Question

5) In a perfectly competitive market the demand curve facing the INDIVIDUAL firm is:

		a. perfectly elastic
		b. perfectly inelastic
		c. relatively elastic
		d. relatively inelastic

6) Any profit maximizing firm will maximize its economic profit or minimize its economic loss where:

		a. the marginal revenue from the last unit produced equals its marginal cost
		b. the marginal cost from the last unit produced is greater than its marginal revenue
		c. the marginal revenue from the last unit produced equals the firm's total revenue
		d. the marginal cost from the last unit produced equals the firm's total cost

7) In monopolistic competition:

		a. there are many firms but not as many as in perfect competition
		b. each produces a differentiated product
		c. all firms incur a normal profit in the long-run
		d. all of the above

8) In an oligopoly

		a. It is in each firms interest to pursue their blind self-interest and ignore how their rivals react to their decisions
		b. in a successful oligopoly firms tacitly collude with each other to reduce industry output to the monopoly output and charge the monopoly price
		c. a price war breaks out when a collusive agreement is broken
		d. both (b) and (c).

9) In the kinked demand curve model of an oligopoly:

		a. all firms follow a price increase by one of the other firms
		b. all firms follow a price decrease by one of the other firms
		c. market price tends to remain stable due to the kink in the demand curve facing all producers
		d. both (b) and (c)

10) In monopolistic competition:

		a. in the long run all firms produce at lowest average cost
		b. all firms face a downward sloping demand curve because there is a close substitute for each others' products
		c. society gets the amount of each firm's product that they want
		d. society has less variety or product choices than in perfect competition

Answer 1

5. Option A

The demand curve for the individual firm is flat or perfectly elastic. This means that individual firm is price taker. The individual firm on perfect competition is small in size. The individual firm is unable to affect the market price irrespective of the fact how much output it produces. In Perfect Competition, the individual firm's equilibrium quantity of output will be completely determined by the amount of output the individual firm chooses to supply.

6. Option A

As per rule, the profit is maximized at that level of output where marginal revenue is equal to marginal cost. If MC < MR, then the firm can increase its total profit by increasing output. If MC > MR, then the firm can increase its total profit by decreasing output. Only if MC = MR is the total profit maximized.

7. Option D

In Monopolistic Competition firms make normal profits in the long run but could make supernormal profits in the short term. This is because in long run new firms enter the market as there are no barriers to entry and thus profits are reduced. There are many firms and they sell differentiated products. In Monopolistic Competition, a buyer can get a specific type of product only from one producer.

8. Option D

Oligopoly is a market structure in which a small number of interdependent firms compete. If any of the firms cheat, then a price war may ensue, lowering the profits of all firms. Firms in an oligopoly may collude to set a price or output level for a market in order to maximize industry profits. The colluding firms may act as a monopoly, reducing their individual output so that their collective output would equal that of a monopolist, allowing them to earn higher profits.

9.Option D

A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. Due to kink in demand curve firms in oligopoly have price stability. If one firm increase the price they will experience huge fall in Quantity Demanded and thus wil become uncompetitive. Also if firm decreases the price, then firm will gain market share and other firm will also reduce the price as they do not want to loose the market share.

10. Option B

A monopolistic competitor's demand curve slopes downward. This means that there is negative relationship between price of product and Quantity Demanded. In monopolistic competition a firm can have market power due to each competitor offering products that differ slightly. As a result the products are close Substitutes. Thus each firm has some control over the price charged. Monopolistically competitive firms will not necessarily lose all of their customers if they raise their price.