Questions

Identify the points, A – E:

1. Profit max
2. Sales revenue max
3. Allocative efficiency
4. Productive efficiency
5. Sales max

Multiple Choice

1. The regulator agrees to set the pricing of Water Companies as RPI – X. This means that:
   1. The Regulator expects there to be inflation
   2. Prices will fall next year by the value of X
   3. Water companies will have to reduce their prices
   4. The Regulator expects efficiency gains to the value of X
   5. X represents expected increases in competition
2. Fixing a price just below the average cost of potential entrants into a market is called:
   1. Price discrimination
   2. Predatory pricing
   3. Cost-plus pricing
   4. Limit pricing
   5. Break-even pricing
3. A distinguishing feature of a natural monopoly is that:
   1. It is the only supplier in a given market
   2. It will be nationalised
   3. It will always make losses
   4. Its average costs rise continuously with output
   5. Its average costs fall continuously with output
4. If a firm’s average total costs are falling then it is necessary that:
   1. Its marginal cost is below its average cost
   2. Its marginal cost is above its average cost
   3. Its marginal cost is falling
   4. Its marginal cost is rising
   5. Its total cost is falling
5. If a monopolist switches from profit maximisation to sales maximisation it will plan to:
   1. Reduce price
   2. Increase price
   3. Reduce output
   4. Increase MR
   5. Increase super-normal profits
6.  In order to continue supplying in the short run a firm must cover:
   1. Total Costs
   2. Fixed Costs
   3. Average Fixed Costs
   4. Average Variable Costs
   5. Marginal Costs
7. If a firm changes price and faces a negative marginal revenue then it must:
   1. Have an inelastic demand
   2. Have an elastic demand
   3. Lower its price to raise revenue
   4. Keep its price constant to increase its revenue
   5. Raise price to increase profits
8. An ice cream maker like Mars, which enters into a contractual agreement with retailers to stock only their products, hopes to benefit from:
   1. Marketing economies of scale
   2. Technical economies of scale
   3. Forwards vertical integration
   4. Backwards vertical integration
   5. Horizontal integration
9. A firm in long run equilibrium under monopolistic competition will exhibit:
   1. Allocative but not productive efficiency
   2. Productive but not allocative efficiency
   3. Neither productive nor allocative efficiency
   4. Super-normal profits
   5. Both allocative and productive efficiency
10. Price discrimination by a monopolist can only be beneficial if:
    1. Advertising costs do not rise
    2. Price elasticities of demand are the same in both markets
    3. It creates a barrier to entry
    4. Consumers can move freely from one market to another
    5. There is no seepage by consumers between markets
11. The turnover (£b) of the main supermarkets in the UK is: Tesco – £2.3, ASDA – £2.1 Sainsbury – £1.3, Somerfields – £1.1. Total turnover in the industry is £11b.
    1. The industry is monopolistically competitive
    2. The 3-firm concentration ratio is £5.7b
    3. There are unlikely to be significant economies of scale in the industry
    4. A proposal that Tesco and ASDA merge is likely to be referred to the Competition Commission
    5. The top three firms are likely to have independent business strategies
12. Which of the following does not relate to perfect competition in the long run?
    1. Firms are allocatively efficient
    2. Firms are productively efficient
    3. Only normal profits are made
    4. The industry supply curve is the summation of all marginal cost curves above average variable cost
    5. The firm’s demand curve is downward sloping
13. The existence of high sunk costs is likely to make a market:
    1. Less profitable
    2. More profitable
    3. Less contestable
    4. More contestable
    5. More efficient
14. Cartels are least likely to be formed when:
    1. There are no barriers to entry
    2. The industry is highly concentrated
    3. There is a weak regulatory regime
    4. The industry is dominated by a few firms
    5. Collusion is easy
15. A distinguishing feature of a firm under perfect competition is that:
    1. Only normal profits are made
    2. AR = MR
    3. AR > MR
    4. There are no major barriers to entry
    5. There are lots of firms in the market
16. The profit maximising monopolist will always:
    1. Make profits
    2. Derive economies of scale
    3. Produce at the lowest average total cost
    4. Produce in the elastic portion of the AR curve
    5. Produce up to the point where the extra costs of production are less than the extra sales revenue
17. If an oligopolist raises price it will:
    1. Increase its profits
    2. Reduce its profits
    3. Expect a big change in its revenue
    4. Make entry into the market less likely
    5. Make entry into the market more likely
18. Normal profit is best described as:
    1. When TR >TC
    2. AR > ATC
    3. Just covering opportunity cost
    4. Exceeding opportunity cost
    5. Not covering transfer earnings
19. The regulator has set the pricing formula for water and gas at RPI – X, with X = 7% for water and 3% for gas. This implies that the regular thinks:
    1. Water is more profitable than gas
    2. The inflation rate will have a bigger impact on gas than water
    3. If the RPI is 3% gas producers must reduce their prices
    4. If the RPI is 8% water producers must not raise their price
    5. The scope for more efficiency is greater for water than gas
20. External diseconomies of scale could be associated with:
    1. Poor communication associated with large scale enterprise
    2. Congested roads which increase costs for all firms
    3. Lack of control of the enterprise as it grows
    4. The gains generated by all firms when an industry expands in one area
    5. The general rise in costs associated with expansion of the business

Answers

Tackling supported choice questions

Selecting the correct answer is only worth 1 mark out of 4. Other marks can be gained by doing the following:

1. Writing a sentence or two explaining why the selected answer is the correct one.
2. Applying the answer to the context of the question.
3. Defining the key terms in the question or answer.
4. Explaining why the main distracter is wrong.
5. Drawing a diagram to support your answer.
6. Annotating an existing diagram.
7. Showing the formula and/or workings