Forms Of Market And Its Equilibrium – CS Foundation Economics Notes
Market, as defined by Stonier and Hague, means ‘ any organization whereby buyers and sellers of a good are kept in close touch with each other’ Market involves buyers, sellers, price, and contact. So for a perfect market firstly there should be some buyers for that product and sellers who are selling that product. Further, the price of the product should be such that is acceptable to buyers and lastly, buyers and sellers should be in contact with each other. Thus market can be defined as a process by which the prices of goods and services are established.
Firm and Industry are the two parts of the market. A firm is an individual unit. The decisions taken in a firm may be of a single person or of many persons whereas Industry is a set of firms. Thus firms either of the same business or of different businesses collectively form an industry.
When economists analyze the production decisions of a firm, they take into account the structure of the market in which the firm is operating. The structure of the market is determined by four different market characteristics: the number and size of the firms in the market, the ease with which firms may enter and exit the market, the degree to which firms’ products are differentiated, and the amount of information available to both buyers and sellers regarding prices, etc. The market can be in various forms
- Perfect Competition
- Monopoly
- Monopolistic competition
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at a predefined price.
Characteristic features are
- It is a hypothetical market where every seller takes the market price as its own price.
- There must be many firms in the market, none of which is large in terms of its sales.
- Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
- There are many buyers and sellers, so each buyer or seller is a price taker, all sellers supply the same, identical product.
- Firms should be able to enter and exit the market easily.
- Each firm in the market produces and sells a nondifferentiated or homogeneous product
- Each unit of input, such as units of labor, is also homogeneous.
- There is no need for government regulation, except to make markets more competitive.
- It is impossible for a single firm to affect market price.
- All firms and consumers in the market have complete information about prices, product quality, and production techniques.
- As there are large sellers so there are large buyers
In perfect competition market prices can not be changed only output can be changed. On this basis, four equilibrium stages are defined.
- Short-run equilibrium in a competitive firm
- Short-run equilibrium in a competitive industry
- Long-run equilibrium in a competitive firm
- Long-run equilibrium in a competitive industry
1. Short-run equilibrium in a competitive firm
Under perfect competition, firms can make super-normal profits or losses depending on the given market price.
- if the firm’s losses get too big in the short-run (i.e. AR < AVC) then it will have to shut down
- In the short run when the market price exceeds the average total cost at the best level of output a firm earns a supernormal profit.
- In a competitive firm, equilibrium is reached when TR is less than TC or where MR=MC
- Taking TR, the TC concept equilibrium point on the graph is that point where the distance between TR and TC curve is maximum.
- Since perfect competition is price taker so demand curve is straight and begins from zero and is a positive curve
- The distance between TR and TC at the equilibrium point on the graph is the maximum profit a firm can get.
- In the short run, a firm has to incur fixed costs even if the production is zero so thus total cost curve starts from Y-axis and is a positive curve.
- The short-run average cost curve is U-shaped.
- In the short-run MC -MR approach is used to reach equilibrium,
- In this supply, the curve lies below the MC curve but is upward sloping.
- Actual equilibrium is the point formed by the intersection of supply and demand curves
- Super-normal profits attract new entrants, which shifts the demand curve for existing firms to the left
2. Short-run equilibrium in a competitive industry
- The equilibrium market price is determined by the interaction between market demand and market supply.
- In the case of the firm the total sale of the firm can be increased but in industry total sales can not be increased which shows that the Demand curve is not negatively sloped
- Total sales can only be changed when the prices of an industry as a whole are changed
- In the short run, the demand curve will show change only when the price of the product falls down which will depict that the demand curve is negatively sloped. Thus whenever the demand curve is negatively sloped it shows that there has been a fall in price
- The place of the interaction of the demand curve and supply curve is the equilibrium point.
- There is never a non-equilibrium position
- Whenever there is a non-equilibrium position it automatically corrects it to the equilibrium position
3. Long-run equilibrium in a competitive firm
- Here the firm can change all its inputs thus there is no fixed cost and the average fixed cost curve disappears.
- Average total cost curve is the average cost curve
- In the long run, every competitive firm will earn a normal profit
- In the long-run firms are attracted into the industry if the incumbent firms are making supernormal profits.
- There are no barriers to entry and exit
- There is perfect knowledge.
- The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down the price until the point where all super-normal profits are exhausted.
- If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises the price and enables those left in the market to derive normal profits.
- For a firm to reach equilibrium MC curve should intersect the MR curve from below and average revenue should be greater than the average cost.
- But when AR>AC then the equilibrium is not reached as the firm is making an abnormal profit.
- Thus to reach equilibrium AC=AR=MC=MR
4. Long-run equilibrium in a competitive industry
- In the long run, industry is in equilibrium when all competitive firms are earning normal profit.
- In the long-run demand curve is negative
- One of the features of the long run is that when the industry is in equilibrium then firms are also in equilibrium
- The change in the average cost of all firms leads to three situations
5. Constant returns
Here average cost of the industry remains constant. The demand curve is downward sloping and the supply curve is parallel to X-axis. When the demand changes there is a shifting of the demand curve but prices do not change and only output changes.
