profits?

• A.

The firm should do nothing.

• B.

The firm should hire less labour.

• C.

The firm should increase price.

• D.

The firm should increase output.

D. The firm should increase output.
Explanation
If the firm is producing a level of output where marginal revenue (MR) is greater than marginal cost (MC), it means that the additional revenue generated from selling one more unit of output is higher than the additional cost incurred in producing that unit. This indicates that the firm can increase its profits by producing and selling more units of output. Therefore, the firm should increase its output to maximize its profits.

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• 5.

Marginal Revenue is equal to:

• A.

The change in price divided by the change in output.

• B.

The change in quantity divided by the change in price.

• C.

The change in P x Q due to a one unit change in output.

• D.

Price, but only if the firm is a price searcher.

C. The change in P x Q due to a one unit change in output.
Explanation
The correct answer is "The change in P x Q due to a one unit change in output." This is because marginal revenue is the additional revenue a firm earns from selling one more unit of output. It is calculated by multiplying the change in price (P) by the change in quantity (Q) resulting from a one unit change in output. This formula captures the concept that marginal revenue is dependent on both price and quantity.

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• 6.

Suppose that a sole proprietorship is earning total revenues of  Rs.1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that:

• A.

The firm is incurring an economic loss.

• B.

Implicit costs are Rs. 25,000.

• C.

The total economic costs are Rs.1,00,000.

• D.

The individual is earning an economic profit of Rs.25,000.

A. The firm is incurring an economic loss.
Explanation
The firm is incurring an economic loss because the total revenues of Rs.1,00,000 are less than the explicit costs of Rs. 75,000. Additionally, the owner could earn Rs. 30,000 by working for another company, which represents an implicit cost. Therefore, the total economic costs are higher than the total revenues, resulting in an economic loss.

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• 7.

Which of the following is not an essential condition of pure competition?

• A.

Large number of buyers and sellers

• B.

Homogeneous product

• C.

Freedom of entry

• D.

Absence of transport cost

D. Absence of transport cost
Explanation
The absence of transport cost is not an essential condition of pure competition because in a perfectly competitive market, buyers and sellers have the freedom to enter and exit the market freely, there is a large number of buyers and sellers, and the products being sold are homogeneous. The absence of transport cost does not directly affect the competitiveness of the market or the ability of buyers and sellers to freely participate in it.

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• 8.

What is the shape of the demand curve faced by a firm under perfect competition?

• A.

Horizontal

• B.

Vertical

• C.

Positively sloped

• D.

Negatively sloped

A. Horizontal
Explanation
Under perfect competition, a firm faces a perfectly elastic demand curve, which means that the firm can sell any quantity of output at the prevailing market price. This is because there are numerous buyers and sellers in the market, and the firm's individual output is negligible compared to the total market output. As a result, the demand curve faced by a firm under perfect competition is horizontal, indicating that the firm has no control over the price and must accept the market price for its output.

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• 9.

Which is the first-order condition for the profit of a firm to be maximum?

• A.

AC = MR

• B.

MC = MR

• C.

MR = AR

• D.

AC = AR

B. MC = MR
Explanation
The first-order condition for the profit of a firm to be maximum is MC = MR. This condition states that in order to maximize profits, a firm should produce an additional unit of output as long as the marginal cost (MC) of producing that unit is less than or equal to the marginal revenue (MR) generated from selling it. If the marginal cost exceeds the marginal revenue, producing that additional unit would result in a decrease in profit. Therefore, MC = MR ensures that the firm is operating at the level of output where profit is maximized.

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• 10.

Which of the following is not a characteristic of a price taker?

• A.

TR = P x Q

• B.

AR = Price

• C.

Negatively - sloped demand curve

• D.

Marginal Revenue = Price

C. Negatively - sloped demand curve
Explanation
A negatively-sloped demand curve is a characteristic of a price taker. This means that as the price decreases, the quantity demanded increases. Price takers are unable to influence the market price and must accept the prevailing price in the market. As a result, they face a downward-sloping demand curve. Therefore, a negatively-sloped demand curve is not a characteristic that is not associated with a price taker.

