Free Microeconomics MCQs with Answers
1,742 Microeconomics MCQs from Economics, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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1,742 questions · page 87 of 88
- A. Large economies of scale over the relevant market range
- B. Many firms producing identical products
- C. Perfect information among all buyers
- D. Free entry and exit for competing firms
Explanation: A natural monopoly arises when one firm can supply the market at a lower average cost than several smaller firms.
Correct answer: Large economies of scale over the relevant market range- A. Its product is differentiated from competing products
- B. The government fixes its selling price
- C. It faces no potential competitors
- D. Its marginal cost is permanently zero
Explanation: Product differentiation gives a firm some control over its price and can attract loyal customers, allowing short-run economic profit.
Correct answer: Its product is differentiated from competing products- A. Interact only once and never meet again
- B. Can observe behaviour and punish future cheating
- C. Have no information about rivals' actions
- D. Always choose the lowest possible price independently
Explanation: Repeated interaction allows firms to reward cooperation and punish defection in later rounds.
Correct answer: Can observe behaviour and punish future cheating- A. Has better information before buying the policy
- B. Changes behaviour after being insured
- C. Cannot obtain insurance because of high risk
- D. Selects a policy with the lowest premium
Explanation: Moral hazard is a post-contract problem in which protection from loss changes the insured person's behaviour.
Correct answer: Changes behaviour after being insured- A. Make private marginal cost reflect external damage
- B. Raise output above the competitive level
- C. Remove all fixed costs from production
- D. Ensure that every firm earns positive profit
Explanation: A Pigouvian tax is set to reflect the marginal external cost imposed on others.
Correct answer: Make private marginal cost reflect external damage- A. Ratio of the consumer's income to wealth
- B. Ratio of the prices of the two goods
- C. Difference between the prices of the two goods
- D. Sum of the quantities of the two goods
Explanation: The budget line shows combinations that exhaust income, and its slope is determined by the relative prices of the two goods.
Correct answer: Ratio of the prices of the two goods- A. Necessity good
- B. Inferior good
- C. Luxury good
- D. Complementary good
Explanation: An income elasticity greater than one means demand rises by a larger percentage than income.
Correct answer: Luxury good1728. A firm's total product reaches its maximum level when the marginal product of the variable input is:
- A. At its highest positive value
- B. Equal to the average product
- C. Equal to zero
- D. Greater than total product
Explanation: Marginal product measures the change in total product caused by one additional unit of input.
Correct answer: Equal to zero- A. Wages paid to employees
- B. Rent paid to a landlord
- C. Electricity purchased by the firm
- D. Income forgone by the owner's resources
Explanation: Economic cost includes both explicit payments and implicit opportunity costs.
Correct answer: Income forgone by the owner's resources- A. Average wage paid to workers
- B. Market price of the firm's output
- C. Average product of labour
- D. Firm's total fixed cost
Explanation: The value of marginal product equals the extra physical output from one more worker multiplied by the output price.
Correct answer: Market price of the firm's output- A. Equal to average total cost
- B. Greater than average total cost
- C. Equal to total fixed cost
- D. Less than average variable cost
Explanation: When marginal cost is below average total cost, it pulls the average downward, and when it is above average total cost, it pushes the…
Correct answer: Equal to average total cost- A. Excess capacity and zero economic profit
- B. Allocative efficiency and maximum capacity
- C. Permanent losses and rising demand
- D. A horizontal market demand curve
Explanation: Free entry and exit remove economic profit in long-run monopolistic competition.
Correct answer: Excess capacity and zero economic profit- A. Higher because private benefits are overstated
- B. Lower because social benefits exceed private benefits
- C. Equal because external effects are fully priced
- D. Lower because private benefits exceed social benefits
Explanation: With a positive consumption externality, benefits to others are not fully reflected in the buyer's private benefit.
Correct answer: Lower because social benefits exceed private benefits- A. A lower price and a higher quantity
- B. A higher price and a lower quantity
- C. A higher price and a higher quantity
- D. An unchanged price and a lower quantity
Explanation: A decrease in supply shifts the supply curve to the left. With demand unchanged, buyers compete for fewer units, causing the equilibrium…
Correct answer: A higher price and a lower quantity- A. Worker's average product
- B. Market wage rate
- C. Firm's average fixed cost
- D. Total revenue from output
Explanation: The firm compares the extra revenue generated by a worker with the extra wage cost of hiring that worker.
Correct answer: Market wage rate- A. Equilibrium price rises, but quantity is uncertain
- B. Equilibrium quantity rises, but price is uncertain
- C. Both equilibrium price and quantity rise
- D. Both equilibrium price and quantity fall
Explanation: A rightward demand shift raises price and quantity, while a leftward supply shift raises price but lowers quantity.
Correct answer: Equilibrium price rises, but quantity is uncertain- A. Increase because quantity demanded rises
- B. Decrease because quantity rises proportionately less
- C. Remain unchanged because demand is inelastic
- D. First rise and then fall at every lower price
Explanation: With inelastic demand, the percentage increase in quantity demanded is smaller than the percentage decrease in price.
Correct answer: Decrease because quantity rises proportionately less- A. Greater than average product
- B. Less than average product
- C. Equal to average product
- D. Equal to total product
Explanation: The marginal product curve intersects the average product curve at the maximum point of average product.
Correct answer: Equal to average product1739. A Giffen good is a good for which a price increase leads to higher quantity demanded because the:
- A. Substitution effect is stronger than the income effect
- B. Positive income effect exceeds the substitution effect
- C. Negative income effect exceeds the substitution effect
- D. Demand curve shifts right after the price increase
Explanation: For a Giffen good, the negative income effect caused by the higher price is unusually strong and outweighs the substitution effect.
Correct answer: Negative income effect exceeds the substitution effect- A. Begins to experience diseconomies of scale
- B. Reaches the lowest point of long-run average cost
- C. Earns the highest possible short-run profit
- D. Has marginal cost equal to average fixed cost
Explanation: Minimum efficient scale is the lowest output at which long-run average cost is minimized.
Correct answer: Reaches the lowest point of long-run average cost