6. Diminishing return
When an existing industry increases its output then the average cost of production also increases. This shows that when there is an increase in production it leads to diseconomies thus a new firm that enters the market faces higher average product cost. The demand curve of the industry is upward sloping. When there is an increase in demand the price as well as quantity of output required increases. Equilibrium is reached at the intersection of demand and supply curves
7. Increasing returns
This theory says that as the industry expands, the average cost of production declines. Thus in this case demand curve and supply curve are both negatively sloped. When the production increases there is a fall in cost price
8. Monopoly
A monopoly is simply a market with only one seller and no close substitutes for that seller’s product. Technically, the term “monopoly” is supposed to refer to the market itself, but it’s become common for the single seller in the market to also be referred to as a monopoly. Characteristic features
- Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
- Products manufactured by the firm are such that they have no substitute which could be because of some technology or inputs etc. Which is confined to that particular firm.
- Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
- Sometimes markets become monopolies simply because it is more cost-effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
- In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward-sloping.
- Production occurs where marginal cost and marginal revenue intersect.
- They are price makers,
- Produce unique products
- The profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve. Short-run equilibrium of a monopolist – here in the short-run all the variables leading to production can not be changed.
Thus there is a fixed cost as well as a variable cost. To reach equilibrium MC should cut MR curve from below as well as AR>= AC
Long-run equilibrium of a monopolist – Here in contrast to short-run all the inputs can be varied thus equilibrium is determined by marginal cost (MC) and average cost (AC). For equilibrium two conditions should be satisfied firstly MC should cut MR from below and AR should be equal to AC.
9. Discriminating monopoly
A single entity that charges different prices, which are not associated with the cost to provide the product or service, for its products or services for different consumers. A discriminating monopoly, by using its monopolistic position, can do this as long as there are differences in price elasticity of demand between consumers or markets, and barriers to prevent consumers from making an arbitrage profit by selling among themselves. By catering to each type of customer the monopoly makes more profit.
10. Monopolistic competition
The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality, neither monopoly nor competitive market exists. The real market that is seen is monopolist competition.
Characteristic features are
• This market is monopolistic as each firm is producing a particular kind of product that is different from other products in context to shape, color, etc. And has its own individual price.
• This market can be said competitive as there are a large number of sellers as well as products supplied by sellers have close substitutes which give choice to the consumer making the market competitive.
• Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
• Knowledge is widely spread between participants, but it is unlikely to be perfect.
• There are a large number of buyers and sellers in the monopolistic market
• The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision-making.
• In a monopolistic competition firms spend a lot of money on advertisement to attract the consumers
• As the product of each firm is different from each other in regard to quality, price, etc. Thus a buyer can make a difference and decide which product it wants to purchase.
• There is the freedom to enter or leave the market, as there are no major barriers to entry or exit.
• In monopolistic competition, the new firm can easily enter into the market because the size of the firms is small in the market.
• In-efficient firms also live in the market side by side.
• Sometimes advertising expenses are done not just to increase the demand for their own product but to neutralize the bad publicity.
• Average selling cost curve is U-shaped but after assigning sales budget its shape changes to a rectangular hyperbola.
• The demand curve of the firm is negatively slopped when there are many firms that are producing a similar commodity, the demand for the product of each firm is elastic:
• A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:
- Physical product differentiation
- Marketing differentiation
- Human capital differentiation
- Differentiation through distribution
• Firms are price makers and are faced with a downward-sloping demand curve.
• monopolistically competitive firms are assumed to be profit maximizers because firms tend to be small with entrepreneurs actively involved in managing the business.
• There are two conditions in monopolistic competition regarding reaching equilibrium.
• When the change of price of the firm is associated with the rivalry firm. In this case demand curve is downward sloping and much steeper.
• When the change of price of the firm is not associated with the rivalry firm. In this case, the demand curve is downward sloping but less steep. Monopolistic competition in the short run At profit maximization, MC intersects MR from below. AR and MR are having negative slopes.
11. Monopolistic competition in the long run
- There are no fixed costs and all the variables can be changed. When deciding on price firm has to check that it also has to keep in mind about rivals.
- Firms are not allowed to have supernormal profits however new firms can enter and exit any time. In this kind of market firms always run below their optimum capacity.
- In equilibrium, the demand curve will be tangent to the firm’s long-run average cost.
12. The advantages of monopolistic competition can bring the following advantages:
- Companies functioning in monopolistic competition market have to differentiate their products from those of their competitors which creates choice for consumers
- Most local companies under monopolistic competitive market enjoy some level of liberty for the price of their product
- Monopolistic competition is characterized by few barriers to market entry; it is easy for new firms to enter and leave such markets without facing the many barriers This allows creativity and an active business environment with ample competitors.
13. The disadvantages of monopolistic competition
- It fails to recognize that the consumer is dependent on the retailer for deciding about which product is more beneficial as he himself is not aware of the technical qualities of the product.
