Here are questions based on the provided notes for Unit IV: *Forms of Market Structure* in Business Economics (B.Com Hons).
Multiple Choice Questions
What does a perfectly competitive market imply?
a) Only one firm sells the product
b) Many firms sell identical products
c) Firms can control the price
d) Barriers to entry are high-
Which of the following market structures has many buyers and sellers, homogeneous products, and no barriers to entry?
a) Perfect competition
b) Monopoly
c) Oligopoly
d) Monopolistic competition -
What is one key feature of monopolistic competition?
a) Single seller
b) Product differentiation
c) No barriers to entry
d) Homogeneous products -
In a monopoly, what is the typical number of firms in the market?
a) One
b) Few
c) Many
d) Infinite -
Which of the following best describes an oligopoly?
a) Many firms sell homogeneous products
b) One firm controls the market
c) A few large firms dominate the market
d) No firms have market power -
What factor is most likely to create a barrier to entry in a monopoly?
a) High product differentiation
b) Economies of scale
c) Perfect information
d) Free entry and exit -
Which market structure is characterized by mutual interdependence between firms?
a) Monopoly
b) Perfect competition
c) Oligopoly
d) Monopolistic competition -
In which market structure is product differentiation a central feature?
a) Perfect competition
b) Monopoly
c) Oligopoly
d) Monopolistic competition -
What is the primary difference between monopolistic competition and perfect competition?
a) Product differentiation
b) Number of sellers
c) Barriers to entry
d) Perfect knowledge -
In a perfectly competitive market, firms:
a) Control prices
b) Face a perfectly elastic demand curve
c) Compete based on advertising
d) Sell differentiated products -
What does "price-taking" behavior imply in a perfectly competitive market?
a) Firms set their own prices
b) Firms accept the market price as given
c) Firms collude to set prices
d) Firms are restricted from changing prices -
Which market structure is most likely to experience the "kinked demand curve" phenomenon?
a) Monopoly
b) Oligopoly
c) Perfect competition
d) Monopolistic competition -
What defines a natural monopoly?
a) Economies of scale make it efficient for only one firm to produce
b) Multiple firms produce similar products
c) Firms do not need to advertise
d) Barriers to entry are low -
In which market structure is there the highest degree of market power for a firm?
a) Perfect competition
b) Monopoly
c) Oligopoly
d) Monopolistic competition -
How do oligopolists typically react to price changes?
a) Ignore competitors
b) Always match price increases but not decreases
c) Engage in price wars
d) None of the above -
What happens when there is a price decrease in a perfectly competitive market?
a) Firms will raise their prices to keep up with competitors
b) Firms will lower prices in the short run
c) Firms adjust output to maintain profitability
d) Prices remain stable -
What does the term "barriers to entry" refer to?
a) Costs that firms incur to produce goods
b) Forces preventing new firms from entering the market
c) Laws that control monopoly power
d) Consumer preferences -
In a monopoly, what happens if the firm’s marginal cost exceeds its marginal revenue?
a) The firm maximizes profits
b) The firm should reduce output to increase profits
c) The firm increases output to gain efficiency
d) The firm will face greater competition -
Which of the following is a characteristic of oligopolies?
a) Homogeneous products
b) A large number of firms
c) Product differentiation
d) Firms have no market power -
The market structure that has the least competition is:
a) Perfect competition
b) Monopoly
c) Oligopoly
d) Monopolistic competition
-
Under perfect competition, firms earn:
a) Supernormal profits in the long run
b) Normal profits in the long run
c) Supernormal profits in the short run
d) Negative profits -
In perfect competition, the demand curve for a firm is:
a) Downward sloping
b) Upward sloping
c) Perfectly elastic
d) Perfectly inelastic -
In the short run, a perfectly competitive firm maximizes profit by:
a) Setting price equal to marginal cost
b) Setting marginal revenue equal to average total cost
c) Setting price equal to average variable cost
d) Setting marginal cost equal to marginal revenue -
When demand increases in a perfectly competitive market, what happens to the equilibrium price in the short run?
