All Free Economics MCQs with Answers

• A. cause a reduction is output
• B. have no effect on output
• C. increase the marginal product of the factor
• D. generate ever smaller amounts of output

Explanation: Diminishing marginal product means each additional unit of an input adds less to total output than the previous unit.

• A. interest
• B. dividends
• C. increases in stocks of goods
• D. retained earnings

Explanation: Interest, dividends, and retained earnings are returns to capital ownership.

• A. have skills that are in relatively scarce supply
• B. produce output for which there is great demand
• C. usually have little capital with which to work
• D. are usually highly paid

Explanation: Workers with a high value of marginal product generally have scarce skills, produce highly demanded output, and earn high wages.

• A. decrease the prosperity of the firm but increases the prosperity of the factors hired by the firm
• B. decreases the prosperity of both the firms and the factors hired by the firm.
• C. increases the prosperity of both the firm and the factors hired by the firm.
• D. increases the prosperity of the firm but decreases the prosperity of the factors hired by the firm.

Explanation: Higher demand for the firm's output raises its price and usually increases production, profits, and the value of the marginal products of…

• A. an amount equal to the price of output times total output
• B. the amount allocated by the political process
• C. an equal share of output
• D. the value of its marginal product

Explanation: With competitive input and output markets, a profit-maximizing firm hires each factor until its factor price equals its value of marginal…

• A. a decrease in the number of apple pickers employed
• B. an increase in the value of the marginal product of apple pickers
• C. an increase in the price of apples
• D. an increase in the wage of apple pickers

Explanation: Greater demand for apples raises their price, increasing the value of the marginal product and demand for apple pickers.

• A. the price of the output times wage of labor
• B. the price of the output times the marginal product of labor
• C. none of these answers
• D. the wage of labor times the quantity of labor
• E. the wage of labor times the marginal product of labor

Explanation: The value of marginal product converts the extra physical output from one more worker into money value by multiplying marginal product of…

• A. labor, land, and capital
• B. water, earth and knowledge
• C. money, stocks and bonds.
• D. management finance and marketing

Explanation: The basic factors of production are land, labour and capital, which provide natural resources, human effort and produced means of…

• A. in response to a price increase is less elastic than the elasticity of demand in response to a price decrease
• B. is perfectly elastic if price increases and perfectly inelastic if price decreases
• C. is constant regardless of whether price increase of decrease.
• D. in response to a price increases is more elastic than the elasticity of demand in response to a price decrease

Explanation: In the kinked-demand model, rivals usually follow a price cut but do not follow a price rise.

• A. The market for copper, where there are very few producers and the product is standardized.
• B. The fast-food market where there are a large number of producers but the demand for fast food is inelastic
• C. The coffee market where the product is standardized and there are a large number of coffee growers.
• D. The automobile industry, where there are few producers but there is great product differentiation.

Explanation: Cartels are easiest to organize when there are few producers and the product is standardized, because cheating is easier to detect and…

• A. price leadership
• B. price concentration
• C. collusion
• D. game theory,

Explanation: Collusion is an agreement among firms to coordinate decisions such as price or output.

• A. a colluding industry
• B. a merged industry
• C. a concentrated industry
• D. a natural monopoly

Explanation: A concentrated industry has a small number of firms controlling a large share of the market.

• A. perfect competition
• B. monopolistic competition
• C. oligopoly
• D. monopoly

Explanation: An oligopoly consists of a few significant firms whose decisions affect market price and whose actions are interdependent.

• A. It is efficient because the right amount of output is produced, but not efficient in that the output produced is produced at a cost above minimum average total cost
• B. It is efficient because entry is free and economic profits are eliminated in the long run.
• C. It is not efficient because too little output is produced and the output that is produced is produced at a cost above minimum average total cost
• D. It is not efficient because too little output is produced but is efficient in that the output produced is produced at minimum average total cost.

Explanation: Monopolistic competition produces less than the output that minimizes average total cost, creating excess capacity, and its price exceeds…

• A. sells a fixed amount of output regardless of price.
• B. must raise price to sell more output
• C. can sell an infinite amount of output at the market-determined price
• D. must lower price to sell more output.

Explanation: A monopolistically competitive firm faces a downward-sloping demand curve because its product is differentiated from competitors'.

• A. by producing differentiated products
• B. because of barriers to exit from the industry
• C. by virtue of size alone
• D. because of barriers to entry into the industry

Explanation: Product differentiation gives each firm a somewhat distinct product, allowing it to raise price without losing every customer.

• A. produced less and charged a higher price
• B. produced more and charged a higher price
• C. produced more and charged a lower price
• D. produced less and charged a lower price.

Explanation: A monopolist restricts output and charges more than would prevail under competition.

• A. maximized its total revenue
• B. set price equal to its average cost
• C. equated marginal revenue and marginal cost
• D. maximized the difference between marginal revenue and marginal cost.

Explanation: Profit is maximized at the output where the additional revenue from one more unit equals the additional cost of producing it, so MR = MC.

• A. always equal to one.
• B. half as steep as the demand curve
• C. the same as the slope of the demand curve
• D. twice as steep as the demand curve

Explanation: For a straight-line demand curve, the marginal-revenue curve has the same intercept but twice the slope in absolute value, so it is twice…

• A. the difference between total revenue and total costs.
• B. anything greater than the normal opportunity cost of investing
• C. the opportunity costs of all inputs
• D. a rate of profit that is just sufficient to keep owners and investors satisfied

Explanation: Economic profit is the return left after covering all opportunity costs, including the normal return needed to keep the investment in its…