Profit Maximizing Under Perfect Competition And Monopoly – MCQs

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1.A company operating in a perfectly competitive market produces 50 units, which is its profit-maximizing output. The market price per unit is £2, with total fixed costs of £25 and total variable costs amounting to £40. What is the firm's economic profit?

2.What is the correct formula to calculate the average variable cost (AVC)?

Change in total variable cost divided by change in quantity producedQuantity produced divided by total variable costChange in quantity produced divided by change in total variable costTotal variable cost divided by quantity producedTotal cost divided by quantity produced

3.Which graph represents all possible combinations of capital and labor that can be purchased with a specified total cost?

4.What is the name of the curve that illustrates all possible combinations of capital and labor capable of producing a specific level of output?

A curve representing consumer preferencesAn isoquant curveA line showing cost constraintsA function describing production outputA budget constraint line

5.If Handel’s Ice Cream benefits from economies of scale up to a certain level of output but faces diseconomies of scale afterward, what shape would its long-run average cost curve most likely take?

Continuously declining as output increasesShaped like a U, first decreasing then increasingRemaining constant regardless of outputContinuously rising as production expandsNone of the above

6.Given that the combined output of two workers is 80 units and the combined output of three workers is 90 units, what are the average product of the third worker and the marginal product of the third worker?

160; 27010; 3010; 3.3330; 10

7.What does the concept of diminishing marginal returns indicate?

A reduction in average fixed costs.A decline in marginal costs.A drop in average variable costs.A rise in marginal costs.

8.Which costs vary with the level of production in the short run?

Only total fixed costs.Only total variable costs.Both total variable costs and total costs.Only total costs.

9.Which of the following statements about contestable markets is incorrect?

In a contestable market, firms constantly face actual or potential competition due to low entry barriers.Sustained economic profits are not possible in the long term within a contestable market.Competitive pressures in a contestable market ensure firms operate efficiently or exit the market.A market can only be considered contestable if the product is manufactured using labor-intensive methods.

10.What is a significant limitation of the kinked demand curve model in explaining oligopoly behavior?

It presumes firms expect no reaction from competitors when they change prices.It does not clarify the initial process by which a firm determines its price and output levels.The model lacks empirical verifiability through real-world data.Pricing tactics in reality are less complex than those proposed by the model.

11.In an oligopolistic market dominated by a price leader, the quantity produced is typically:

the same as the output a monopoly would select in that marketsomewhere between the competitive market output and the monopoly output levelsequivalent to the output under perfect competitionbetween the output levels of perfect competition and monopolistic competitiongreater than the output chosen by a monopolistic competitor

12.What is the term for a coalition of companies that collaborate to determine prices and production levels?

13.In an oligopoly where firms currently cooperate to set prices and output for maximizing collective profits, what happens to the price and total quantity produced if this collusion ends?

Price will fall; output will fallPrice will rise; output will fallPrice will fall; output will risePrice will rise; output will risePrice and output remain unchanged

14.If a single company in the breakfast cereal industry launches an advertising campaign highlighting the health benefits of its products, and all other cereal producers quickly follow with similar campaigns, what type of market structure does this behavior indicate?

A market with many firms selling differentiated productsA market dominated by a few large firmsA market with numerous firms selling identical productsUnable to determine the market structure based on this informationA market controlled by a single company

15.Which statement most accurately reflects the market outcome in monopolistic competition?

Monopolistic competition features an excessive number of firms, each producing a somewhat differentiated product at a scale smaller than ideal.In monopolistic competition, there are too few firms, and each produces a slightly varied product at a scale larger than optimal.Monopolistic competition has the perfect number of firms, with each producing a slightly differentiated product at an optimal scale.There are too many firms in monopolistic competition, each manufacturing a slightly different product at the optimal scale.Monopolistic competition consists of a limited number of firms producing identical products at a suboptimal scale.

16.Why do monopolistic competition and perfect competition yield similar long-run results?

The market generates the most efficient quantity of goods eventuallyBusinesses earn only normal profits in the long termCompanies fully exploit all available economies of scaleFirms operate at the lowest possible average cost

17.In monopolistic competition, a firm experiencing losses will continue operating provided the price it sets can at least cover which of the following costs?

the additional cost of producing one more unitthe expenses that do not change with outputthe costs that vary with the level of productionthe expenses related to promotional activities

18.What is the main characteristic that sets monopolistic competition apart from perfect competition?

In monopolistic competition, new firms are prevented from entering the market.Monopolistic competition features minimal obstacles for new businesses to join the market.Firms in monopolistic competition offer products that are distinct from one another.In perfect competition, companies sell products that are unique and varied.Monopolistic competition involves only a few firms dominating the market.

19.What characterizes a market as perfectly contestable?

Entering the market involves expenses, but leaving it is free of chargeBoth entering and exiting the market incur no costsBoth entering and exiting the market require significant expensesEntering the market is free, but exiting requires paymentNone of the above

20.What do we call an industry where the production of a good or service is most efficient when a single company supplies the entire market due to significant economies of scale?