- Some differentiation does not create utility but generates unnecessary waste, such as excess packaging.
- Advertising may also be considered wasteful, though most are informative rather than persuasive.
- Theory fails to account for the determination of equilibrium quantities and prices of goods like raw materials and other inputs.
Forms Of Market And Its Equilibrium MCQ Questions
Question 1.
A market is dependent on basic component
a. Firm
b. Industry
c. Price
d. All of the above
Answer:
c. Price
Question 2.
Perfect competition market is
a. Most prominent market
b. Hypothetical market
c. Resourceful Market
d. All of the above
Answer:
b. Hypothetical market
Question 3.
In perfect market Competition the price is Not dependent on
a. Transportation cost
b. Products of individual firms
c. Both a & b
d. None of the above
Answer:
c. Both a & b
Question 4.
In a long run equilibrium of a competitive firm
a. fixed cost vanishes
b. Average fixed cost curve vanishes
c. Average total cost are present
d. All of the above
Answer:
d. All of the above
Question 5.
In a long run equilibrium of a competitive firm
a. AR<AC
b. AR>AC
c. AR__>AC
d. AR = LRAC
Answer:
c. AR__>AC
Question 6.
In a perfect competitive firm
a. it can sell as much as it wants at unchanged prices
b. It has no market power
c. It is a price taker
d. All of the above
Answer:
d. All of the above
Question 7.
Monopolistic competition is
a. Real form of market
b. Hypothetical market
c. Neither a nor b
d. Both a & b
Answer:
a. Real form of market
Question 8.
Monopolistic competition market form is
a. A differential product is produced
b. seller has individual rights over his products
c. Heterogeneous
d. All of the above
Answer:
d. All of the above
Question 9.
There are a large number of demand curve is not elastic in nature. It is _________ type of market
a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. All of the above
Answer:
c. Monopolistic competition
Question 10.
Which of the following is Not the feature of monopoly form of market?
a. Not elastic in nature
b. Legal barriers
c. Size of the market is too small
d. All of the above
Answer:
a. Not elastic in nature
Question 11.
To induce new buyers in the market in a monopolistic form of market
a. Reduce the price of the product
b. Increase the price of the product
c. reduces the production of the product
d. Increase the production of the product
Answer:
a. Reduce the price of the product
Question 12.
Price discrimination of second degree is
a. monopolist selling his output in batches and charging a separate price for each batch
b. monopolist charging price for each unit
c. monopolist selling his output as per the different categories of buyers
d. None of the above
Answer:
a. monopolist selling his output in batches and charging a separate prices for each batch
Question 13.
In a free-market economy, the optimal quality of goods and services is determined by
a. customers.
b. Workers.
c. Firms.
d. Government
Answer:
a. customers.
Question 14.
The elements which decide the market structure are
a. Number and size distribution of firms
b. Entry conditions
c. Production priorities
d. Both a& b
Answer:
d. Both a& b
Question 15.
When a price floor is above the equilibrium price
a. quantity demanded will exceed quantity supplied.
b. Quantity supplied will exceed quantity demanded
c. The market will be in equilibrium.
d. This is a trick question because price floors generally exist below the equilibrium price
Answer:
b. Quantity supplied will exceed quantity demanded
Question 16.
A firm operating under conditions of perfect conditions will find that its
a. marginal costs are more than its average costs
b. average revenues are the same as its margins revenues
c. marginal costs are below its average revenue
d. marginal revenues will be higher than its available revenues
Answer:
b. average revenues are the same as its margins revenues
Question 17.
The monopolistic competition differs from perfect competition primarily because
a. in monopolistic competition, firms can differentiate their products
b. in perfect competition, firms can differentiate their products.
c. In monopolistic competition, the industry produces all of the market supply of goods.
d. In Perfect competition, the exits are too less
Answer:
a. in monopolistic competition, firms can differentiate their products
Question 18.
In monopolistic competition, firms achieve some degree of market power
a. By virtue of size alone
b. By producing differentiated products.
c. Many interdependent industries produce a homogenous product
d. Because of barriers to exit from the industry
Answer:
b. By producing differentiated products.
Question 19.
A monopolistically competitive firm will produce as long as the price that the firm charges is sufficient to cover
a. Product costs
b. Marginal costs
c. Average costs
d. Variable costs
Answer:
d. Variable costs
Question 20.
A firm in a monopolistically competitive industry
a. Can sell an infinite amount of output at the market-determined price
b. Must lower price to sell more output
c. Must raise to sell more output
d. Is dependent on the oligopolistic firm
Answer:
b. Must lower price to sell more output
Question 21.
Short-run curves of monopolistic Firms are
a. similar to the short-run curves of perfect competition
b. Different to the short-run curves of perfect competition
c. similar to the long, run curves of perfect competition
d. None of the above
Answer:
a. similar to the short-run curves of perfect competition
Question 22.
