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Free CFA Economics Practice Questions & Answers
2,050 exam-style Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 211
In the short run, a perfectly competitive firm can earn positive economic profit if:
Select an option first.
Correct answer: A — P > ATC at the profit-maximizing output.
Explanation: ✔ Why correct: Economic profit is positive when price exceeds ATC at the chosen quantity. B: That implies zero economic profit (normal profit). C: The firm would shut down if P < AVC. D: P < ATC implies economic loss, not profit.
Question 212
In the long run under perfect competition, positive economic profits:
Select an option first.
Correct answer: B — Attract entry, which drives price down to ATC.
Explanation: ✔ Why correct: Free entry drives supply up, pushing price down until firms earn only normal profit (P = ATC). A: Firms are price takers; profits don’t persist with free entry. C: Profits attract entry, not exit. D: Entry/exit is driven by profit signals.
Question 213
A firm is said to break even when:
Select an option first.
Correct answer: A — TR = TC.
Explanation: ✔ Why correct: Breakeven occurs when total revenue equals total cost (including opportunity costs). B: TR < TVC implies shutdown in the short run. C: P < AVC also implies shutdown. D: TR > TC implies positive economic profit.
Question 214
Normal profit occurs when:
Select an option first.
Correct answer: B — TR = economic cost.
Explanation: ✔ Why correct: Normal profit means the firm covers all explicit and implicit (opportunity) costs—TR equals economic cost. A: Implies economic loss. C: Implies positive economic profit. D: TVC excludes fixed and opportunity costs of capital.
Question 215
In a competitive industry with no barriers to entry, long-run equilibrium implies:
Select an option first.
Correct answer: B — Firms earn normal profit only.
Explanation: ✔ Why correct: Entry and exit drive economic profit to zero; firms earn a normal return on capital. A: Profits attract entry and are competed away. C: Losses cause exit. D: Zero economic profit does not mean zero accounting profit.
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Question 216
In the long run, if a firm cannot earn at least zero economic profit, it will:
Select an option first.
Correct answer: B — Exit the industry.
Explanation: ✔ Why correct: If TR cannot cover economic costs in the long run, the firm exits to avoid erosion of equity capital. A: Sunk fixed costs matter less in the long run; the firm can avoid them by exiting. C: Long-run decision is exit, not just temporary shutdown. D: Increasing output doesn’t fix a structurally unprofitable situation.
Question 217
A sunk cost is best described as:
Select an option first.
Correct answer: C — A cost that cannot be recovered regardless of future actions.
Explanation: ✔ Why correct: Sunk costs are unrecoverable and should be ignored in current decisions. A: That describes variable cost. B: Sunk costs cannot be avoided by shutting down. D: No direct link to marginal cost.
Question 218
In the short run, a firm should continue to operate (even at a loss) as long as:
Select an option first.
Correct answer: B — P > AVC.
Explanation: ✔ Why correct: If price exceeds AVC, the firm covers all variable costs and some fixed costs, minimizing loss by operating. A: P > ATC implies profit, not just “operate at a loss.” C and D: If P < AVC or TR < TVC, the firm should shut down in the short run.
Question 219
The shutdown point in the short run is where:
Select an option first.
Correct answer: B — P = AVC at its minimum.
Explanation: ✔ Why correct: The shutdown point is the minimum of the AVC curve; below this, the firm cannot cover variable costs. A: Minimum ATC is the breakeven point. C: Minimum MC is not the shutdown criterion. D: MR is constant in perfect competition; this is not the definition.
Question 220
The breakeven point for a firm is:
Select an option first.
Correct answer: B — The minimum of the ATC curve.
Explanation: ✔ Why correct: At minimum ATC, P = ATC and TR = TC, so the firm breaks even. A: That’s the shutdown point. C and D: These equalities do not define breakeven in standard analysis.
Question 221
If TR < TVC in the short run, the firm should:
Select an option first.
Correct answer: C — Shut down production immediately.
Explanation: ✔ Why correct: If TR cannot cover TVC, operating adds more loss than shutting down; best to shut down and lose only fixed cost. A: Operating would increase losses beyond fixed costs. B: More output increases TVC and losses. D: Plant expansion is a long-run decision and not rational under losses this severe.
Question 222
If TR covers TVC but not all of TFC in the short run, the firm:
Select an option first.
Correct answer: B — Can continue to operate in the short run but will exit in the long run if conditions persist.
Explanation: ✔ Why correct: Covering TVC but not full TFC means operating minimizes short-run loss, but long-run viability is not sustainable. A: Shutdown would increase loss to full fixed cost. C and D: The firm is incurring economic losses, not normal or positive profit.
Question 223
In the long run, if TVC exceeds TR at all output levels, the firm will:
Select an option first.
Correct answer: C — Exit the market to avoid erosion of equity capital.
Explanation: ✔ Why correct: If TR < TVC even in the long run, the firm cannot cover variable costs and will exit to avoid ongoing losses. A: That would destroy equity. B: Long-run decision is exit, not just temporary shutdown. D: Increasing fixed costs doesn’t solve a fundamental revenue shortfall.
Question 224
The short run is defined as the period during which:
Select an option first.
Correct answer: B — At least one factor of production is fixed.
Explanation: ✔ Why correct: Short run: at least one input (often capital/plant size) is fixed. A: That defines the long run. C: Fixed costs exist in the short run. D: Entry/exit is a long-run feature.
Question 225
The long run is best described as the time period in which:
Select an option first.
Correct answer: B — All factors of production are variable.
Explanation: ✔ Why correct: In the long run, the firm can adjust all inputs, including plant size and technology. A: That’s a typical short-run assumption. C: Fixed costs can be avoided in the long run. D: Plant size is precisely what can be changed in the long run.