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• 11.

Which of the following statements is false?

• A.

Economic costs include the opportunity costs of the resources owned by the firm.

• B.

Accounting costs include only explicit costs.

• C.

Economic profit will always be less than accounting profit if resources owned and used by the firm have any opportunity costs.

• D.

Accounting profit is equal to total revenue less implicit costs.

D. Accounting profit is equal to total revenue less implicit costs.
Explanation
The statement that accounting profit is equal to total revenue less implicit costs is false. Accounting profit is equal to total revenue minus both explicit costs and implicit costs. Implicit costs refer to the opportunity costs of using resources owned by the firm, such as the foregone income from the owner's time or the foregone rent from a building owned by the firm. Therefore, accounting profit takes into account both explicit and implicit costs, whereas economic profit only considers explicit costs.

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• 12.

With a given supply curve, a decrease in demand causes

• A.

An overall decrease in price but an increase in equilibrium quantity.

• B.

An overall increase in price but a decrease in equilibrium quantity.

• C.

An overall decrease in price and a decrease in equilibrium quantity.

• D.

No change in overall price but a reduction in equilibrium quantity.

C. An overall decrease in price and a decrease in equilibrium quantity.
Explanation
When there is a decrease in demand, it means that consumers are buying less of the product. This leads to an excess supply in the market, causing sellers to lower the price in order to attract buyers. As a result, there is an overall decrease in price. Additionally, the decrease in demand also leads to a decrease in the equilibrium quantity, as sellers are producing and selling less of the product. Therefore, the correct answer is that a decrease in demand causes an overall decrease in price and a decrease in equilibrium quantity.

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• 13.

It is assumed in economic theory that

• A.

Decision making within the firm is usually undertaken by managers, but never by the owners.

• B.

The ultimate goal of the firm is to maximise profits, regardless of firm size or type of business organisation.

• C.

As the firm's size increases, so do its goals.

• D.

The basic decision making unit of any firm is its owners.

B. The ultimate goal of the firm is to maximise profits, regardless of firm size or type of business organisation.
Explanation
The ultimate goal of a firm is to maximize profits, regardless of its size or type of business organization. This assumption is based on the profit maximization principle in economic theory, which suggests that firms aim to maximize their profits by making rational decisions. Profit maximization is considered the primary objective of firms as it ensures their long-term survival and growth. This assumption implies that firms prioritize profit generation over other goals such as market share, social welfare, or employee satisfaction.

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• 14.

Assume that consumers' incomes and the number of sellers in the market for good A both decrease. Based upon this information we can conclude, with certainty, that equilibrium :

• A.

Price will increase.

• B.

Price will decrease.

• C.

Quantity will increase.

• D.

Quantity will decrease.

D. Quantity will decrease.
Explanation
If consumers' incomes and the number of sellers in the market for good A both decrease, it implies a decrease in demand and supply for the good. As a result, the equilibrium quantity of the good will decrease. This is because there will be fewer buyers and sellers in the market, leading to a decrease in the quantity of the good that is exchanged at the equilibrium price. The decrease in quantity is the only certain conclusion that can be drawn from the given information.

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• 15.

Suppose that the supply of cameras increases due to an increase in foreign imports. Which of the following will most likely occur?

• A.

The equilibrium price of cameras will increase.

• B.

The equilibrium quantity of cameras exchanged will decrease.

• C.

The equilibrium price of camera film will decrease.

• D.

The equilibrium quantity of camera film exchanged will increase.

D. The equilibrium quantity of camera film exchanged will increase.
Explanation
An increase in the supply of cameras due to an increase in foreign imports will lead to a decrease in the equilibrium price of cameras. This is because the increase in supply will create a surplus of cameras in the market, causing sellers to lower their prices in order to attract buyers. However, this increase in the supply of cameras will also lead to an increase in the demand for camera film. As more cameras are available, people will need more film to use with their cameras. This increase in demand for camera film will result in an increase in the equilibrium quantity of camera film exchanged.

