MCQ questions:

1. In which market structure firms have the highest market power and why?

A) Duopoly because two firms collude with each other to set prices

B) Monopolistic competition because firms sells relatively differentiated products

C) Monopoly because firms are the single supplier in the market and thus can charge higher

D) Oligopoly because oligopolists can engage in aggressive business strategies due to their
dominance in the market

2. A company experiences an increase in production from 100 to 200 units. During this
time, it observes that average variable cost (AVC) is rising, while average fixed cost (AFC)
is declining. Which of the following best explains this phenomenon?

A) AVC rises due to increasing marginal cost (i.e. cost of prod, while AFC falls because fixed
costs are spread over more units of output.
B) AVC falls because of economies of scale, while AFC rises due to increasing fixed costs.
C) AVC remains constant while AFC rises because fixed costs increase with higher output.
D) AVC rises as output increases due to increasing fixed costs, while AFC remains unchanged.

3. A manufacturing company decides to expand its production from 1,000 to 5,000 units in
the long run. After the expansion, the average cost per unit decreases due to more efficient
use of machinery and bulk purchasing of materials. Which of the following best describes
this situation?

A) The company is experiencing diseconomies of scale due to increased complexity.

B) The company is achieving economies of scale by reducing average costs as production
increases.
C) The company’s marginal costs are increasing despite higher production levels.
D) The company is operating in a perfectly competitive market, leading to constant average
costs.
4. A small furniture manufacturer has fixed costs associated with renting its workshop and
salaries for its employees. As the company increases production from 100 to 500 furniture
pieces, which of the following statements about costs is most likely true?

A) The average fixed cost per piece will increase as production rises.

B) The marginal cost of producing each additional piece will remain constant.

C) The average total cost per piece will likely increase as production increases due to the
spreading of fixed costs.

D) Total costs will be the same regardless of production levels

5. Consider the global smartphone market where Apple is a dominant player. If Apple has
a significant level of market power, how does this influence their pricing strategy compared
to a firm in a perfectly competitive market?

A) Apple sets its price equal to the marginal cost of production.

B) Apple maximizes profits by setting a price above marginal cost and reducing quantity.
C) Apple competes on price with multiple firms, leading to lower prices.
D) Apple cannot influence the price as it is in a perfectly competitive market.

6. Which of the following is a typical characteristic of a monopolist's demand curve?

A) Perfectly elastic at the market price.

B) Horizontal and equal to the marginal cost curve.
C) Downward-sloping, meaning the monopolist must lower the price to sell more.
D) Vertical, indicating that the monopolist can sell any quantity at the same price.

7. What is deadweight loss in the context of a monopoly, and why does it occur?

A) Deadweight loss occurs because monopolists produce at the socially optimal quantity, leading
to inefficient pricing.
B) Deadweight loss occurs because monopolists set prices lower than the marginal cost, causing
inefficiency.
C) Deadweight loss occurs because monopolists produce less than the efficient output and charge
a price above marginal cost, creating a loss in total welfare.
D) Deadweight loss occurs because monopolists produce more than the socially optimal quantity,
causing inefficiency.

8. A monopolist is currently producing 100 units of a product and charging a price of $50
per unit. If the monopolist were to increase production to 120 units, the price would fall to
$48 per unit.

Which of the following statements is most likely true based on the information given?

A) At 120 units, the monopolist is operating in a region where marginal revenue is less than
price.
B) The monopolist is maximizing profit at this level of output.
C) The monopolist is likely facing a situation where marginal revenue is negative.
D) The monopolist would maximize profits by reducing output further.

9. In the short run, how can a monopolist achieve economic profits?

A) By setting its price equal to average total cost (ATC).

B) By setting its price above marginal cost (MC), where marginal revenue (MR) equals MC.
C) By setting its price below average variable cost (AVC).
D) By producing at the level where price equals marginal revenue.

10. In a perfectly competitive market, firms are considered price takers because:

A) They have market power to set the price of their product.

B) The products they sell are identical to those of other firms.
C) Consumers demand the product regardless of its price.
D) There are significant barriers to entry in the market.

11. In the short run, a perfectly competitive firm maximizes its profit by producing the
output level where:

A) Marginal cost equals average total cost.

B) Marginal cost equals marginal revenue.
C) Total revenue equals total cost.
D) Average variable cost equals average fixed cost.
12. In perfect competition, when a firm is operating at the point where marginal cost equals
marginal revenue, it is:

A) Maximizing its losses.

