Free Microeconomics MCQs with Answers

• 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.

• 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.