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• 16.

Assume that in the market for good Z there is a simultaneous increase in demand and the quantity supplied. The result will be :

• A.

An increase in equilibrium price and quantity.

• B.

A decrease in equilibrium price and quantity.

• C.

An increase in equilibrium quantity and uncertain effect on equilibrium price.

• D.

A decrease in equilibrium price and increase in equilibrium quantity.

C. An increase in equilibrium quantity and uncertain effect on equilibrium price.
Explanation
When there is a simultaneous increase in demand and quantity supplied for a good, it means that both consumers and producers are willing to buy and sell more of the good at the existing price. This will result in an increase in the equilibrium quantity, as the quantity demanded and supplied both increase. However, the effect on the equilibrium price is uncertain because it depends on the magnitude of the increase in demand and supply. If the increase in demand is larger than the increase in supply, the price may increase. Conversely, if the increase in supply is larger than the increase in demand, the price may decrease. Therefore, the correct answer is an increase in equilibrium quantity and uncertain effect on equilibrium price.

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• 17.

Suppose the technology for producing personal computers improves and, at the same time, individuals discover new uses for personal computers so that there is greater utilisation of personal computers. Which of the following will happen to equilibrium price and equilibrium quantity?

• A.

Price will increase; quantity cannot be determined.

• B.

Price will decrease; quantity cannot be determined.

• C.

Quantity will increase; price cannot be determined.

• D.

Quantity will decrease; price cannot be determined.

C. Quantity will increase; price cannot be determined.
Explanation
As the technology for producing personal computers improves and individuals discover new uses for them, the demand for personal computers will increase. This will lead to an increase in the equilibrium quantity of personal computers. However, it is not possible to determine the effect on the equilibrium price because it depends on various factors such as the cost of production, competition, and consumer preferences. Therefore, the correct answer is "Quantity will increase; price cannot be determined."

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• 18.

Which of the following is not a condition of perfect competition?

• A.

A large number of firms.

• B.

Perfect mobility of factors.

• C.

Informative advertising to ensure that consumers have good information.

• D.

Freedom of entry and exit into and out of the market.

C. Informative advertising to ensure that consumers have good information.
Explanation
Perfect competition is a market structure characterized by a large number of firms, perfect mobility of factors, and freedom of entry and exit into and out of the market. In perfect competition, firms are price takers and have no control over the market price. However, informative advertising to ensure that consumers have good information is not a condition of perfect competition. In perfect competition, firms compete solely based on price, and there is no need for informative advertising as consumers have perfect information about the products and prices available in the market.

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• 19.

Which of the following is not a characteristic of a perfectly competitive market?

• A.

Large number of firms in the industry.

• B.

Outputs of the firms are perfect substitutes for one another.

• C.

Firms face downward-sloping demand curves.

• D.

Resources are very mobile.

C. Firms face downward-sloping demand curves.
Explanation
In a perfectly competitive market, firms are price takers and have no control over the price of their products. This means that they face a horizontal or perfectly elastic demand curve, as they can sell as much as they want at the market price. Therefore, the statement that firms face downward-sloping demand curves is not a characteristic of a perfectly competitive market.

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• 20.

Which of the following is not a characteristic of monopolistic competition?

• A.

Ease of entry into the industry.

• B.

Product differentiation.

• C.

A relatively large number of sellers.

• D.

A homogenous product.

D. A homogenous product.
Explanation
Monopolistic competition is characterized by product differentiation, which means that each firm offers a slightly different product from its competitors. This allows firms to have some control over the price and to differentiate their products through branding, packaging, or other features. A relatively large number of sellers is also a characteristic of monopolistic competition, as there are many firms competing in the market. Ease of entry into the industry is another characteristic, as new firms can easily enter the market and compete with existing firms. However, a homogenous product is not a characteristic of monopolistic competition, as it implies that all firms offer the same product, which is not the case in this market structure.