a) The price remains unchanged
b) The price decreases
c) The price increases
d) There is no clear effect -
What happens to the number of firms in the long run in a perfectly competitive market when firms are earning supernormal profits?
a) No change, firms remain the same
b) New firms enter the market
c) Some firms exit the market
d) Firms start to cooperate -
Which of the following is true for a perfectly competitive firm in the long run?
a) The firm produces at the point where marginal cost equals marginal revenue
b) The firm earns supernormal profits
c) The firm operates with excessive capacity
d) The firm’s price exceeds marginal cost -
In the long run, firms in perfect competition:
a) Earn supernormal profits
b) Operate at an efficient scale with zero economic profits
c) Experience constant price changes
d) Engage in heavy advertising -
A perfectly competitive firm’s short-run supply curve is derived from:
a) The marginal cost curve above average total cost
b) The marginal cost curve
c) The average cost curve
d) The average variable cost curve -
Under perfect competition, the price in the market is determined by:
a) The firm
b) The government
c) The interaction of supply and demand
d) The monopolist -
Which of the following is an assumption of perfect competition?
a) Firms can set prices
b) There are barriers to entry
c) Firms sell homogeneous products
d) Firms have market power -
If a perfectly competitive firm is incurring losses in the short run, what should it do?
a) Shut down immediately
b) Continue producing if price is above average variable cost
c) Increase prices
d) Decrease production -
A perfectly competitive firm achieves efficiency by:
a) Setting price equal to average cost
b) Setting price equal to marginal cost
c) Maximizing total revenue
d) Maximizing total output -
In perfect competition, what does the firm's supply curve represent?
a) The cost of production for the firm
b) The quantity supplied at each price level
c) The profit-maximizing output
d) The quantity demanded by consumers -
What happens in the long run when firms in perfect competition are earning supernormal profits?
a) Firms exit the market
b) Firms enter the market, driving prices down
c) Prices rise as demand increases
d) Market output decreases -
What is true about the market in the long run under perfect competition?
a) Firms can make excessive profits
b) Firms exit the market
c) All firms earn normal profits
d) The market experiences long-term disequilibrium -
In a perfectly competitive market, the product sold is:
a) Unique
b) Differentiated
c) Homogeneous
d) Patented -
A perfectly competitive market achieves allocative efficiency because:
a) Price equals marginal cost
b) Firms produce at minimum average cost
c) The government sets prices
d) Firms maximize total revenue -
In perfect competition, if the market price falls below the average variable cost, the firm:
a) Continues producing
b) Shuts down in the short run
c) Reduces output
d) Increases output -
Under perfect competition, the firm’s demand curve is:
a) Downward sloping
b) Vertical
c) Horizontal
d) Upward sloping -
The efficiency of perfect competition can be measured by:
a) Maximum output produced at the lowest possible cost
b) Maximum price charged
c) Highest profit earned
d) Lowest consumer surplus
- What is the primary reason for a monopolistic firm’s ability to set prices higher than marginal cost?
- How does product differentiation in monopolistic competition lead to excess capacity?
- Why does a perfectly competitive firm face a horizontal demand curve at the market price?
- In an oligopoly, what is the significance of the kinked demand curve theory?
- How do firms in monopolistic competition achieve long-run equilibrium?
- What is the condition for allocative efficiency in perfect competition?
- How does the presence of economies of scale create barriers to entry in a monopoly?
- Explain how a monopoly can achieve productive efficiency in the short run.
- How does price leadership work in an oligopoly market structure?
- Why is there no room for non-price competition in a monopoly?
- What are the implications of perfect knowledge for firms operating in perfect competition?
- How do firms in an oligopoly respond to competitive pressures without initiating price wars?
- What causes firms in monopolistic competition to earn only normal profit in the long run?
- How does a perfectly competitive firm achieve long-run equilibrium where price equals average cost?
- Why does monopolistic competition lead to a loss of productive efficiency?
- How do barriers to entry affect the number of firms in an oligopoly?
- Why do firms in a monopoly have no close substitutes for their products?
- Explain how government regulation can affect monopolistic behavior in certain markets.
