Question 1

1. Economists consider the model of perfect competition useful because:Answer

   		it is a standard for analyzing producer and consumer benefits.
   		its assumptions exactly fit into actual conditions in some markets.
   		its assumptions can be easily replaced with realistic ones.
   		it is a standard for analyzing consumer choices.

2 points

Question 2

1. Suppose the cost of raw materials used by the cotton industry rises to a larger extent compared to the increase in demand in the market. Which of the following situations will arise?Answer

   		The incidence of the higher cost will fall completely on the consumers.
   		The incidence of the higher cost will fall completely on the high cost firms.
   		The incidence of the higher cost will fall completely on the low cost firms.
   		The incidence of the higher cost will fall partially on the consumers and partially on the sellers.

2 points

Question 3

1. Refer to Table 5-1. Suppose initially 3,200 units are demanded at a price of $3 per unit. What will be the quantity of output supplied by each type of firm in the market? The following table gives the average cost of production for three different categories of firms producing the same product.Table 5-1

   Type of firms	No. of firms	Average Cost per unit	Equilibrium output
   A	350	$3	10 units
   B	400	$6	10 units
   C	550	$10	10 units

   Answer

   		Type A and Type B will jointly supply 3,000 units while Type C will supply 200 units.
   		Type A firms will supply 3,000 units, while the remaining 200 units will be supplied by Type B.
   		Type A firms will supply the entire 3,200 units, while Type B and Type C firms will not enter the market.
   		Type A and Type B will each supply 1,600 units, Type C will not enter the market.

2 points

Question 4

1. If the long-run market supply curve is perfectly elastic, a decrease in variable cost will:Answer

   		shift the supply curve upward to a higher market-clearing price level.
   		shift the supply curve downward to a lower market-clearing price level.
   		shift the supply curve to the right to a higher market-clearing output.
   		shift the supply curve to the left to a lower market-clearing output.

2 points

Question 5

1. Which of the following commodities have a high short-run own-price elasticity of supply?Answer

   		Livestock
   		Petroleum
   		Food crops
   		Diamonds

2 points

Question 6

1. Refer to Figure 5-1. Which of the following points represents the long-run equilibrium price-output combination? In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition. Figure 5-1Answer

   		E0
   		E3
   		E1
   		E2

2 points

Question 7

1. Assume that recent oil exploration coupled with a fall in demand reduced petroleum imports of a nation to zero. We can expect:Answer

   		the domestic price of petroleum to fall below the world price.
   		the world price of petroleum to fall to equal the domestic price.
   		petroleum exported by the domestic producers to increase.
   		petroleum exported by the domestic producers to decrease.

2 points

Question 8

1. Which of the following conditions define a perfectly competitive market?Answer

   		The transaction costs are very high.
   		Information is available to participants at a high cost.
   		The product is homogenous.
   		There are limited number of buyers and sellers.

2 points

Question 9

1. The short-run supply curve of a perfectly competitive industry with firms having identical costs is:Answer

   		a horizontal line at the market price.
   		a vertical line at the equilibrium output.
   		an upward rising curve.
   		a downward sloping step function.

2 points

Question 10

1. Assume that the world price of Good A is $8 per unit while its domestic price is $6, and the marginal cost incurred by domestic producers for producing one unit of Good A is $5. If the government imposes a tax of $3 per unit on domestic producers, which of the following situations will be observed?Answer

   		The tax will increase the price of Good A in the domestic market.
   		The tax will increase the world price of Good A.
   		The tax will decrease the profit earned by domestic producers.
   		The tax will decrease the price of Good A in the domestic market.

2 points

Question 11

1. Assume that the government of a nation prohibits producers from extracting crude oil from some domestic oil fields. Which of the following will be witnessed in the market for crude oil?Answer

   		The domestic and world price of crude oil would remain unaffected.
   		The domestic price of crude oil would increase.
   		Oil import from the world market would decline.
   		The world price of crude oil would increase.

2 points

Question 12

1. Assume that the world price of Commodity X is $9 per unit while its domestic price is $8, and the marginal cost of production is $6 per unit. If the government imposes a price ceiling of $7 on domestic output:Answer

   		the import of Commodity X from the world market would stop.
   		the world price of Commodity X would decline.
   		a surplus of Commodity X would accumulate in the domestic market.
   		a shortage of Commodity X would be observed in the domestic market.

2 points

Question 13

1. Which of the following situations resulted from the North American Free Trade Agreement (NAFTA)?Answer

   		The cost of tortillas in Mexico decreased.
   		Corn export to the U.S. from Mexico declined.
   		Corn export to the U.S. from Mexico increased.
   		The cost of tortillas in the U.S. increased.

2 points

Question 14

1. A set of producers is competitive if:Answer

   		the good produced by one can be differentiated from the other.
   		each supplies a complement of what the others produce.
   		each supplies a substitute for what the others produce.
   		the good produced by one can be used as an input by other producers.