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• 21.

All of the following are characteristics of a monopoly except :

• A.

There is a single firm.

• B.

The firm is a price taker.

• C.

The firm produces a unique product.

• D.

B. The firm is a price taker.
Explanation
A monopoly is a market structure in which there is a single firm that dominates the entire market, giving it significant control over the price and quantity of the product. The firm is not a price taker, as it has the power to set prices based on its own discretion. A price taker refers to a firm in a perfectly competitive market, where it has no control over the price and must accept the market price as given. Therefore, the statement "The firm is a price taker" contradicts the characteristics of a monopoly.

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• 22.

Oligopolistic industries are characterized by :

• A.

A few dominant firms and substantial barriers to entry.

• B.

A few large firms and no entry barriers.

• C.

A large number of small firms and no entry barriers.

• D.

One dominant firm and low entry barriers.

A. A few dominant firms and substantial barriers to entry.
Explanation
Oligopolistic industries are characterized by a few dominant firms and substantial barriers to entry. This means that there are only a small number of firms that dominate the industry, and it is difficult for new firms to enter and compete. The dominant firms have a significant market share and often have the power to control prices and output. The substantial barriers to entry, such as high capital requirements or government regulations, make it challenging for new firms to enter the market and challenge the dominance of existing firms. This leads to limited competition and the potential for collusion among the dominant firms.

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• 23.

Price-taking firms, i.e., firms that operate in a perfectly competitive market, are said to be asmalla relative to the market. Which of the following best describes this smallness?

• A.

The individual firm must have fewer than 10 employees.

• B.

The individual firm faces a downward-sloping demand curve.

• C.

The individual firm has assets of less than ? 20 lakh.

• D.

The individual firm is unable to affect market price through its output decisions.

D. The individual firm is unable to affect market price through its output decisions.
Explanation
In a perfectly competitive market, price-taking firms are unable to affect the market price through their output decisions. This means that individual firms have no control over the price at which they can sell their products. They must accept the market price as given and adjust their output accordingly. This is because there are numerous buyers and sellers in the market, and no individual firm has enough market power to influence the price. Therefore, the correct answer is that the individual firm is unable to affect market price through its output decisions.

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• 24.

For the price-taking firm :

• A.

Marginal revenue is less than price.

• B.

Marginal revenue is equal to price.

• C.

Marginal revenue is greater than price.

• D.

The relationship between marginal revenue and price is indeterminate.

B. Marginal revenue is equal to price.
Explanation
The correct answer is that marginal revenue is equal to price. In a price-taking firm, the firm is a price taker and cannot influence the market price. Therefore, the firm's marginal revenue is equal to the price of the good or service it sells. This is because each additional unit sold by the firm will generate the same amount of revenue as the market price.

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• 25.

Monopolistic competition differs from perfect competition primarily because

• A.

In monopolistic competition, firms can differentiate their products.

• B.

In perfect competition, firms can differentiate their products.

• C.

In monopolistic competition, entry into the industry is blocked.

• D.

In monopolistic competition, there are relatively few barriers to entry.

A. In monopolistic competition, firms can differentiate their products.
Explanation
Monopolistic competition differs from perfect competition primarily because firms in monopolistic competition have the ability to differentiate their products. This means that each firm can offer a slightly different product in terms of quality, features, branding, or other factors. In perfect competition, on the other hand, all firms offer identical products. This differentiation in monopolistic competition allows firms to have some control over the price and demand for their product, leading to a certain degree of market power.

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• 26.

The long-run equilibrium outcomes in monopolistic competition and perfect competition are similar, because in both market structures

• A.

The efficient output level will be produced in the long run.

• B.

Firms will be producing at minimum average, cost.

• C.

Firms will only earn a normal profit.

• D.

Firms realise all economies of scale.