- How do oligopolistic firms decide on output and pricing strategies in the context of game theory?
- In what way does the "prisoner's dilemma" apply to oligopoly behavior?
- Why is the market supply curve in perfect competition upward sloping, even if firms operate at zero profit in the long run?
- Explain the role of perfect mobility of factors of production in perfect competition.
- Why do firms in perfect competition have no incentive to advertise?
- How does the concept of "normal profit" apply to firms in the long-run equilibrium in perfect competition?
- Why is there no need for government intervention in a perfectly competitive market?
- What happens to the price and output of a perfectly competitive firm if demand increases in the short run?
- How is allocative efficiency attained in the long run under perfect competition?
- In what way do firms in perfect competition face a perfectly elastic demand curve?
- Why do firms in perfect competition earn zero economic profit in the long run?
- What is the significance of the marginal cost curve for a perfectly competitive firm's supply decision?
- How does the law of diminishing returns apply to the short-run production in perfect competition?
- Why do firms in perfect competition tend to produce at the minimum point of their average cost curve in the long run?
- What role does free entry and exit play in ensuring long-run equilibrium in perfect competition?
- Why can’t a firm in perfect competition influence the market price?
- How does a perfectly competitive firm decide how much to produce in the short run?
- Why does the demand curve for a firm in perfect competition remain perfectly elastic at the equilibrium price?
- How does the concept of "productive efficiency" apply to perfect competition?
- Why do firms in perfect competition experience zero barriers to entry or exit in the long run?
- How does the concept of the “shutdown point” apply to firms in perfect competition during periods of low demand?
- How does perfect competition maximize consumer surplus?
Explain the characteristics of perfect competition and discuss how it achieves both allocative and productive efficiency in the long run. How does the perfectly competitive firm’s behavior differ from that of a monopoly?
Discuss the concept of a natural monopoly. How do economies of scale create a situation where a single firm dominates the market, and what are the implications for pricing and output determination?
Explain how the kinked demand curve theory attempts to explain price rigidity in an oligopoly. What are the assumptions behind this theory, and how does it explain the behavior of firms in an oligopolistic market?
Compare and contrast the long-run equilibrium conditions in perfect competition and monopolistic competition. How does the entry and exit of firms affect these market structures in the long run?
How does product differentiation lead to the inefficiencies observed in monopolistic competition? What is the impact of this inefficiency on consumer surplus and social welfare?
Discuss the implications of collusion in an oligopolistic market. How do collusive agreements affect market prices, output levels, and consumer welfare? What are the possible reasons firms in an oligopoly may choose to collude rather than compete?
Examine the concept of price leadership in an oligopoly. What role does dominant firm price leadership play in determining market prices, and how does it affect smaller firms in the market?
Discuss the concept of "barriers to entry" in a monopoly. How do legal, technological, and strategic barriers create a situation where new firms are discouraged from entering the market?
In a monopolistic market, explain the process by which the monopolist determines its profit-maximizing output and price in both the short-run and long-run. How does the monopolist’s pricing strategy differ from that of a perfectly competitive firm?
Explain how the concept of a "discriminating monopoly" operates. What are the conditions necessary for price discrimination to occur, and how does it impact consumers and producers in different market segments?
Explain how the forces of supply and demand determine the equilibrium price and quantity in a perfectly competitive market. How do these forces ensure that resources are allocated efficiently?
Discuss the impact of a technological innovation in a perfectly competitive industry. How would the introduction of new technology affect the firm's cost structure, market price, and long-run equilibrium?
Analyze the condition of "zero economic profit" in the long run under perfect competition. How does the entry and exit of firms in the market lead to this equilibrium, and what role does the concept of normal profit play in this context?
A perfectly competitive firm experiences an increase in demand for its product in the short run. Discuss how the firm adjusts its output and price to reach the new equilibrium, and explain how this adjustment process works.
In the long run, the perfectly competitive firm operates at the point where marginal cost equals marginal revenue. How does this condition ensure that the firm is producing at the minimum point of its average total cost curve?
