All Free Economics MCQs with Answers

• A. Is the rate of return on investments over the interest rate on risk-free government bonds.
• B. is the rate that is just sufficient to keep owners or investors satisfied.
• C. is the difference between total revenue and total costs
• D. is zero in a perfectly competitive industry.

Explanation: Normal profit is the minimum return required to keep owners and investors in the business, including their opportunity costs.

• A. immediate run
• B. intermediate run
• C. long run
• D. short run

Explanation: The short run is the period in which firms cannot freely enter or leave an industry.

• A. there are many EU and government health controls on cosmetic products
• B. there are a very large number of firms in the industry
• C. firms spend a large amount of money on advertising
• D. profit margins are very high for both producers and retailers

Explanation: Heavy advertising suggests that firms compete by creating or emphasizing product differences rather than selling an identical product at a…

• A. no longer influences the amount demand of the firm's product
• B. becomes a decision variable for the firm
• C. is guaranteed to be above a firm's average cost.
• D. is determined by the actions of other firms in the industry

Explanation: With market power, a firm faces a downward-sloping demand curve and can influence the price through its output decision.

• A. a firm's ability to monopolies a market completely.
• B. a firm's ability to raise price without losing all demand for its product
• C. a firm's ability to sell any amount of output it desires at the market-determined price.
• D. a firm's ability to charge any price it likes

Explanation: Market power means the ability to raise price without losing all buyers, because the firm faces a downward-sloping demand curve.

• A. fixed costs exceed revenues.
• B. it is suffering a loss.
• C. variable costs exceed revenues
• D. total costs exceed revenues

Explanation: In the short run, a firm shuts down when revenue cannot cover variable costs, because fixed costs must be paid even when output is zero.

• A. £35
• B. £15
• C. £30
• D. £60

Explanation: Total revenue is £2 × 50 = £100, while total cost is £25 + £40 = £65. Economic profit is therefore £100 − £65 = £35.

• A. DTVC/Dq
• B. q/TVC
• C. Dq/DTVC
• D. TVC/q

Explanation: Average variable cost spreads total variable cost over the units produced, so AVC equals TVC divided by quantity, written as TVC/q.

• A. expenditure set
• B. isocost line.
• C. budget constraint
• D. isoquant

Explanation: An isocost line shows combinations of capital and labour that can be purchased for the same total cost.

• A. an indifference curves.
• B. an isoquant.
• C. an isocost line
• D. a production functions

Explanation: An isoquant connects different combinations of capital and labour that produce the same level of output.

• A. downward sloping to the right
• B. U-shaped
• C. Horizontal
• D. upward sloping to the right

Explanation: Economies of scale reduce long-run average cost as output expands, while diseconomies increase it beyond the efficient scale.

• A. 160; 270
• B. 10; 30
• C. 10; 3.33
• D. 30; 10

Explanation: The marginal product of the third worker is 90 − 80 = 10. Average product with three workers is 90/3 = 30, giving 30 for average product…

• A. decreasing average fixed costs.
• B. decreasing marginal costs.
• C. decreasing average variable costs.
• D. increasing marginal costs.

Explanation: With diminishing marginal returns, each additional unit of input produces less extra output.

• A. total fixed cost only.
• B. total variable costs only.
• C. both total variable costs and total costs.
• D. total costs only

Explanation: In the short run, total variable cost changes with output, and total cost changes because it equals total fixed cost plus total variable…

• A. participants in a contestable market are continuously faced with competition or the threat of competition because entry is cheap
• B. In a contestable market, economic profits cannot persist in the long run.
• C. In a contestable market forces will guarantee that the firms produce efficiently or be driven out of business
• D. For a market to be contestable, the product must be produced with a labor-intensive technology

Explanation: Contestability depends on easy entry and exit, often called hit-and-run competition, not on whether production is labour-intensive.

• A. it assumes that firms believe that their rivals will not respond to any price change they initiate
• B. it fails to explain how a firm arrived at its price and output decision initially
• C. The model cannot be tested empirically.
• D. Real-world pricing strategies are more simple than those assumed in this model

Explanation: The kinked-demand model explains why prices may remain rigid after a firm has set its price, but it does not explain how the original…

• A. equal to what a monopolist would choose in the same industry
• B. between that which would prevail under competition and that which a monopolist would choose in the same industry
• C. that would prevail under competition
• D. between that which would prevail under competition and that which a monopolistic competitor would choose in the same industry.

Explanation: A dominant price leader typically sets a price above the competitive level but below the monopoly level, so industry output lies between…

• A. a concentrated industry.
• B. a cartel
• C. price leadership
• D. an oligopoly.

Explanation: A cartel is a group of firms that cooperates by jointly deciding price, output, or market shares.

• A. decrease; decrease
• B. increase; decrease
• C. decrease; increase
• D. increase; increase

Explanation: Collusion restricts total output and raises the industry price much like a monopoly.

• A. monopolistically competitive
• B. oligopolistic
• C. perfectly competitive
• D. indeterminate from this information

Explanation: The firms' immediate imitation of a rival's advertising shows strategic interdependence, a defining feature of oligopoly.