C. Firms will only earn a normal profit.
Explanation
In both monopolistic competition and perfect competition, firms will only earn a normal profit. This means that they will make enough profit to cover their opportunity cost and keep them in the industry, but they will not make any excess profit. This is because in both market structures, there is free entry and exit, meaning that if firms were making above-normal profit, new firms would enter the market, increasing competition and driving down prices until only a normal profit is earned. Therefore, in the long run, both monopolistic competition and perfect competition result in firms earning a normal profit.

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• 27.

A monopolist is able to maximise his profits when :

• A.

His output is maximum.

• B.

He charges a high price.

• C.

His average cost is minimum.

• D.

His marginal cost is equal to marginal revenue.

D. His marginal cost is equal to marginal revenue.
Explanation
A monopolist is able to maximize his profits when his marginal cost is equal to marginal revenue. This is because the monopolist determines the price and quantity of goods in the market, and in order to maximize profits, they need to produce at a level where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue earned from selling that unit (marginal revenue). This ensures that the monopolist is not producing at a level where the cost exceeds the revenue, leading to a decrease in profits.

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• 28.

In which form of the market structure is the degree of control over the price of its product by a firm very large?

• A.

Monopoly

• B.

Imperfect Competition

• C.

Oligopoly

• D.

Perfect competition

A. Monopoly
Explanation
A monopoly is a form of market structure where there is only one firm that dominates the entire market and has complete control over the price of its product. This means that the firm can set the price at any level it desires without facing competition from other firms. As there are no close substitutes available in the market, consumers have no choice but to accept the price set by the monopolistic firm. Therefore, in a monopoly, the degree of control over the price of its product by a firm is very large.

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• 29.

Which is the other name that is given to the average revenue curve?

• A.

Profit Curve

• B.

Demand Curve

• C.

Average Cost Curve

• D.

Indifference Curve

B. Demand Curve
Explanation
The correct answer is "Demand Curve." The demand curve represents the relationship between the price of a product and the quantity of that product that consumers are willing to purchase. It shows the average revenue a firm receives from selling a unit of output at different price levels. The demand curve is downward sloping, indicating that as the price increases, the quantity demanded decreases. Therefore, the other name given to the average revenue curve is the demand curve.

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• 30.

Under which of the following forms of market structure does a firm have no control over the price of its product?

• A.

Monopoly

• B.

Monopolistic competition

• C.

Oligopoly

• D.

Perfect competition

D. Perfect competition
Explanation
In perfect competition, a firm has no control over the price of its product because there are many buyers and sellers in the market. Each firm is a price taker, meaning they must accept the market price set by the forces of supply and demand. In this market structure, no individual firm has the ability to influence or manipulate the price of the product. Therefore, the correct answer is Perfect competition.

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• 31.

Discriminating monopoly implies that the monopolist charges different prices for his commodity :

• A.

From different groups of consumers

• B.

For different uses

• C.

At different places

• D.

Any of the above

D. Any of the above
Explanation
The correct answer is "Any of the above." Discriminating monopoly refers to a situation where a monopolist charges different prices for their commodity based on different groups of consumers, different uses, or different places. This means that the monopolist has the power to set prices based on various factors and can exploit these differences to maximize their profits.

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• 32.

Price discrimination will be profitable only if the elasticity of demand in different market in which the total market has been divided is :

• A.

Uniform

• B.

Different

• C.

Less

• D.

Zero

B. Different
Explanation
Price discrimination refers to the practice of charging different prices to different groups of customers for the same product or service. In order for price discrimination to be profitable, the elasticity of demand in different markets must be different. Elasticity of demand measures how responsive the quantity demanded is to a change in price. If the elasticity of demand is different in different markets, it means that customers in some markets are more sensitive to price changes than others. This allows the seller to charge higher prices to the less price-sensitive markets and lower prices to the more price-sensitive markets, maximizing their overall profit.

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• 33.

The Kinked demand hypothesis is designed to explain in the context of oligopoly

• A.

Price and output determination

• B.

Price rigidity

• C.

• D.