Discuss the concept of "productive efficiency" and "allocative efficiency" in the context of perfect competition. How does perfect competition achieve both types of efficiency, and what role does the firm’s cost structure play in this process?
In perfect competition, firms produce at the point where price equals marginal cost. Discuss the implications of this condition for consumer surplus, producer surplus, and social welfare in the market.
Explain the "shutdown point" for a perfectly competitive firm. What happens if the firm’s price falls below average variable cost in the short run, and how does the firm make the decision to continue operating or shut down?
How do changes in market conditions (such as an increase in demand or cost of production) affect the equilibrium price and output in a perfectly competitive market in the short run and long run?
In a perfectly competitive market, firms produce homogeneous products and have no control over the market price. Discuss how this lack of pricing power impacts firms' behavior and market outcomes, especially in the context of market entry and exit.
Explain the pricing and output decisions of a monopolist in the short run. How does the monopolist determine its profit-maximizing output and price, and how do these decisions differ from those made in perfect competition?
Discuss the concept of "price discrimination" in a monopoly. What are the different types of price discrimination, and how do they impact consumer welfare and firm profitability? Provide examples of real-world monopolists who practice price discrimination.
How does the monopolist’s ability to restrict output and raise prices result in deadweight loss? Explain the concept of deadweight loss and how it arises in monopoly markets compared to perfectly competitive markets.
Discuss the role of government regulation in natural monopolies. How do governments intervene in monopoly markets to promote social welfare, and what are the pros and cons of such regulation?
Analyze the long-run equilibrium of a monopolist. How does a monopolist’s pricing strategy and output level differ from those of a perfectly competitive firm in the long run, and what are the implications for economic efficiency?
Explain how the monopolist’s marginal revenue curve is derived. How does it differ from the price and demand curves, and what does this difference imply for the monopolist’s output and pricing decisions?
Discuss the concept of "rent-seeking behavior" in monopolistic markets. How do monopolists engage in rent-seeking, and what are the economic consequences of such behavior for society as a whole?
Compare the economic efficiency of a monopoly to that of perfect competition. What are the key differences in terms of productive efficiency, allocative efficiency, and the distribution of consumer and producer surplus?
How do monopolies impact consumer choice and market innovation? Discuss the trade-offs between market power and innovation in a monopolistic market compared to more competitive market structures.
In the context of a monopolistic market, explain the concept of "barriers to entry." How do these barriers prevent other firms from entering the market, and how do they contribute to the monopolist’s market power?
Discuss the long-run equilibrium under monopolistic competition. How do firms in this market structure adjust to eliminate economic profits, and what happens to product variety and prices in the long run?
Explain how advertising and brand loyalty play a crucial role in monopolistic competition. How do firms use these tools to differentiate their products, and how does this affect market outcomes?
Compare and contrast monopolistic competition and perfect competition in terms of efficiency. Why does monopolistic competition lead to inefficiency, and what are the implications for both consumers and producers?
Discuss the implications of "excess capacity" in monopolistic competition. How does the presence of excess capacity affect firms' pricing strategies and the overall efficiency of the market?
Analyze the price and output determination in an oligopoly using the Cournot model. How do firms in an oligopolistic market decide on their optimal output levels, and how does this model explain the market equilibrium?
Explain the concept of the "prisoner’s dilemma" in oligopolistic markets. How does this concept illustrate the strategic behavior of firms in oligopoly, and what are the possible outcomes for firms in terms of collusion and competition?
Discuss the role of game theory in oligopoly. How do firms use game theory to predict the actions of their competitors, and what strategies can they adopt to maximize their profits in an oligopolistic market?
Compare and contrast the models of oligopoly (e.g., Cournot, Bertrand, Stackelberg). How do these models differ in terms of assumptions, outcomes, and predictions about market behavior?
Explain the concept of "price rigidity" in oligopoly markets. How does price rigidity emerge, and what role do non-price competition and collusion play in maintaining price stability?
Analyze the impact of government intervention in oligopoly markets. How can antitrust laws and regulation affect the pricing and output decisions of firms in oligopolistic markets, and what are the potential benefits and drawbacks of such intervention?