economics beginner 10 sample questions

Supply And Demand MCQ Practice Test

Market forces and equilibrium

Q1. A monopolistically competitive firm faces a downward-sloping demand curve due to its ability to differentiate its product. If the firm's marginal revenue (MR) curve intersects its marginal cost (MC) curve at a point where the elasticity of demand is 1, what is the effect on the firm's price and quantity supplied compared to a perfectly competitive market?

A. The firm will produce a higher quantity and charge a lower price than a perfectly competitive firm.
B. The firm will produce a lower quantity and charge a higher price than a perfectly competitive firm. ✓
C. The firm will produce the same quantity and charge the same price as a perfectly competitive firm.
D. The firm's price and quantity supplied will be indeterminate compared to a perfectly competitive market.

Explanation: In a monopolistically competitive market, the firm faces a downward-sloping demand curve due to product differentiation. When the MR curve intersects the MC curve, the firm maximizes profits. If the elasticity of demand is 1, the firm is on the elastic portion of its demand curve, resulting in a higher price and lower quantity supplied compared to a perfectly competitive market.

Q2. A small town has a local farmer's market where apples are sold. The market price of apples is $\1.50$ per pound. If the demand for apples at this price is 200 pounds per day, and the supply of apples is given by the equation $Q_s = 2P - 100$, where $Q_s$ is the quantity supplied and $P$ is the price in dollars per pound, what is the price per pound of apples that will be supplied to the market?

A. The price will remain at $\1.50$ per pound.
B. The price will increase to $\2.00$ per pound. ✓
C. The price will decrease to $\1.00$ per pound.
D. The price will increase to $\3.00$ per pound.

Explanation: To find the price at which the quantity supplied equals the quantity demanded, we need to find the price at which the quantity supplied, $Q_s$, equals the quantity demanded, which is 200 pounds. The supply equation is $Q_s = 2P - 100$. We set $Q_s = 200$ and solve for $P$: 200 = 2P - 100. Adding 100 to both sides gives 300 = 2P. Dividing both sides by 2 gives P = 150. Therefore, the price at which the quantity supplied equals the quantity demanded is $1.50 per pound. The question is asking for the price that will be supplied to the market, which is already given as $1.50.

Q3. A monopolist firm faces a downward-sloping demand curve for its product, which is a substitute for another product produced by a competitive firm. If the monopolist increases the price of its product, the demand for the competitive firm's product will

A. increase due to the law of one price
B. decrease due to the substitution effect ✓
C. remain unchanged because the two products are unrelated
D. increase due to the income effect

Explanation: When a monopolist increases the price of its product, consumers will seek cheaper alternatives, including the product produced by the competitive firm. This is an example of the substitution effect, where the increase in price of one product leads to a decrease in demand for the substitute product.

Q4. A firm is considering introducing a new product in a market where the demand curve is downward sloping and the firm has a fixed cost of production. If the firm's supply curve is perfectly inelastic, what will be the effect on the firm's profit-maximizing price and quantity?

A. The firm's profit-maximizing price will increase, but the quantity sold will remain the same.
B. The firm's profit-maximizing price will decrease, but the quantity sold will remain the same.
C. The firm's profit-maximizing price and quantity will both increase.
D. The firm's profit-maximizing price and quantity will remain the same. ✓

Explanation: Since the firm's supply curve is perfectly inelastic, the quantity supplied is fixed. The firm will set the price based on the demand curve to maximize profit. Changes in fixed costs do not affect the profit-maximizing price or quantity in this scenario.

Q5. A monopolistic competitor in a local market for artisanal cheeses faces a downward-sloping demand curve due to product differentiation. The firm’s marginal cost of production is $10 per unit, and the market price is $20 per unit. If the firm were to produce at a point where the price elasticity of demand is -2, what action should the firm take to maximize profits?

A. The firm should increase quantity and lower price.
B. The firm should decrease quantity and increase price. ✓
C. The firm should maintain the current quantity and price.
D. The firm should shut down production.

Explanation: The firm is not maximizing profit because the price elasticity of demand is -2, indicating that the firm could increase its price and still sell some units. The firm should decrease quantity and increase price to move towards the profit-maximizing point where marginal revenue equals marginal cost.

Q6. A monopolistically competitive firm faces a downward-sloping demand curve and a U-shaped average total cost (ATC) curve. The firm maximizes profit where marginal cost (MC) equals marginal revenue (MR). If consumer preferences shift, increasing demand for the firm's product, what is the expected effect on the firm's profit-maximizing output and price?

