Microeconomics MCQs | ECO402 MCQs | Set 8
Microeconomics MCQs | ECO402 MCQs | Set 8
MCQs (Multiple Choice Questions)
1) The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because:
a) The market price is determined (through regulation) by the government.
b) The firm supplies a different good than its rivals.
c) The firm's output is a small fraction of the entire industry's output.
d) The short run market price is determined solely by the firm's technology.
Correct Answer:
The correct answer is 'c'.
Explanation:
In a perfectly competitive market, individual firms are price takers. This means their output is a very small fraction of the entire industry's production. As a result, the quantity of goods an individual firm produces or sells has negligible impact on the overall market supply and, subsequently, on the market price. The market price is determined by the collective forces of supply and demand in the entire industry, not by any individual firm's output.
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2) In an unregulated, competitive market consumer surplus exists because some:
a) Sellers are willing to take a lower price than the equilibrium price.
b) Consumers are willing to pay more than the equilibrium price.
c) Sellers will only sell at prices above the equilibrium price (or actual price).
d) Consumers are willing to make purchases only if the price is below the actual price.
Correct Answer:
The correct answer is 'b'.
Explanation:
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3) Which of the following is true concerning the income effect of a decrease in price?
b) It always will lead to an increase in consumption.
c) It will lead to an increase in consumption only for an inferior good.
d) It will lead to an increase in consumption only for a Giffen good.
Correct Answer:
The correct answer is 'a'.
Explanation:
Normal goods are goods whose demand increases as income increases. When the price of a normal good decreases, consumers' real income increases, and they can afford to buy more of the good. This is called the income effect.
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4) Generally, long-run elasticities of supply are:
a) Greater than short-run elasticities, because existing inventories can be exploited during shortages.
b) Greater than short-run elasticities, because consumers have time to find substitutes for the good.
c) Greater than short-run elasticities, because firms can make alterations to plant size and input combinations to be more flexible in production.
d) Smaller than short-run elasticities, because the firm has made long-term commitments it cannot easily modify.
Correct Answer:
The correct answer is 'c'.
Explanation:
In the long run, firms have the flexibility to adjust various factors, such as plant size, technology, and input combinations, to respond more effectively to changes in demand or price. This increased flexibility enables firms to be more responsive to price changes, resulting in greater elasticity of supply compared to the short run, where these adjustments are limited by existing commitments and fixed factors.
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5) The demand curve facing a perfectly competitive firm is:
a) The same as the market demand curve.
b) Downward-sloping and less flat than the market demand curve.
c) Perfectly horizontal.
d) Perfectly vertical.
Correct Answer:
The correct answer is 'c'.
Explanation:
In a perfectly competitive market, each individual firm faces a perfectly horizontal demand curve. This is because they are price takers, meaning they have no influence over the market price. As a result, they can sell all the output they want at the prevailing market price, and therefore, their demand curve is perfectly elastic or horizontal at the market price.
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6) Which of the following statements is TRUE about the demand curve for a perfectly competitive firm?
a) The demand curve is same as its average revenue curve, but not the same as its marginal revenue curve.
b) The demand curve is same as its average revenue curve and its marginal revenue curve.
c) The demand curve is same as its marginal revenue curve, but not the same as its average revenue curve.
d) The demand curve is not the same as either its marginal revenue curve or its average revenue curve.
Correct Answer:
The correct answer is 'b'.
Explanation:
Marginal revenue is the additional revenue that a firm earns from selling one more unit of output. Average revenue is the total revenue that a firm earns from selling all of its output divided by the quantity of output sold.
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7) In a perfectly competitive market:
a) There are few buyers.
b) There is a single seller.
c) There is a cartel.
d) No single buyer or seller can significantly affect the market price.
Correct Answer:
The correct answer is 'd'.
Explanation:
In a perfectly competitive market, there are many buyers and sellers, and no individual buyer or seller has the power to influence the market price. The market operates based on the forces of supply and demand, where prices are determined by the collective interaction of numerous buyers and sellers, rather than being dictated by any single entity.
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8) Although there are many reasons why a market can be non-competitive, the economic difference between a competitive and a nonprincipal-competitive market is:
a) The extent to which any firm can influence the price of the product.
b) The size of the firms in the market.
c) The annual sales made by the largest firms in the market.
d) The presence of government intervention.
Correct Answer:
The correct answer is 'a'.
Explanation:
In a competitive market, no single firm has enough market power to influence the price of the product. This is because there are many buyers and sellers in the market, and they are all selling the same or similar products. As a result, firms in a competitive market are price takers, meaning that they have to accept the market price for their products.
In a non-competitive market, one or more firms have enough market power to influence the price of the product. This can be due to a number of factors, such as the presence of a few large sellers (oligopoly), the existence of barriers to entry, or product differentiation. As a result, firms in a non-competitive market are price makers, meaning that they can set their own prices for their products.
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9) Our economy is characterized by:
a) Unlimited wants and needs.
b) Unlimited material resources.
c) No energy resources.
d) Abundant productive labor.
Correct Answer:
The correct answer is 'a'.
Explanation:
The economic principle of unlimited wants and needs refers to the concept that human desires for goods and services are essentially insatiable. People have diverse needs and desires that surpass the available resources, leading to a perpetual quest for satisfaction, consumption, and the pursuit of various goods and services. This characteristic drives economic activity and decision-making within an economy.
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10) When the current price is above the market-clearing level, we would expect:
a) Quantity demanded to exceed quantity supplied.
b) Quantity supplied to exceed quantity demanded.
c) Greater production to occur during the next period.
d) None of the given options.
Correct Answer:
The correct answer is 'b'.
Explanation:
At a price above the market-clearing level (the equilibrium price), the quantity supplied by producers will typically exceed the quantity demanded by consumers. This situation creates a surplus in the market as producers are willing to supply more goods or services than consumers are willing to purchase at that higher price.
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