In short-run equilibrium of a monopolistic, a plant will be shut down only if
a. Loss is equal to its fixed cost
b. Loss is more than its fixed cost
c. Profit is more than its fixed cost
d. all of the above
Answer:
b. Loss is more than its fixed cost
Question 23.
The demand curve in the long run Equilibrium should be
a. Tangent to AC curve
b. Must lie to the right of the AC curve and intersect it
c. Must lie to the right of the AC curve and intersect it twice
d. Both a & c
Answer:
c. Must lie to the right of the AC curve and intersect it twice
Question 24.
In long run, monopolistic competitive firms earn profits only when
a. The efficient output level will be produced in the long run.
b. They earn zero economic profit
c. Firms will only earn a normal profit==
d. Firms realize all economies of scale
Answer:
c. Firms will only earn a normal profit==
Question 25.
which of the following statements best describes the outcome under monopolistic competition?
a. In monopolistic competition, there are too few firms and each firm gets a price leadership in the market.
b. In monopolistic competition, there are too many firms and each firm produces a slightly different product at a scale that is less than optimal.
c. In monopolistic competition, there is the correct number of firms and each firm produces a slightly different product at an optimal scale.
d. In monopolistic competitions, there are too many firms and each firm produces a slightly different product at the optimal scale.
Answer:
b. In monopolistic competition, there are too many firms and each firm produces a slightly different product at a scale that is less than optimal.
Question 26.
The situation in which buyers are able to affect the price of a good is referred to as _________ power.
a. Monopoly
b. Purchasing
c. Monophony
d. Countervailing
Answer:
c. Monophony
Question 27.
If a monopolist sets her output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:
a. negative.
b. Positive
c. Zero
d. Indeterminate from the given information
Answer:
b. Positive
Question 28.
The efficient level of output can be achieved under perfect competition as
a. government regulates the output level that must be produced
b. firms earn only normal profit in the long run
c. firms can earn an economic profit in the long run
d. price equals marginal cost
Answer:
d. price equals marginal cost
Question 29.
The characteristic feature of perfect competition is
a. large number of firms; heterogeneous product; easy entry and exit
b. a large number of firms homogeneous product; incomplete information
c. a large number of firms; homogeneous product; easy entry and exist
d. few firms; homogenous product; difficult entry and exit
Answer:
c. large number of firms; homogeneous product; easy entry and exist
Question 30.
In perfectly competitive industries firms are termed as
a. price takers
b. Price creators
c. Price makers
d. Price setters
Answer:
a. price takers
Question 31.
Select that is not a valid option for a perfectly competitive firm
a. Zero long-run profit
b. decreasing its output
c. increasing its price ==
d. increasing its resources
Answer:
c. increasing its price ==
Question 32.
Select the most appropriate option for price discrimination in the monopoly form of market
a. Ignorance regarding the cost of product
b. legal barrier leading to monopoly form of market
c. The size of the market of the monopolistic items is too small
d. Hurdles in the entry to this market
Answer:
a. Ignorance regarding the cost of the product
Question 33.
Which of the market structures will have only normal profits in long term?
a. Monopolistic competition
b. Perfect competition
c. Monopoly
d. productive efficiency
Answer:
a. Monopolistic competition
Question 34.
In a firm if the price a firm receives for its product is equal to the marginal cost of producing that product, we can say the firm is
a. always earning an long term profit
b. always productive and economically efficient
c. always allocatively efficient
d. always experiencing an economic loss
Answer:
c. always allocatively efficient
Question 35.
The characteristic feature of a perfectly competitive firm should be
a. Earn an economic profit
b. Earn a zero economic profit in short run
c. Produce the quantity where its marginal cost equals its marginal revenue
d. produce at the productively efficient level of output
Answer:
c. Produce the quantity where its marginal cost equals its marginal revenue
Question 36.
Non technical product differentiation is
a. Performance
b. Packing
c. size
d. Both b& c
Answer:
d. Both b& c
Question 37.
Demand curve of each firm in monopolistic competition is
a. Downward sloping
b. Parallel to X axis
c. Corresponds to industry as a whole
d. both a & c
Answer:
d. both a & c
Question 38.
Selling expenses in monopolistic include
a. Advertisement
b. discounts
c. Both a & b
d. Input Cost
Answer:
c. Both a & b
Question 39.
A firm operating under monopolistic competition is able to make a choice between
a. Product differentiation
b. selling costs
c. Product quality
d. All of the above
Answer:
d. All of the above
Question 40.
If a consumer is paying higher price for a given product and for a given price they are getting inferior product. It describes ____________ form of market
a. Long run equilibrium under monopolistic competition
b. Short run equilibrium under monopolistic competition
c. long run equilibrium under monopolistic
d. short run equilibrium under monopolistic
Answer:
a. Long run equilibrium under monopolistic competition
Question 41.
The long run equilibrium under monopolistic competition has
a. free exit and entry of forms
b. Competition among firms
c. Both a & b
d. None of the above
Answer:
c. Both a & b
Question 42.
