Question

1. Which of the following is NOT characteristic of pure competition:

A. a large number of firms

B. perfectly elastic demand curve

C. standardized product

D. significant barriers to entry

2.Real wages are:

A. nominal wages adjusted for inflation

B. wages in manufacturing industries

C. wages earned by the most senior level employees

D. none of the above

3. Which of the following is NOT a determinant of demand.

A. taste or preferences

B. income

C. number of buyers

D. the costs of resources such as labor or raw materials.

4. The long-run supply curve in pure competition would be upward- sloping in:

A. an increasing costs industry

B. a decreasing cost industry

C. a constant cost industry

D. all of the above

5. A market economy will under allocate resources to products that:

A. generate spillover costs

B. are purchased mostly by poorer people

C. generate spill over benefits

D. are identified as public goods

Answer 1

1. Option D

• Significant barriers to entry is not the characteristic of pure competition.
• Markets characterised by pure competition lack barriers to entry or exit and new firms can freely enter and existing firms can freely move out of the market on making losses when there is pure competition.

2. Option A

• Real wages are the nominal wages that are adjusted for inflation or for changes in purchasing power.
• It is calculated as the nominal wage divided by the price level in the Economy.

3. Option D

• The cost of resources such as labour or raw materials is not a determinant of demand but income, taste or preferences, the number of buyers are the important determinants of demand.
• When income increases , the demand increases and vice versa, change in consumer tastes and preferences also leads to a change in demand,when there are more or less buyers to buy a good, the demand changes.

4.Option A

• The long run supply curve in pure competition is dependent on the cost of the industry. When the supply of goods and labour increases in an industry, the industry experiences increasing costs.
• This causes the long run supply curve of such industries to slope upward.

5. Option A

• Spill over costs are those costs incurred by the third parties who are not directly involved in the transaction.
• These spill over costs are caused due to the production of certain products which can lead to market failures in which the benefit of a good are spiller over to another party other than the customers or the sellers.
• Therefore the market Economy will under allocate resources to products that generate spill over costs.