A. The firm will produce a higher output and sell at a higher price. ✓
B. The firm will produce a lower output and sell at a lower price.
C. The firm's output and price will remain unchanged.
D. The firm will produce a higher output and sell at a lower price.

Explanation: When demand increases, the firm's demand curve shifts to the right. The firm will adjust its output level to the point where its new marginal revenue curve intersects its marginal cost curve. This will result in a higher profit-maximizing output and a higher price, as the firm moves up along its marginal cost curve and its new demand curve.

Q7. A firm producing a differentiated product faces a downward-sloping demand curve, a fixed cost of $100,000, and a marginal cost of $50. The market price is $150, but this is irrelevant to the firm's profit-maximizing quantity. Which of the following statements correctly describes the profit-maximizing condition for this firm?

A. The firm should produce where marginal cost equals marginal revenue (MC = MR). ✓
B. The firm should produce where price equals marginal cost (P = MC).
C. The firm should produce where marginal cost equals price (MC = P).
D. The firm should produce where marginal revenue equals price minus variable cost (MR = P - VC).

Explanation: A profit-maximizing firm produces where marginal revenue (MR) equals marginal cost (MC). This is true regardless of the market structure, although the firm's ability to influence price depends on the market structure. The market price is irrelevant to the profit-maximizing quantity in this case, as the firm's demand curve is downward sloping, and it can set its own price. The fixed costs are also irrelevant to the profit-maximizing quantity.

Q8. A monopolist's firm is considering a price increase, but the cost of production is increasing at a rate of 8% per annum, and the demand for the product is decreasing at a rate of 5% per annum. If the cross-price elasticity of demand between this product and a complementary product is -0.2, and the income elasticity of demand for this product is 0.8, what will be the impact on the firm's profit maximization decision?

A. The price increase will lead to a decrease in demand, but the increase in cost will be offset by the increase in demand for the complementary product.
B. The price increase will lead to a decrease in demand, and the increase in cost will further reduce the firm's profit maximization. ✓
C. The price increase will lead to an increase in demand, and the increase in cost will be offset by the increase in demand for the complementary product.
D. The price increase will have no impact on the firm's profit maximization decision.

Explanation: The decrease in demand due to the price increase and the increase in cost will reduce the firm's profit maximization. The cross-price elasticity of demand between this product and the complementary product is -0.2, indicating that a decrease in demand for this product will lead to an increase in demand for the complementary product, but the effect is negligible. The income elasticity of demand for this product is 0.8, indicating that an increase in income will lead to an increase in demand, but the effect is also negligible. Therefore, the price increase will lead to a decrease in demand, and the increase in cost will further reduce the firm's profit maximization.

Q9. A monopolistically competitive firm faces a downward-sloping demand curve due to product differentiation and a constant price elasticity of demand of -2. If a close substitute's price increases by 5%, what is the approximate percentage change in the firm's optimal price, assuming a cross-price elasticity of demand of 1?

A. The firm will increase its price by approximately 2.5% ✓
B. The firm will increase its price by 5%
C. The firm will decrease its price by 2.5%
D. The firm will decrease its price by 5%

Explanation: A 5% increase in the price of a close substitute will shift the firm's demand curve to the right. With a cross-price elasticity of demand of 1, this shift is equivalent to a 5% increase in demand. Given a constant price elasticity of demand of -2, the firm will increase its price by approximately 2.5% to maintain the same level of sales. The percentage change in price is roughly half the percentage change in demand because elasticity is -2.

Q10. A monopolistically competitive firm faces a downward-sloping demand curve and produces where marginal revenue (MR) equals marginal cost (MC). If the firm's average total cost (ATC) curve intersects the MR curve at a point where the MR curve is still above the ATC curve, what is the likely effect on the firm's price and quantity supplied in the short run?

A. The firm will increase price and decrease quantity supplied
B. The firm will decrease price and increase quantity supplied
C. The firm will increase price and increase quantity supplied ✓
D. The firm will decrease price and decrease quantity supplied

Explanation: In the short run, the firm produces where MR = MC. If the MR curve intersects the ATC curve above the minimum point of the ATC, the firm is making a profit. The firm will increase output to maximize profits, and the price will be determined by the demand curve at the new quantity. The firm will increase quantity supplied and increase price.

That was just a sample. Sign up to unlock the full question bank with timed tests and certificates.