Collusion among rivals

B. Price rigidity
Explanation
The kinked demand hypothesis suggests that in an oligopoly market, firms face a demand curve with a kink at the current price level. This kink arises from the assumption that rival firms will not follow price increases, but will match price decreases. As a result, firms have an incentive to keep prices stable and rigid, leading to price rigidity in the market. This hypothesis helps explain why prices in oligopoly markets tend to remain relatively stable over time, even in the face of changes in costs or demand.

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• 34.

The firm in a perfectly competitive market is a price taker. This designation as a price taker is based on the assumption that

• A.

The firm has some, but not complete, control over its product price.

• B.

There are so many buyers and sellers in the market that any individual firm cannot affect the market.

• C.

Each firm produces a homogeneous product.

• D.

There is easy entry into or exit from the market place.

D. There is easy entry into or exit from the market place.
Explanation
The correct answer is that there is easy entry into or exit from the market place. In a perfectly competitive market, there are a large number of buyers and sellers, and each firm produces a homogeneous product. Due to the ease of entry and exit from the market, new firms can easily enter if they believe they can earn profits, and existing firms can exit if they are unable to compete. This prevents any individual firm from having significant control over the market price, making them price takers.

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• 35.

Suppose that the demand curve for the XYZ Co. slopes downward and to the right. We can conclude that

• A.

The firm operates in a perfectly competitive market.

• B.

The firm can sell all that it wants to at the established market price.

• C.

The XYZ Co. is not a price taker in the market because it must lower price to sell additional units of output.

• D.

The XYZ Co. will not be able to maximise profits because price and revenue are subject v to change.

C. The XYZ Co. is not a price taker in the market because it must lower price to sell additional units of output.
Explanation
The demand curve for XYZ Co. slopes downward and to the right, indicating that as the price decreases, the quantity demanded increases. This suggests that XYZ Co. is not a price taker in the market because it must lower the price in order to sell more units of output. In a perfectly competitive market, firms are price takers and cannot influence the market price. Since XYZ Co. needs to lower the price to sell more, it implies that the firm has some market power and is not operating in a perfectly competitive market.

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• 36.

If firms in the toothpaste industry have the following market shares, which market structure Would best describe the industry? Market share                                                     (% of market) Toothpaste                                                                18.7 Dentipaste                                                                 14.3 Shinibright                                                                 11.6 I can't believe its not toothpaste                             9.4 Brighter than white                                                     8.8 Pastystuff                                                                      7.4 Others                                                                          29.8

• A.

Perfect competition

• B.

Monopolistic competition

• C.

Oligopoly

• D.

Monopoly

C. Oligopoly
Explanation
The toothpaste industry is best described as an oligopoly because there are a few dominant firms with significant market shares. The market shares of the top toothpaste brands are provided, showing that a small number of firms control a large portion of the market. Oligopolies are characterized by a few large firms that have the ability to influence prices and compete with each other. In this case, the market is not perfectly competitive or monopolistic, as there are not numerous small firms or one dominant firm in control.

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• 37.

The kinked demand curve model of oligopoly assumes that

• A.

Response to a price increase is less than the response to a price decrease.

• B.

Response to a price increase is more than the response to a price decrease.

• C.

Elasticity of demand is constant regardless of whether price increases or decreases.

• D.

Elasticity of demand is perfectly elastic if price increases and perfectly inelastic if price decreases.

A. Response to a price increase is less than the response to a price decrease.
Explanation
The kinked demand curve model of oligopoly assumes that the response to a price increase is less than the response to a price decrease. This is because in an oligopoly market, firms are interdependent and closely monitor each other's pricing strategies. If one firm increases its price, other firms are likely to keep their prices stable to avoid losing market share. However, if one firm decreases its price, other firms are more likely to follow suit in order to remain competitive. Therefore, the response to a price increase is generally less pronounced than the response to a price decrease in an oligopoly market.

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• 38.

A firm encounters its ashutdown pointa when :

• A.

Average total cost equals price at the profit-maximising level of output.

• B.

Average variable cost equals price at the profit-maximising level of output.

• C.

