Free Microeconomics MCQs with Answers

• A. Since price is above marginal cost surplus is redistributed from buyers to sellers
• B. monopolistically competitive firms earn economic profits in the long run
• C. monopolistically competitive firms produce beyond their efficient scale
• D. excess of the cost of production and this causes a deadweight loss.

Explanation: With price above marginal cost, some potential buyers value additional units more than the cost of producing them, but those units are not…

• A. a manual fracture of breakfast cereal
• B. a wholesaler of crude oil
• C. a restaurant
• D. a manufacturer of home heating and air conditioning

Explanation: A wholesaler of crude oil sells a largely standardized product to business buyers, so advertising creates little additional demand.

• A. breakfast
• B. cotton
• C. video games
• D. beer

Explanation: Cotton is a relatively homogeneous commodity with little scope for product differentiation, so it is generally associated with competitive…

• A. Advertising increases competition
• B. Advertising provides information to customers about prices, new products and location of retail outlets.
• C. Advertising provides a creative outlet for artists and writers
• D. Advertising provides new firms with the means to attract customers from existing firms.

Explanation: Economists defend advertising for its market effects, such as informing consumers, increasing competition, and helping new firms attract…

• A. all of these answers
• B. are useful even in socialist economics such as the former Soviet Union
• C. provide information about the quality of the product
• D. give firms incentive to maintain high quality

Explanation: Brand names can signal product quality and give firms a reputation to protect, encouraging consistent quality.

• A. monopolistically competitive firms charge prices equal to their marginal costs just like monopolists
• B. a monopolistically competitive firms faces a downward-sloping demand curve for its differentiated product and so does a monopolist
• C. monopolistically competitive markets have free entry and exit just like a monopolistic market
• D. monopolistically competitive firms produce beyond their efficient scale and so do monopolists

Explanation: The monopoly element is that each firm has some market power over its differentiated product and therefore faces a downward-sloping demand…

• A. there are too many firms in the market and market efficiency could be increased if firms exited the market
• B. the number of firms in the market is optimal and the market is efficient
• C. There are too few firms in the market and market efficiency could be be increased with additional entry
• D. The only way to improve efficiency in this market is for the government to regulate it like a natural monopoly.

Explanation: The business-stealing externality makes entry impose a cost on existing firms, while product variety benefits consumers.

• A. at the efficient scale and charge a price equal to marginal cost
• B. at the efficient scale and charge a price above marginal cost
• C. With excess capacity and charge a price above marginal cost
• D. With excess capacity and charge a price equal to marginal cost

Explanation: Product differentiation gives a monopolistically competitive firm a downward-sloping demand curve, so its profit-maximizing price exceeds…

• A. marginal revenue and then use the demand curve to determine the price consistent with this quantity
• B. average total cost and then use the supply curve to determine the price consistent with this quantity
• C. marginal revenue and then use the supply curve to determine the price consistent with this quantity
• D. average total cost and then use the demand curve to determine the price consistent with this quantity

Explanation: The firm first chooses output where marginal revenue equals marginal cost, which maximizes profit.

• A. the monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve
• B. the monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost
• C. The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run
• D. Both the monopolist and the monopolistic competitor operate at the efficient scale

Explanation: Both market structures allow price to exceed marginal cost, but free entry in monopolistic competition eliminates economic profit in the…

• A. free entry and exit
• B. long run economic profits
• C. many sellers
• D. differentiated products

Explanation: Monopolistic competition has many sellers, differentiated products, and relatively free entry and exit, but entry eventually eliminates…

• A. capital increasingly replaces labor
• B. technological change compensates for capital depletion
• C. costs rise, leaving less capital for future investment
• D. contingent valuation becomes critical

Explanation: The Limits to Growth argues that diminishing natural resources raise production costs and reduce the resources available for future…

• A. biological diversity is dominant in agricultural production
• B. the globe's water pollution affects plankton
• C. the earth's atmosphere traps infrared radiation
• D. climatic changes occur naturally in the forest

Explanation: The greenhouse effect occurs when atmospheric gases absorb and re-radiate outgoing infrared energy, trapping heat near the Earth's…

• A. rivalry and exclusion in consumption
• B. nonrivalry and nonexclusion in consumption
• C. rivalry but nonexclusion in production
• D. nonrivalry but exclusion in usage

Explanation: A public good is non-rival because one person's use does not reduce availability to others, and non-excludable because users cannot easily…

• A. population growth leads to rigid land rights
• B. participants will organize their transactions
• C. violence displacement erosion and poverty are minimized
• D. individuals overuse of the biosphere is curtailed

Explanation: Coase's theorem states that with clearly defined, enforceable property rights and negligible transaction costs, affected parties can…

• A. external economies
• B. negative externalities
• C. internal spillover
• D. social distortion

Explanation: Pollution imposes health and environmental costs on people who were not parties to the transaction, so it is a negative externality.

• A. capital accumulation
• B. common property resources
• C. non-producible
• D. output

Explanation: Land and naturally occurring resources are non-produced inputs because they are not created through the production process.

• A. includes genetic species ecosystem and functional diversities
• B. refers to diversifying earth's nonrenewable resource
• C. refers to reconstruction of tropical rainforests
• D. refers to biological effects on commercial plantation

Explanation: Biodiversity means variety at several biological levels, including genes, species, ecosystems, and functional roles.

• A. natural resource that cannot be reproduced in the future if we fail to preserve them now
• B. obtaining intellectual property rights for products
• C. natural extinction of various species in DCs
• D. industrialization replacing agriculture in LDCs

Explanation: Irreversibility means that destroying a natural asset or species may prevent its recovery or reproduction in the future.

• A. markets distortions
• B. defective economic policies
• C. inadequate property
• D. the expansion of capitalism

Explanation: Panayotou identifies market distortions, defective policies, and weak or inadequate property rights as sources of environmental…