Question 1

A market is clearly NOT perfectly competitive if which of the following is true in equilibrium

Accepted Answer

In a perfectly competitive market, price equals marginal cost in equilibrium. If price exceeds marginal cost, it indicates that the market is not perfectly competitive, as firms have some power to set prices above their marginal cost.

Question 2

If a perfectly competitive industry is in long-run equilibrium, which of the following is most likely to be true

Accepted Answer

In a perfectly competitive industry in long-run equilibrium, firms earn normal profit, which means they are earning a return on investment equal to their opportunity costs. This ensures no new firms enter or exit the market, maintaining equilibrium.

Question 3

Which of the following is NOT a characteristic of a competitive market

Accepted Answer

In a competitive market, prices are determined by the forces of supply and demand rather than by firms themselves. Firms in a competitive market are price takers, meaning they accept the market price as given.

Question 4

Which of the following statements is true, regarding the revenues of a firm under perfect competition

Accepted Answer

In a perfectly competitive market, the price of the product is determined by the market and is the same for all firms. Therefore, each additional unit sold (marginal revenue) and the average revenue per unit sold are equal to the market price.

Question 5

A firm under perfect competition will maximize profits when its

Accepted Answer

A firm under perfect competition maximizes profits when its marginal revenue (MR) is equal to its marginal cost (MC). This is because producing one more unit of output adds exactly the same amount to the firm's revenue as it does to the firm's cost, meaning profit is maximized at this point.

Question 6

The short-run supply curve of a firm in perfect competition is the segment of its:

Accepted Answer

The short-run supply curve of a firm in perfect competition is the portion of its marginal cost curve that lies above the minimum average variable cost. This is because a firm will continue to produce as long as it can cover its variable costs in the short run, even if it cannot cover its total costs.

Question 7

In perfect competition the shutdown point is defined by

Accepted Answer

The shutdown point in perfect competition is defined by where price equals average variable cost (AVC). At this point, the firm covers its variable costs but cannot cover any of its fixed costs, making it indifferent between producing and shutting down.

Question 8

A monopoly is a ________

Accepted Answer

A monopoly is a price maker because it has significant control over the market price due to the lack of competition.

Question 9

A monopoly is a ________, therefore the demand curve it faces is ________

Accepted Answer

A monopoly is a price setter because it is the only seller in the market and can set the price of its product. The demand curve it faces is downward-sloping, indicating that as the price increases, the quantity demanded decreases, and vice versa.

Question 10

As output increases in a monopoly, the firm's total revenue:

Accepted Answer

In a monopoly, as output increases, the firm's total revenue first increases at a decreasing rate and then starts to decrease due to the downward-sloping demand curve. This means the firm must lower the price to sell more units, which eventually leads to a decrease in total revenue after a certain point.

Question 11

Marginal revenue in a monopoly is:

Accepted Answer

In a monopoly, marginal revenue is always smaller than the price due to the downward-sloping demand curve. To sell additional units, the monopolist must lower the price, which applies to all units sold, thus making the marginal revenue less than the price.

Question 12

Which of the following statements is true regarding a profit maximizing monopoly

Accepted Answer

A profit-maximizing monopoly causes a deadweight loss because it restricts output below the socially optimal level, leading to inefficiency. It produces less than what would be produced under perfect competition because it restricts output to increase prices and maximize profits. Consequently, it sells its product at a higher price than would prevail under perfect competition, where prices are pushed to the level of marginal costs.

Question 13

In India, which law deals with monopolies

Accepted Answer

The MRTP (Monopolies and Restrictive Trade Practices) Act, 1969, was the law that dealt with monopolies in India. It aimed to prevent concentration of economic power and ensure fair competition.

Question 14

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

Accepted Answer

In monopolistic competition, products are differentiated, not identical. This differentiation is a key characteristic that distinguishes it from perfect competition, where the goods offered by different sellers are identical.

Question 15

The diagram depicting monopolistic competition in the short run:

Accepted Answer

The diagram depicting monopolistic competition in the short run is very similar to the short run monopoly diagram because both market structures can have firms making supernormal (or abnormal) profits due to having some degree of market power and facing downward sloping demand curves.

Question 16

If the Average Total Cost curve of a firm in monopolistic competition happens to be above the demand curve, it means:

Accepted Answer

If the Average Total Cost (ATC) curve is above the demand curve, it means that the price at which the firm can sell its product (determined by the demand curve) is lower than the average cost of producing that product. Therefore, the firm will be incurring losses, as it cannot cover its average total costs at any level of output.

Question 17

If firms in monopolistic competition are enjoying positive economic profits, in the long run

Accepted Answer

In monopolistic competition, positive economic profits attract new firms into the industry, increasing competition, which leads to a decrease in prices and the elimination of economic profits over time.

Question 18

Firms in monopolistic competition in long run equilibrium ________ than firms in perfect competition.

Accepted Answer

In long-run equilibrium, firms in monopolistic competition produce less compared to firms in perfect competition due to the presence of product differentiation and brand loyalty, which reduces the elasticity of demand they face.

Question 19

In monopolistic competition in long run equilibrium, the price will be equal to:

Accepted Answer

In the long run equilibrium of monopolistic competition, firms face a downward-sloping demand curve and have some degree of market power, but due to the entry and exit of firms, they end up making zero economic profit. This condition is met when price equals average total cost (ATC).

Question 20

A major critique of advertising is that

Accepted Answer

Advertising is often criticized for manipulating people's tastes and preferences, leading them to make choices that may not be in their best interest or that they might not have made otherwise. This manipulation can influence consumer behavior in ways that prioritize consumption over more rational or beneficial decisions.

Quiz 1: Market Models, Structures and Competition