Invariably if a typical firm in a perfectly competitive market is experiencing an average revenue that is greater than its average cost.
a. price will increase.
b. Other firms will enter the market
c. Other firms will leave the market
d. Demand will decrease
Answer:
b. Other firms will enter the market
Question 43.
When the demand of the product increase and product price increases
a. the marginal revenue product curve will shift to the right.
b. The marginal revenue product curve will shift to the left
c. The firm will move up the marginal revenue product curve and hire fewer units of the input.
d. The firm will move down the marginal revenue product curve and hire more units of the input
Answer:
a. the marginal revenue product curve will shift to the right.
Question 44.
Short-run market supply curve is
a. the horizontal summation of ach firms’ short- run supply curve.
b. The vertical summation of each firms short- run supply curve
c. The horizontal summation of each firm’s short-run average cost curve.
d. The vertical summation of each firms short- run average cost curve
Answer:
a. the horizontal summation of ach firms’ short- run supply curve.
Question 45.
Recently India has experienced a large growth in population. As a result, the demand curve for telephone service in India
a. has shifted to the right.
b. Has shifted to the left
c. Has shifted down
d. None of the given options
Answer:
a. has shifted to the right.
Question 46.
Which of the following is true for ? The law of diminishing returns applies to:
a. the short run only
b. the long run only
c. both the short and the long run
d. neither the short nor the long run
Answer:
c. both the short and the long run
Question 47.
The feature of a monopolistic firm is
a. cannot determine the price, which is determined by consumer demand.
b. Will never sell a product whose demand is inelastic at the quantity sold
c. Cannot sell additional quantity unless it raises the prices on each unit
d. None of the above
Answer:
b. Will never sell a product whose demand is inelastic at the quantity sold
Question 48.
A Monopolistic competition is
a. cut-throat price competition
b. product differentiation
c explicit consideration at firm level of the feedback effects of other firms pricing decisions.
d. High profit margins.
Answer:
b. product differentiation
Question 49.
In monopolistic competition a firm
a. earns positive monopoly profits because each sells differentiated product
b. earns positive oligopoly profits because each firm sells a differentiated product.
c. Earns zero economic profits because it is in perfectly or pure competition.
d. Earns Zero economic profits because of free entry.
Answer:
d. Earns Zero economic profits because of free entry.
Question 50.
In long run with increasing returns in a firm it still earns normal profit. This feature is present in _______ form of market
a. Perfect Competition
b. Monopoly
c. Monopolistic competition
d. All of the above
Answer:
c. Monopolistic competition
Question 51.
In monopolistic Completion
a. Close substitution can be defined
b. Close substitute can not be defined
c. Both a& b
d. None of the above
Answer:
b. Close substitute can not be defined
Question 52.
The estimation of consumer demand by questioning a sample of consumer is referred to as the
a. consumer survey approach
b. Product research approach
c. selling approach
d. marketing approach
Answer:
a. consumer survey approach
Question 53.
After doing the thorough calculation of consumer demand by setting up simulated stores, providing a sample of consumers with money, and then allowing them to purchase and keep the commodities they select in the stores is called the
a. consumer survey approach
b. observational approach
c. consumer clinic approach
d. Product research approach
Answer:
c. consumer clinic approach
Question 54.
If the long-run average cost curve is a downward sloping curve for a. firm, it implies that the unit is subject to the law of …………………………. always.
a. Diminishing returns to factor
b. Diminishing return to scale
c. Increasing return to scale
d. Constant returns
Answer:
c. Increasing return to scale
Hint
Increasing returns
This theory says that as the industry expands ,the average cost of production declines. Thus in this case demand curve and supply curve are both negatively sloped . When the production increases there is a fall in cost price. In the long-run average cost curve is a downward sloping curve for a. firm, It implies that the unit is subject to the law of increasing returns to scale .
Question 55.
A firm would be in equilibrium at the level of
output where its-
a. MR = Me
b. AR = AC
c. MR > MC
d. MR< AR
Answer:
a. MR = Me
Hint
In a competitive firm equilibrium is reached when TR is less than TC or where MR=MC
Question 56.
Which of the following commodities best represents a monopolistic competitive market?
a. Market for motorbikes
b. Market for parlours and saloons
c. Metro rail
d. Market for vegetables.
Answer:
c. Metro rail
Hint
Monopolistic competition
The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality neither monopoly nor competitive market exists. The real market that is seen is monopolist competition
Question 57.
In which of the following market structures, a firm is not a price maker-
a. Perfect competition
b. Monopoly
c. Duopoly
d. Oligopoly
Answer:
a. Perfect competition
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. Firm is not a price maker in such market.
Question 58.
In which of the following market structures, a firm in long-run equilibrium earns abnormal profit
a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. None of the above
Answer:
c. Monopolistic competition
Hint
A monopoly is simply a market with only one seller and no close substitutes for that seller’s product. Technically, the term “monopoly” is supposed to refer to the market itself, but it’s become common for the single seller in the market to also be referred to as a monopoly. They are price makers. A monopolist can earn abnormal profits in both the short run and the long’run unlike perfectly competitive market where abnormal profits are competed away In monopolist firm earns abnormal profits.