Average fixed cost equals price at the profit-maximising level of output.

• D.

Marginal cost equals price at the profit-maximising level of output.

B. Average variable cost equals price at the profit-maximising level of output.
Explanation
The shutdown point for a firm occurs when the average variable cost equals the price at the profit-maximizing level of output. At this point, the firm is just covering its variable costs and is not able to cover its fixed costs. Therefore, it would be better for the firm to shut down and minimize its losses rather than continue producing. This is because producing at this level would result in a negative contribution towards fixed costs, leading to even greater losses.

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• 39.

Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?

• A.

The firm should shutdown in order to minimise its losses.

• B.

The firm should raise its price enough to cover its losses.

• C.

The firm should move its resources to another industry.

• D.

The firm should continue to operate in the short run in order to minimize its losses.

D. The firm should continue to operate in the short run in order to minimize its losses.
Explanation
If the market price is less than average total cost but greater than average variable cost, the firm is still covering its variable costs and some portion of its fixed costs. By continuing to operate in the short run, the firm can minimize its losses by at least covering its variable costs. Shutting down would result in incurring the entire fixed costs without any revenue, leading to even greater losses. Raising the price may lead to further loss of customers and revenue. Moving resources to another industry is not mentioned as a viable option in the given scenario. Therefore, the correct statement is that the firm should continue to operate in the short run to minimize its losses.

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• 40.

When price is less than average variable cost at the profit-maximising level of output, a firm should :

• A.

Produce where marginal revenue equals marginal cost if it is operating in the short run.

• B.

Produce where marginal revenue equals marginal cost if it is operating is the long run.

• C.

Shutdown, since it will lose nothing in that case.

• D.

Shutdown, since it cannot even cover its variable costs if it stays in business.

D. Shutdown, since it cannot even cover its variable costs if it stays in business.
Explanation
When the price is less than the average variable cost at the profit-maximizing level of output, it means that the firm is not able to generate enough revenue to cover its variable costs. In this situation, the firm should choose to shut down because continuing to operate would result in losses that cannot even be covered by the revenue generated. Shutting down would minimize the losses incurred by the firm. Therefore, the correct answer is to shut down since it cannot even cover its variable costs if it stays in business.

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• 41.

A purely competitive firm's supply schedule in the short run is determined by

• A.

Its average revenue.

• B.

Its marginal revenue.

• C.

Its marginal utility for money curve.

• D.

Its marginal cost curve.

D. Its marginal cost curve.
Explanation
In the short run, a purely competitive firm's supply schedule is determined by its marginal cost curve. This is because in a purely competitive market, the firm is a price taker and must sell its output at the market price. The firm will only produce and supply goods as long as the marginal cost of producing an additional unit is less than or equal to the market price. Therefore, the firm's decision to supply goods in the short run is based on its marginal cost curve.

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• 42.

One characteristic not typical of oligopolistic industry is

• A.

Horizontal demand curve.

• B.

Too much importance to non-price competition.

• C.

• D.

A small number of firms in the industry.

A. Horizontal demand curve.
Explanation
An oligopolistic industry is characterized by a small number of firms, which implies that there is limited competition. Price leadership is also commonly observed in oligopolies, where one dominant firm sets the price and others follow suit. Additionally, non-price competition, such as advertising and product differentiation, is given significant importance in oligopolistic industries. However, a horizontal demand curve is not typical of oligopolies. In an oligopoly, firms have some control over prices and can influence demand, resulting in a downward-sloping demand curve.

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• 43.

The structure of the toothpaste industry in India is best described as

• A.

Perfectly competitive.

• B.

Monopolistic.

• C.

Monopolistically competitive.

• D.

Oligopolistic.

C. Monopolistically competitive.
Explanation
The toothpaste industry in India is best described as monopolistically competitive because there are many firms competing in the market, each offering slightly differentiated toothpaste products. These firms have some control over the price of their products, but they also face competition from other firms. There are low barriers to entry and exit in the industry, allowing new firms to enter and existing firms to exit relatively easily. Overall, this market structure exhibits characteristics of both monopoly and perfect competition, making it monopolistically competitive.