Question 226
The long run is often referred to as the “planning horizon” because:
Select an option first.
Correct answer: B — Firms choose the optimal short-run operating size that maximizes profit over time.
Explanation: ✔ Why correct: In the long run, firms plan which plant size and technology (short-run positions) will maximize profit over time. A: Planning involves both fixed and variable costs. C: Fixed costs matter when choosing capacity. D: Technology is one of the adjustable factors in the long run.
Question 227
Short-run total cost (STC) includes:
Select an option first.
Correct answer: C — Both fixed and variable costs at a given level of capital.
Explanation: ✔ Why correct: STC = TFC + TVC, given a fixed level of capital in the short run. A and B: Each omits one component of total cost. D: Total cost is precisely the sum of fixed and variable costs.
Question 228
The typical shape of the short-run total cost (STC) curve reflects:
Select an option first.
Correct answer: C — First increasing, then diminishing marginal returns to labor.
Explanation: ✔ Why correct: STC rises at a decreasing rate initially (specialization) and then at an increasing rate (diminishing marginal returns). A and B: Ignore the two-phase behavior. D: Cost behavior is directly tied to marginal product.
Question 229
An increase in the level of fixed capital (plant size), holding technology constant, will:
Select an option first.
Correct answer: B — Increase TFC and shift the STC curve upward.
Explanation: ✔ Why correct: Higher capital raises TFC and thus the vertical intercept of STC, shifting it upward. A: More capital raises fixed cost, not lowers it. C: Diminishing returns can still occur with respect to the variable input. D: Variable costs remain; only fixed capital changed.
Question 230
Economies and diseconomies of scale are primarily:
Select an option first.
Correct answer: B — Long-run phenomena related to changing the scale of all inputs.
Explanation: ✔ Why correct: Economies/diseconomies of scale arise when all inputs are variable—i.e., in the long run—affecting long-run average cost. A: Short run involves at least one fixed input; scale changes are long-run. C: They are central to long-run cost analysis. D: They depend on how all inputs and technology scale, not just fixed costs.
Question 231
The long-run average total cost (LRAC) curve is best described as:
Select an option first.
Correct answer: B — The envelope of all possible short-run average total cost (SATC) curves.
Explanation: ✔ Why correct: LRAC is constructed as the lower boundary (envelope) of all SATC curves corresponding to different plant sizes. A: LRAC includes both fixed and variable costs, not just fixed. C: MC is separate from LRAC. D: It’s not a sum; it’s the lower envelope.
Question 232
Economies of scale occur when:
Select an option first.
Correct answer: B — Average cost per unit falls as output rises.
Explanation: ✔ Why correct: Economies of scale mean cost per unit (average cost) decreases as the firm scales up output. A: Total cost usually rises with output. C: Constant MC doesn’t necessarily imply economies of scale. D: That describes diseconomies of scale.
Question 233
Diseconomies of scale are most likely when:
Select an option first.
Correct answer: B — Output increases and average cost rises.
Explanation: ✔ Why correct: Diseconomies of scale occur when increasing scale leads to higher cost per unit. A: That’s economies of scale. C: Could be other effects, not necessarily diseconomies of scale. D: Says nothing about scale effects.
Question 234
Which of the following is a potential source of diseconomies of scale?
Select an option first.
Correct answer: C — Overlapping and duplicating business functions.
Explanation: ✔ Why correct: Duplication and overlap increase inefficiency and cost as the firm grows. A: Increasing returns to scale reduce average cost. B: Specialization usually creates economies of scale. D: Bulk discounts lower input cost.
Question 235
Decreasing returns to scale imply that:
Select an option first.
Correct answer: B — Output increases less than proportionately with inputs.
Explanation: ✔ Why correct: Decreasing returns to scale mean doubling inputs increases output by less than double. A: That’s increasing returns to scale. C: That’s constant returns to scale. D: That would be zero returns.
Question 236
The minimum efficient scale (MES) is:
Select an option first.
Correct answer: B — The output level at the minimum point of the LRAC curve.
Explanation: ✔ Why correct: MES is the output at which LRAC is minimized—the least-cost scale of operation. A: MES is about LRAC, not AVC. C: MC minimum is not necessarily LRAC minimum. D: TR = TVC is not the definition of MES.
Question 237
Under perfect competition in the long run, firms are forced to operate:
Select an option first.
Correct answer: C — At the minimum point of LRAC.
Explanation: ✔ Why correct: Competitive pressure drives price to the minimum LRAC, forcing firms to operate at least-cost scale. A and B: Would imply higher average cost and loss of competitiveness. D: Only the minimum point is sustainable in long-run equilibrium.
Question 238
If a firm operates above the minimum efficient scale in a perfectly competitive market:
Select an option first.
Correct answer: B — Its long-term viability is threatened.
Explanation: ✔ Why correct: Operating at higher average cost than competitors makes the firm vulnerable to being priced out. A: Higher costs reduce profit. C: Regulation is not automatic. D: Competition is precisely what threatens it.
Question 239
An oligopoly is characterized primarily by:
Select an option first.
Correct answer: C — A few firms whose decisions are interdependent.
Explanation: ✔ Why correct: In oligopoly, a small number of firms must consider rivals’ reactions to price and output changes. A: That’s monopoly. B and D: Describe perfect competition.
Question 240
In an oligopoly, firms’ pricing decisions are often influenced by:
Select an option first.
Correct answer: B — Expected retaliatory strategies of rival firms.
Explanation: ✔ Why correct: Oligopolists anticipate and react to competitors’ responses when setting prices and output. A: Regulation may exist but is not the defining feature. C and D: Ignore the strategic interdependence central to oligopoly.
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