All Free Economics MCQs with Answers

• A. the efficient output level will be produced in the long run
• B. firms will only earn a normal profit
• C. firms realize all economies of scale
• D. firms will be producing at minimum average cost

Explanation: Free entry and exit drive economic profit to zero in both structures, leaving firms with normal profit in long-run equilibrium.

• A. marginal costs
• B. fixed costs
• C. variable costs
• D. advertising costs

Explanation: A loss-making firm should continue operating in the short run when price covers average variable cost, because revenue then pays variable…

• A. in monopolistic competition entry into the industry is blocked
• B. in monopolistic competition there are relatively few barriers to entry.
• C. in monopolistic competition, firms can differentiate their products
• D. in perfect competition firms can differentiate their products

Explanation: Both structures allow relatively easy entry, but monopolistic competition gives firms some market power through product differentiation.

• A. entry to it is costly but exit from it is costless
• B. entry to it and exit from it are both costless
• C. entry to it and exit from it are both costly
• D. entry to ti costless but exist from it is costly

Explanation: A perfectly contestable market has no significant barriers to entry or exit, so firms can enter when profits appear and leave without…

• A. a fixed cost monopoly
• B. a natural monopoly
• C. a government franchise monopoly
• D. a economies of scale monopoly

Explanation: A natural monopoly arises when economies of scale are so large that one firm can supply the entire market at a lower average cost than…

• A. lower than price for all units other than the first
• B. less than price at low levels of output and greater than price at high levels of output
• C. always greater than price
• D. always equal to price

Explanation: A monopolist faces a downward-sloping demand curve, so reducing price to sell an additional unit also lowers the price received on earlier…

• A. approximately one-half
• B. smaller than
• C. larger than
• D. approximately equal to

Explanation: For a relatively risk-free business, the normal return should be close to the return on an equally safe government bond.

• A. normal profit is zero
• B. total costs exceed total revenue
• C. total costs exceed normal profit
• D. the firm is earning are economic profit

Explanation: A return above the minimum needed to keep the business operating includes economic profit, which is revenue remaining after both explicit…

• A. all firms must make economic profits.
• B. there are no fixed factors of production
• C. a firm can vary all inputs, but it cannot change the mix of inputs it uses.
• D. a firm can shut down, but it cannot exit the industry

Explanation: In the long run, no input is fixed, so the firm can adjust all factors of production and its scale of operation.

• A. a period where the law of diminishing returns does not hold.
• B. at least one fixed factor of production and firms neither leaving nor entering the industry
• C. all inputs being variable
• D. no variable inputs - that is all of the factors of production are fixed

Explanation: The short run is the period in which at least one factor of production remains fixed, even though other inputs can vary.

• A. Produces less output, charges higher prices and earns economic profits.
• B. Produces less output, charges lower prices and earns only a normal profit
• C. produces more output, charges higher prices and earns economics profits
• D. produces less output, charges lower prices and earns economic profits

Explanation: Compared with perfect competition, a monopoly restricts output and charges a higher price because it faces the market demand curve.

• A. more; more
• B. fewer; less
• C. more; less
• D. no; infinite

Explanation: More substitutes make consumers more responsive to a price increase, so the monopolist has less power to raise price.

• A. how much to spend on advertising?
• B. how much of each input to use?
• C. What price to charge
• D. none of these

Explanation: A perfectly competitive firm is a price taker, so it cannot choose the market price or rely on advertising to differentiate its product.

• A. the additional profit the firms earns when it sells an additional unit of output
• B. the difference between total revenue and total cost
• C. The ratio of total revenue to quantity.
• D. the added revenue that a firm takes in when it increases output by one additional unit.

Explanation: Marginal revenue is the extra revenue obtained from selling one additional unit of output.

• A. Dq/DTFC
• B. TFC - q
• C. TFC/q
• D. q/TFC

Explanation: Average fixed cost spreads total fixed cost over the units produced, so AFC equals total fixed cost divided by quantity, or TFC/q.

• A. marginal rate of factor substitution
• B. marginal rate of substitution
• C. law of diminishing marginal returns.
• D. marginal rate of production

Explanation: The marginal rate of factor substitution measures how much capital can replace labour while output remains unchanged, along an isoquant.

• A. slope up to the right
• B. are U-shaped
• C. slope down to the right
• D. slope down to the right and then level off.

Explanation: Empirical evidence often finds long-run cost curves falling initially because of economies of scale and then becoming nearly flat as scale…

• A. average costs to remain constant
• B. average costs to decrease
• C. average costs to increase
• D. marginal costs to increase

Explanation: A 15% increase in every input producing a 15% increase in output indicates constant returns to scale.

• A. If TP is declining, then AP is negative
• B. If AP = MP, then total product is at a maximum.
• C. If AP exceeds MP then AP is falling
• D. If AP is at a maximum, then MP is also,

Explanation: When marginal product is below average product, the new unit pulls the average down, so AP is falling.

• A. at least one fixed factor of production and firms neither leaving nor entering the industry.
• B. no variable inputs - that is, all of the factors of production are fixed
• C. all inputs being variable
• D. a period where the law of diminishing returns does not hold

Explanation: In the short run, at least one factor of production is fixed while other inputs may vary; firms also generally cannot freely enter or…