2 points

Question 15

1. In a perfectly competitive market, the demand curve faced by each firm is:Answer

   		highly inelastic.
   		perfectly elastic.
   		perfectly inelastic.
   		less elastic.

2 points

Question 16

1. Refer to Figure 6-4. What price will the monopolist charge when its marginal cost shifts from C to C’? The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.Figure 6-4Answer

   		$20
   		$16
   		$15
   		$9

2 points

Question 17

1. The practice of charging different prices on the basis of varying customer preferences is known as:Answer

   		arbitrage.
   		discounting.
   		price discrimination.
   		rationing.

2 points

Question 18

1. In the small country of Talisman, the liquor industry is monopolized by a single producer Best Drinks Inc. Best Drinks charges high end customers like 5-star hotels a much higher price than it charges local pubs. Identify the correct statement from the following.Answer

   		Best Drinks is aware of the variations in the valuation of its products by different consumer segments.
   		Best Drinks minimizes cost by charging different consumers different prices.
   		Charging different prices for different consumers increases consumer surplus.
   		Best Drinks charges different prices because its sole objective is sales maximization.

2 points

Question 19

1. Refer to Figure 6-3. What is the monopolist’s revenue when he incurs a marginal cost of $2 per unit? The following figure shows the demand curve and marginal revenue curve for a monopolist who incurs a marginal cost of $2 per unit.Figure 6-3Answer

   		$99
   		$88
   		$96
   		$72

2 points

Question 20

1. Refer to Figure 6-4. Calculate the profit earned by the monopolist when the marginal cost of production is $15 per unit. The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist.Figure 6-4Answer

   		$20
   		$35
   		$25
   		$45

2 points

Question 21

1. You and your friend go out shopping for television sets for your respective apartments. You find the one you want to buy and pay extra money to have it delivered during the weekend. Your friend is unwilling to pay extra and will wait for the television to be delivered as per the store’s usual practice. Which of the following conclusions can be drawn from this information?Answer

   		You have a higher price elasticity of demand for the TV than your friend.
   		Your opportunity cost of time is higher and than your friend’s.
   		Your friend’s opportunity cost of time is higher than your’s.
   		Both of you have the same price elasticity of demand for the TV.

2 points

Question 22

1. Which of the following statements is true regarding the difference between a monopolist and a perfectly competitive firm?Answer

   		Competitive price is higher than the price charged by a monopolist.
   		Supply of output is higher in case of a monopoly than if the market is competitive.
   		A monopoly can choose its price while a competitive firm is a price taker.
   		A market characterized by competition has a higher deadweight loss.

2 points

Question 23

1. Refer to Figure 6-1. Which of the following conclusions can be drawn from this figure? The following figure shows the demand, marginal revenue, and marginal cost curves for a profit maximizing monopolist.Figure 6-1Answer

   		The monopolist produces at the point where marginal cost is zero.
   		The monopolist incurs a fixed marginal cost of OC’.
   		The monopolist charges a price of OP’ and total revenue is OP’D’Q’.
   		The consumer surplus enjoyed by customers is PC’D”.

2 points

Question 24

1. The demand curve faced by a perfectly competitive firm is:Answer

   		downward sloping.
   		the same as the market demand curve.
   		horizontal.
   		perfectly inelastic.

2 points

Question 25

1. The peak of the total revenue curve is achieved at the point where:Answer

   		marginal revenue is the highest.
   		price is the highest.
   		marginal revenue is zero.
   		marginal cost is zero.

2 points

Question 26

1. Tying products can be a profitable strategy for facilitating price discrimination only when:Answer

   		the demands for the goods are unrelated.
   		the supply of one of the tied products is low.
   		the demands for the goods are related.
   		the market for one of the goods is competitive.

2 points

Question 27

1. Refer to Table 6-1. Identify the profit maximizing production level for this monopolist. The following table shows the price and revenue for a monopolist at different levels of production. The monopolist incurs no marginal cost of production.Table 6-1Answer

   		2 units
   		3 units
   		4 units
   		5 units

2 points

Question 28

1. Refer to Figure 6-2. What would be the consumer surplus if this remained a perfectly competitive market? A group of firms in competitive market produced 20 units of a good when the market price was $2. They incurred no marginal cost. Eventually they realized the benefits they could get by teaming up and acting as a monopolist. The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist.Figure 6-2Answer

   		$320
   		$160
   		$280
   		$140

2 points

Question 29

1. Which of the following is a possible explanation for the fall in prices after an industry is monopolized by combining a group of competitors?Answer

   		A monopolist faces a downward sloping demand curve. Hence, output expansion leads to lower prices.
   		A reduction in price increases producer surplus. Hence a monopolist may reduce the price of his product.
   		A monopolist may reduce prices to make it difficult for other firms to compete.
   		A monopolist can increase profits by reducing price when its cost of production declines due to increased size of the new firm. The fall in price is less than the decline in cost.

2 points

Question 30

1. The total revenue curve of a monopolist is:Answer

   		U-shaped.
   		inverted U-shaped.
   		upward sloping.
   		downward sloping.

2 points