Question 59.
In the figure below, a perfectly competitive market is represented by figure:-
a.Figure (i)
b. Figure (ii)
c. Figure (iii)
d. Figure (iv)
Answer:
d. Figure (iv)
Hint
In perfectly competitive market AR = MC =MR.
Question 60.
For a firm in short-run equilibrium its AR <AC, i.e. it is incurring losses, it will-
a. Immediately stop production
b. Increase its level of output so that its AR becomes more than MR
c. Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC
d. Pray to God and flood the market with its own product and begin to charge very high prices.
Answer:
c. Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC
Hint
Under perfect competition, firms can make super-normal profits or losses depending on the given market price. If the firm’s losses get too big in the short run (i.e. AR < AVC) then it will have to shut down but for a firm in short-run equilibrium its AR <AC, i.e. it is incurring losses then it will Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC
Question 61.
Excess capacity for a monopolistic competition firm equals-
a. OS
b. OZ
c. SZ
d. None of the above
Answer:
c. SZ
Hint
OS is the quantity produced when AR intersects LAC curve at E. But in long run LAC cuts LMC curve to produce OZ quantity. The excess capacity produced = OZ-OS = SZ.
Question 62.
A firm has to take decision about the nature and extent of product differentiation and hence the level ot ‘ selling expenses in …………………………. market structure.
a. Monopoly
b. Monopolistic competitive
c. Perfectly competitive
d. Any of the above
Answer:
b. Monopolistic competitive
Hint
Monopolistic competition -The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality neither monopoly nor competitive market exists. The real market that is seen is monopolist competition.
Some of the features are
• This market is monopolistic as each firm is producing a particular kind of product which is different from other products in context to shape , colour etc. And has its own individual price.
• This market can be said competitive as there are large number of sellers as well as products supplied by sellers have close substitutes which gives choice to the consumer making the market competitive.
• Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
Thus in such market a firm has to take decision about the nature and extent of product differentiation.
• A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:
- Physical product differentiation
- Marketing differentiation
- Human capital differentiation
- Differentiation through distribution
Question 63.
Under monopolistic competition, loss making firms leave the group
a. To cover production costs
b. To recover selling costs
c. To maintain profits
d. To increase market share
Answer:
a. To cover production costs
Hint
One of the advantage of the Monopolistic competition is characterized by few barriers to market entry; it is easy for new firms to enter and leave such markets without facing the many barriers. Thus loss making firm can leave the market to cover production cost.
Question 64.
‘Government should increase expenditure on social services to benefit the poor1. Which one of the following represent the correct reason that establishes that the above given statement is a normative statement?
a. It states the facts as they are
b. It passes a value judgment
c. It states that there is a direct relationship between public expenditure and poverty alleviation
d. It states that poverty cannot be removed by market forces.
Answer:
b. It passes a value judgment
Hint
It is a normative statement. Normative economics deals heavily in value judgments and theoretical scenarios.
Question 65.
Marginal Revenue (MR) curve is a straight horizontal line in:
a. Perfectly competitive market
b. Monopolistic competitive market
c. Oligopoly market
d. Monopoly market.
Answer:
a. Perfectly competitive market
Hint
MR curve is a straight horizontal line in perfectly competitive market.
Question 66.
Which of the following figures correctly represents the revenue curves of a monopolistic competitive firm?
The correct option is:
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4.
Answer:
a. Figure 1
Hint
In monopolistic competitive firm AR falls But MR falls faster and becomes negative as shown in figure.
Question 67.
Which of the following monopolistic competitive firm perfectly competitive firm?
a. Differentiated products
b. Number of sellers .
c. Number of buyers
d. Free entry and exit of the firm
Answer:
a. Differentiated products
Hint
A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:
- Physical product differentiation
- Marketing differentiation
- Human capital differentiation
- Differentiation through distribution
Companies functioning in monopolistic competition market have to differentiate their products from those of their competitors which creates choice for consumers
Question 68.
A perfectly competitive firm attains equilibrium at a point where:
a. Marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below
b. MC is equal to MR
c. MC is falling but is equal to average cost (AC)
d. MC is constant.
Answer:
a. Marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below
Hint
A perfectly competitive firm attains equilibrium at a point where marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below
Question 69.
A kinked revenue curve best represents:
a. Monopoly
b. Duopoly
c. Oligopoly
d. Monopolistic competition.
Answer:
c. Oligopoly
Hint
The Kinked-Demand curve theory is an economic theory regarding oligopoly . The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable.
Question 70.
In the given figure below, a firm:
(a) is making an abnormal profit in a monopolistic competitive situation
(b) is undergoing losses in a monopoly
(c) is at break-even in a perfectly competitive market
(d) does not know if it is making a profit or is undergoing a loss.
Answer:
(a) is making an abnormal profit in a monopolistic competitive situation
Hint
At profit maximization, MC intersects MR from below. AR and MR are having negative slopes.
