Practice MCQs for Final Assessment_With Solutions

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ECO10004: Economic Principles Semester 1, 2021 Final Assessment: Practice MCQs 1. Each firm in a perfect competition market: a. Produces a good that is slightly different from that of the other firms. b. Has an important influence on the market price of the good or service being produced. c. Attains economies of scale so that its efficient size is large compared to the market as a whole. d. Produces a good that is identical to that of the other firms. 2. Assume the market for organic produce sold at farmers’ markets is perfectly competitive. All else being equal, as more farmers choose to produce and sell organic produce at farmers’ market, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run? a. The equilibrium price is likely to increase, and profits are likely to remain unchanged b. The equilibrium price is likely to remain unchanged, and profits are likely to increase c. The equilibrium price is likely to decrease, and profits are likely to decrease d. The equilibrium price is likely to increase, and profits are likely to increase 3. Which of the following is NOT a characteristic of a perfect competition market? a. There is a very large number of firms that are small compared to the market b. All firms sell identical products c. There are no restrictions to entry by new firms d. None of above (i.e. All of the above are characteristics of a perfect competition market) 4. Both individual buyers and sellers in a perfect competition market a. Can influence the market price by their own individual actions b. Can influence the market price by joining with a few of their competitors c. Have to take the market price as a given d. Have the market price dictated to them by the government

5. Which of the following is NOT a reason why a monopolistically competitive firm might be able to maintain economic profits in the long run? a. Creating value for customers b. Charging a higher price than competitors to generate more sales revenue c. Achieving lower average costs of production than competitors d. None of the above (i.e. All above are valid reasons why a firm in a monopolistic competition market can maintain economic profits in the long run). 6. Consider a firm in a monopolistic competition market. Which of the following statements is NOT true? a. The firm’s output is at where marginal cost equals to average total cost so that cost production can be minimised b. The firm sells at a price which equals its average total cost c. The firm sells at a price which is greater than its marginal cost d. None of the above (i.e. All of the above statements are correct). 7. Under monopolistic competition, the differentiation of products implies that: a. Individual firms face downward sloping demand curves b. Both marginal cost and marginal revenue will increase as output increases c. Individual firms will make economic profits even in the long run d. Individual firms will produce at minimum average cost in the long run 8. When a firm faces a downward-sloping demand curve, marginal revenue a. must exceed price because the price effect outweighs the output effect. b. is less than price because a firm must lower its price to sell more. c. equals price because the firm sells a standardised product. d. must exceed price because the output effect outweighs the price effect. 9. An oligopoly industry is characterised by all of the following EXCEPT: a. the existence of entry barriers. b. the possibility of reaping long-run economic profits. c. firms pursuing aggressive business strategies, independent of rivals' strategies. d. production of standardised products.

10. Jake K Carrier and Timothy F Tourister are the only two luggage retailers in the town of Swinville. Each of them is contemplating whether to spend more on advertising to attract new customers. The payoff matrix below summarises all possible outcomes for Jake K and Timothy F. Timothy F More advertising Leave advertising the same Jake K More advertising Timothy F: $30,000 profit Jake K: $30,000 profit Timothy F: $20,000 Jake K: $40,000 Leave advertising the same Timothy F: $40,000 Jake K: $20,000 Timothy F: $50,000 Jake K: $50,000 Which of the following statements is correct? a. Timothy F has a dominant strategy, that is, to spend more on advertising. Meanwhile, Jake K does not have a dominant strategy b. Jake K has a dominant strategy, that is, to spend more on advertising. Meanwhile, Timothy F does not have a dominant strategy c. Both Timothy F and Jake K have a dominant strategy, that is, to spend more on advertising d. Neither Timothy F nor Jake K has a dominant strategy 11. There is much evidence to suggest that airlines are more likely to match price cuts than price increases. Which of the following best explains this evidence? a. The law of demand, which states that an increase in price leads to a decrease in quantity demanded b. No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases c. An airline fears that if it does not match a price cut, its sale may fall considerably, but it does not match a price increase, it will be able to attract customers away from its rivals d. Airlines have different costs of production, and therefore it is more difficult to agree on a price increase than on a price decrease 12. The study of how people make decisions in situations in which attaining their goals depends on their interaction with others is called: a. Game theory b. Oligopoly c. Competitive analysis d. Strategic analysis 13. When economies of scale are present at all relevant levels of output, the market is: a. A perfect competition market b. A monopolistic competition market c. A natural monopoly d. An oligopoly

14. Encouraging firms to invest in research and development and individuals to engage in creative endeavours such as writing novels is one justification for: a. Government-created monopolies b. Resource monopolies c. Natural monopolies d. Monopolistic competition 15. Refer to the figure below: Suppose the grocery store market in Brisbane is perfectly competitive. Then one store buys all the others and becomes a single-price monopoly. The figure above shows the relevant demand and cost curves. When the market is perfectly competitive, the price of a kilogram of steak is ____. And when it is a monopoly, the price of a kilogram of steak is ____. a. $4, $20 b. $4, $12 c. $4, $8 d. $8, $12

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