B) Maximizing its profit or minimizing its loss.
C) Producing at a loss but cannot shut down.
D) Operating inefficiently and should reduce output.

13. In the market for street vendors selling bottled water in a crowded tourist spot, each
vendor charges the same price and offers identical products. What will likely happen in the
long run if one vendor begins making economic profits?

A) The vendor will increase prices, leading to higher profits.

B) New vendors will enter the market, increasing competition and driving down prices.
C) The vendor will expand their business and establish a monopoly.
D) The government will intervene and regulate prices.

14. In a city with many small coffee shops selling the same type of coffee at the same price,
a new shop opens and immediately starts offering discounts on their coffee. What does this
suggest about the coffee shop market structure?

A) The coffee market is a monopoly because a new shop can lower prices.
B) The coffee shop market is monopolistically competitive, but not perfectly competitive.
C) The coffee market is perfectly competitive, as new firms can enter and exit freely.
D) The coffee market is perfectly competitive, and the new shop is attempting to collude with
others.

15. A local flower market in a small town is characterized by a large number of florists who
sell identical flowers at the same price. One day, a new florist opens a store offering slightly
lower prices than the others. What will likely happen in the long run?

A) The new florist will dominate the market and set the price.
B) The existing florists will lower their prices to match the new florist's prices.
C) The new florist will leave the market due to lack of profits.
D) The prices of flowers will continue to rise as the market becomes less competitive.
16. In a perfectly competitive market, a firm faces marginal costs that exceed the market
price. What should the firm do in the short run?

A) Continue producing, as long as marginal cost equals marginal revenue.

B) Shut down immediately, since it is making losses.
C) Increase production to lower the marginal cost.
D) Reduce output to minimize its losses.

17. In a perfectly competitive market for smartphones, if a new technology allows firms to
produce smartphones at a lower cost, what is the likely short-term effect on the market?

A) The market price will rise, and firms will exit the industry.
B) The market price will fall, and firms will produce more units.
C) The market price will remain unchanged, but firms will produce less.
D) The market price will rise, but firms will keep their output the same.

18. In a perfectly competitive market for tomatoes, if an unexpected frost ruins a large
portion of the tomato crop, what will happen to the price and quantity in the short run?

A) The price of tomatoes will decrease, and the quantity will remain the same.
B) The price will increase, and the quantity of tomatoes available will decrease.
C) The price will remain constant, and the quantity will increase.
D) The price will decrease, and the quantity of tomatoes will increase.

19. If a firm's Marginal Revenue (MR) equals Marginal Cost (MC) at 200 units of output,
and the price of the product is constant at $50 per unit, what can be concluded about the
firm's total revenue and profit at this output level?

A) The firm is making an economic profit, as MR = MC.

B) The firm is maximizing its profit, as MR = MC and no changes in production should be made.
C) The firm is experiencing a loss, as MR = MC but it cannot cover its fixed costs.
D) The firm is breaking even, as its total revenue equals total cost.
20. Fixed inputs are resources
A) whose quantities do not change in the short run
B) whose quantities do not change in the long run
C) whose quantities can be changed at any time
D) which are too large and bulky to be moved easily

21. A firm’s total revenue is $500,000, and its explicit costs (such as wages, rent, and
materials) are $300,000. If the firm has no implicit costs (opportunity costs), what is its
accounting profit?

A) $300,000
B) $500,000
C) $200,000
D) $100,000

Answer: C

Answer Key:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

C A B A B C C A B B B B B B B D B B B A
 Sample Short Questions:

1. The market for milk in a region is highly competitive, with dairy farms selling
identical products at the same price.

A) How do firms in perfect competition determine their level of output? Draw graphs to support
your answer.

B) What is the role of price takers in a perfectly competitive market?

2. A pharmaceutical company holds a patent for a life-saving drug, making it the only
supplier in the market.

A) How can the company use its monopoly power to maximize profits?

B) What laws can be used to mitigate its power?

3. A small car manufacturer decides to increase production by expanding its factory

and workforce, leading to a reduction in per-unit costs.

A) What type of cost behavior is the company experiencing, and why?

B) After further expansion, the company starts to face rising per-unit costs as it grows larger.
What is this phenomenon called, and what could be the potential reasons for it?

Draw graphs to support your answer.