Question 71.
Which of the following type of commodities, normally, do not operate in an oligopoly market structure?
a. High-brand luxury goods
b. Air-line services
c. High end beauty parlours
d. Metro rails.
Answer:
c. High end beauty parlours
Hint
Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition,monopoly, and monopolistic competition. An oligopoly is a market structure in which a few firms dominate. Not many firms dominate airline service, metro rails , high brand luxury goods but there are too many high end beauty parlour. Even if a few firms may dominate, many small firms may also operate in the beauty parlour market .Thus high end beauty parlour do not operate in oligopoly market structure.
Question 72.
Market for mobile phone-sets in India demonstrates the characteristics of a-
a. Perfectly competitive market
b. Oligopoly
c. Monopsony
d. Monopoly.
Answer:
a. Perfectly competitive market
Hint
Perfect Competition – It is a market structure where there is maximum competition. The mobile company in India demonstrates a perfectly competitive market. There are many firms in the market, none of which is large in terms of its sales.
Question 73.
Given below is the short-run cost-sheet of a perfectly competitive firm, at equilibrium level of output:
Average variable cost = Rs. 9 per unit Average fixed cost = Rs. 2 per unit The firm would be well advised to continue to produce if the per unit market price of the commodity is –
a. Rs.6
b. Rs. 7
c. Rs. 8
d. Rs.10.
Answer:
d. Rs.10.
Hint
In case of short run production is to be continued till the variable cost is being recovered. So production can be done till the market price is equal to AVC or above . AVC is Rs 9 so production can be continued till market price is Rs 9 or above i.e Rs 10.
Question 74.
Which of the following figures best represents the profit being earned by a perfectly competitive firm?
Correct option is –
a. Figure 1
b. Figure 2
c. Figure 3
d. None of the above
Answer:
a. Figure 1
Hint
In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal to marginal cost i.e. i r
MR=MC
Since perfect competition is price taker so demand curve is straight and is a positive curve. Figure 1 best represents the profit being earned by a perfectly competitive firm.
Question 75.
Under which market system, seller can influence the price to the maximum?
a. Perfect competition
b. Monopoly
c. Monopolistic
d. Oligopoly
Answer:
b. Monopoly
Hint
Characteristic features of monoploy
• Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
• Products manufactured by the firm are such that they have no substitute which could because of some technology or inputs etc. Which is confined with that particular firm.
• Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
• Sometimes markets become monopolies simply because it is more cost effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
• In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward- sloping.
• Production occurs where marginal cost and marginal revenue intersect.
• They are price makers
• Produce unique products
• Profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve.
Question 76.
Under which market, price discrimination is not possible?
a. Perfect competition
b. Monopoly
c. Monopolistic
d. Oligopoly
Answer:
a. Perfect competition
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. It is impossible for a single firm to affect market price.
Question 77.
Which statement is correct under perfect competition market?
a. Large number of sellers and buyers
b. Large number of sellers and small number of buyers
c. Large number of sellers only
d. Large number of buyers only.
Answer:
a. Large number of sellers and buyers
Hint
Characteristic features of perfect competition are
– It is a hypothetical market where every seller takes the market price as its own price.
– There must be many firms in the market, none of which is large in terms of its sales.
– Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
– There are many buyers and sellers, so each buyer or seller is a price taker, all sellers supply the same, identical product.
– Firms should be able to enter and exit the market easily.
– Each firm in the market produces and sells a non differentiated or homogeneous product
– Each unit of input, such as units of labour, are also homogeneous.
– There is no need for government regulation, except to make markets more competitive.
– It is impossible for a single firm to affect market price.
– All firms and consumers in the market have complete information about prices, product quality, and production techniques.
– As there are large sellers so there are large buyers
Question 78.
When does the firm gets equilibrium points? OR When the firm is said to be in equilibrium?
a. MR = MC
b. AR = MR
c. AR = MC
d. Both (a) & (b)
Answer:
d. Both (a) & (b)
Hint
To reach equilibrium AC=AR=MC=MR
Question 79.
“Differentiated product” is the feature of-
a. Perfect competitive market
b. Monopoly market
c. Monopolistic market
d. None of the above
Answer:
c. Monopolistic market
Hint
A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:
– Physical product differentiation
– Marketing differentiation
– Human capital differentiation
– Differentiation through distribution
Question 80.
In which type of market, the firm is the “price taker”.
a. Perfect competitive market
b. Monopoly Market
c. Monopolistic market
d. All of the above
Answer:
a. Perfect competitive market
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. The firm is a price taker in such market.
Question 81.
In monopolistic competition the price policy is-
a. Relatively high
b. Low
c. Moderate
d. Very low
Answer:
b. Low
Hint
One of the characteristic feature of monopolistic competitive market is that each firm is producing a particular kind of product which is different from other product in context to shape , colour etc. and has its own individual price.
Question 82.