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• 44.

The structure of the cold drink industry in India is best described as

• A.

Perfectly competitive.

• B.

Monopolistic.

• C.

Monopolistically competitive.

• D.

Oligopolistic.

D. Oligopolistic.
Explanation
The structure of the cold drink industry in India is best described as oligopolistic because it is dominated by a few large players who have significant market power. These players engage in strategic behavior, such as price wars and advertising campaigns, to gain a competitive advantage. Additionally, barriers to entry, such as high capital requirements and strong brand loyalty, make it difficult for new firms to enter the market and challenge the existing players. Overall, the industry exhibits characteristics of an oligopoly where a small number of firms control the market.

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• 45.

Which of the following statements is incorrect?

• A.

Even monopolistic can earn losses.

• B.

Firms in a perfectly competitive market are price takers.

• C.

It is always beneficial for a firm in a perfectly competitive market to discriminate prices.

• D.

Kinked demand curve is related to an oligopolistic market.

C. It is always beneficial for a firm in a perfectly competitive market to discriminate prices.
Explanation
In a perfectly competitive market, firms are price takers, meaning they have no control over the price and must accept the market price. Price discrimination, on the other hand, involves charging different prices to different customers based on their willingness to pay. This practice is not beneficial for a firm in a perfectly competitive market as they have no control over the price and cannot discriminate prices. Therefore, the statement that it is always beneficial for a firm in a perfectly competitive market to discriminate prices is incorrect.

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• 46.

In perfect competition in the long run there will be no ____________.

• A.

Normal profits

• B.

Supernormal profits

• C.

Production

• D.

Costs

B. Supernormal profits
Explanation
In perfect competition in the long run, there will be no supernormal profits. This is because in perfect competition, there are no barriers to entry or exit for firms, meaning that new firms can easily enter the market if they see that existing firms are making supernormal profits. As more firms enter the market, competition increases, driving down prices and reducing profits. Eventually, in the long run, firms will only earn normal profits, which are just enough to cover their opportunity costs and keep them in the industry.

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• 47.

When_________ , we know that the firms are earning just normal profits.

• A.

AC = AR

• B.

MC = MR

• C.

MC = AC

• D.

AR = MR

A. AC = AR
Explanation
When AC (average cost) is equal to AR (average revenue), we know that the firms are earning just normal profits. This means that the firms are making enough revenue to cover their average costs, resulting in zero economic profit. In other words, they are earning a fair return on their investment without any excess profits.

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• 48.

When_________ , we know that the firms must be producing at the minimum point of the average cost curve and so there will be productive efficiency.

• A.

AC = AR

• B.

MC = AC

• C.

MC = MR

• D.

AR = MR

B. MC = AC
Explanation
When MC (Marginal Cost) is equal to AC (Average Cost), we know that the firms must be producing at the minimum point of the average cost curve. This indicates that the firms are operating at the most efficient level of production, where they are minimizing their average costs per unit of output. This implies productive efficiency, as the firms are producing goods or services at the lowest cost possible.

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• 49.

When___________, there will be allocative efficiency meaning thereby that the cost of the last unit is exactly equal to the price consumers are willing to pay for it and so that the right goods are being sold to the right people at the right price.

• A.

MC = MR

• B.

MC = AC

• C.

MC = AR

• D.

AR = MR

C. MC = AR
Explanation
When the marginal cost (MC) of producing an additional unit is equal to the average revenue (AR) received from selling that unit, there will be allocative efficiency. This means that the cost of producing the last unit is exactly equal to the price consumers are willing to pay for it. In other words, the price charged for the good is equal to its marginal cost, ensuring that the right goods are being sold to the right people at the right price.

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• 50.

Agricultural goods markets depict characteristics close to

• A.

Perfect competition.

• B.

Ooligopoly.

• C.

Monopoly.

• D.

Monopolistic Competition.