An Oligopoly is a market in which:
a. Firms are price takers
b. The actions of one seller in the market have no impact on the other seller’s profits
c. There are only a few sellers, each offering- a product similar/dissimilar to the others
d. Firms are price giver
Answer:
c. There are only a few sellers, each offering- a product similar/dissimilar to the others
Hint
Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition,monopoly, and monopolistic competition. An oligopoly is a market structure in which a few firms dominate.
Question 83.
Which of the following is the difference between perfect competition and monopolistic competition?
a. In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods.
b. Perfect competition has no barriers to entry, while monopolistic competition does
c. In perfect competition firms produce identical goods, while in monopolistic competition, firms produce slightly different goods
d. Perfect competition has a large number of small firms, while in monopolistic competition does not.
Answer:
c. In perfect competition firms produce identical goods, while in monopolistic competition, firms produce slightly different goods
Hint
Perfect Competition – Each firm in the market produces and sells a non differentiated or homogeneous product Monopolistic completion – A central feature of monopolistic competition is that products are differentiated.
Question 84.
A perfectly competitive firms short run shutdown point is the level of output at which:
a. Price equals average fixed costs.
b. Price is above the minimum average total cost but below the minimum average fixed cost
c. Price equals average total cost
d. Price equals the minimum average variable cost
Answer:
a. Price equals average fixed costs.
Hint
A firm will produce at the level of output where MR = MC (or P = MC). that is, the marginal cost curve for a firm tells us how many units of a product the firm is willing to sell at any given price. Thus, a perfectly competitive firm’s marginal cost curve also is its supply curve. But a firm will shut down if its total revenue is less than its variable cost P x Q < VC P < AVC.
So, the firm’s marginal cost curve is its supply curve only for prices at or above average variable cost. Another way to state the rule is that a firm should compare the profits from operating to those realized if it shutdown and select the option that produces the greater profit. A firm that is shutdown is generating zero revenue and incurring no variable costs. However, the firm still has to pay fixed cost. So the firm’s profit is all used up in fixed costs . Thus if firm’s profit is equal to fixed cost then it should shut down .
Question 85.
In a free market, which of the following will be caused by excess supply for a commodity?
a. A fall in the price of commodity
b. A rise in the price of commodity
c. Either a or b
d. Can’t say
Answer:
a. A fall in the price of commodity
Hint
Price is derived by the interaction of supply and demand. The resultant market price is dependant upon both of these fundamental components of a market. Thus Producers would have to lower their prices in order to clear the market of excess supplies.V\/e already know price and demand are inversely proportional. When price falls demand increases.
Question 86.
Which of the following is a characteristic of Monopoly?
a. Large number of sellers and buyers
b. A single seller and large number of buyers
c. Large number of sellers and small number of buyers
d. Small number of sellers and small number of buyers
Answer:
b. A single seller and large number of buyers
Hint
Characteristic features of monopoly
- Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
- Products manufactured by the firm are such that they have no substitute which could be because of some technology or inputs etc. Which is confined to that particular firm.
- Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
- Sometimes markets become monopolies simply because it is more cost-effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
- In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward-sloping.
- Production occurs where marginal cost and marginal revenue intersect.
- They are price makers
- Produce unique products
- The profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve.
Thus a monopoly is simply a market with only one seller and no close substitutes for that seller’s product.
Question 87.
In case of monopolistic competition, the size of the market for each firm would be ………………………
a. large
b. small
c. Infinite
d. very large
Answer:
b. small
Hint
In case of monopolistic competition, the size of the market for each firm would be small. Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
Question 88.
In case of monopoly, capacity utilization of the firm would be ……………………
a. Minimum
b. Sub-optimum
c. Optimum
d. Not optimum
Answer:
b. Sub-optimum
Hint
Capacity utilisation is the extent to which an enterprise or a nation actually uses its installed productive capacity. It is the relationship between output that is actually produced with the installed equipment, and the potential output which could be produced with it, if capacity was fully used. The economic approach, on the other hand, defines the potential output as being the optimum level of output from the economic point of view. In case of monopoly, capacity utilization of the firm would be suboptimum
Question 89.
In case of Perfect Competition, number of selling firms would be:
a. Large
b. Only two
c. Varied but not too many
d. Single
Answer:
a. Large
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. There are many firms in the market, none of which is large in terms of its sales.
Question 90.
In a market that is characterised by imperfect competition:
a. Firms are price takers
b. The actions of one firm in the market never have any impact on the other firms profits
c. There is always a large number of firms
d. There are at least a few firms that compete with one another.
Answer:
d. There are at least a few firms that compete with one another.
Hint
Imperfect competition is a type of market structure showing some but not all features of competitive markets. Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods unlike perfect competitive market. In such market, there are at least a few firms that compete with one another unlike the perfect competition.
Question 91.
In case of Perfect Competition a firm is a ………………………..
a. Price Controller
b. Price taker
c. Price maker
d. Price creator
Answer:
b. Price taker
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at a predefined prices. Each firm in the market produces and sells a nondifferentiated or homogeneous product. A firm is a price taker in this kind of market.