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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 391
The distinction between collusive and non-collusive oligopoly turns on whether the firms:
Select an option first.
Correct answer: B — Reach an AGREEMENT, open or tacit, on price and output
Explanation: Under collusion the group behaves more like a monopolist; without it each firm must guess its rivals' reactions, which is the situation the kinked demand curve model addresses. The same industry may move between the two states over time.
Question 392
A formal agreement among oligopolists to fix prices or share the market is called:
Select an option first.
Correct answer: A — A cartel
Explanation: A cartel behaves collectively like a monopolist, restricting output to raise price. Cartels are inherently unstable, since each member gains by secretly exceeding its quota while the others restrict, and they are prohibited by competition law in most countries including India.
Question 393
In long-run equilibrium, a firm under monopolistic competition differs from one under perfect competition in that it:
Select an option first.
Correct answer: D — Produces where average cost is still FALLING, so it has excess capacity
Explanation: Both earn only normal profit in the long run, since entry is free in each. The difference is the point of tangency: with a downward sloping demand curve, tangency with the average cost curve necessarily occurs to the left of its minimum.
Question 394
The number of firms and the nature of the product under monopolistic competition are respectively:
Select an option first.
Correct answer: C — Many firms, differentiated products
Explanation: Monopolistic competition combines the large numbers of perfect competition with the product differentiation that gives each firm a little market power. That combination produces a downward sloping but highly elastic demand curve, free entry, and long-run normal profit with excess capacity.
Question 395
Which market structure is characterised by a large number of sellers, an identical product and free entry, but IMPERFECT knowledge?
Select an option first.
Correct answer: D — Pure competition
Explanation: Pure competition requires large numbers, homogeneity and free entry, but not perfect knowledge or perfect factor mobility. Adding those two gives perfect competition. Since perfect knowledge is unattainable in practice, pure competition is the closer approximation to real markets.
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Question 396
Price discrimination is possible only where:
Select an option first.
Correct answer: B — The markets are separable, have different elasticities, and resale between them is impossible
Explanation: All three conditions must hold together. Separability and the impossibility of resale prevent arbitrage from wiping out the price gap, and differing elasticities make discrimination worthwhile - the higher price being charged in the LESS elastic market. It also requires some degree of monopoly power, which is why it cannot occur under perfect competition.
Question 397
In a constant cost industry under perfect competition, the long-run supply curve of the industry is:
Select an option first.
Correct answer: B — HORIZONTAL, since expansion does not change factor prices
Explanation: Entry expands industry output without bidding up input prices, so each firm's cost curves are unchanged and the long-run price returns to the same minimum average cost. In an INCREASING cost industry, expansion raises factor prices and the long-run supply curve slopes upward.
Question 398
The theory of contestable markets holds that a firm may behave competitively even with few rivals, provided:
Select an option first.
Correct answer: A — Entry and exit are free and costless, so the THREAT of entry disciplines it
Explanation: What matters is not the number of firms actually present but the absence of sunk costs that would deter hit-and-run entry. A single airline on a route may price competitively if another could enter tomorrow - which shifts the policy focus from market share to entry barriers.
Question 399
The deadweight loss under monopoly represents:
Select an option first.
Correct answer: D — The value of mutually beneficial transactions that do NOT take place because output is restricted
Explanation: It is a loss to society that nobody captures - distinct from the transfer of consumer surplus to the monopolist, which merely changes hands. This distinction between a transfer and a genuine loss is the heart of the welfare case against monopoly.
Question 400
Charging each individual buyer the maximum he is willing to pay is known as:
Select an option first.
Correct answer: A — First degree or perfect price discrimination
Explanation: First degree discrimination extracts the entire consumer surplus and requires knowledge of every buyer's reservation price, so it is rare in practice. Second degree charges by BLOCKS of quantity consumed, as with electricity tariffs, and third degree charges different prices to separable GROUPS such as students or off-peak travellers.
Question 401
The demand curve facing a firm under monopolistic competition is:
Select an option first.
Correct answer: D — Downward sloping but HIGHLY elastic, because close substitutes exist
Explanation: Product differentiation gives the firm some power to raise price without losing every customer, but the availability of close substitutes means it loses many - so the curve slopes downward yet is much flatter than a monopolist's. That elasticity is what limits the firm's market power.
Question 402
Selling a good abroad at a price below that charged in the home market is called:
Select an option first.
Correct answer: A — Dumping
Explanation: Dumping is third degree price discrimination between the domestic and foreign markets, made possible because the two are separable and resale between them is impractical. The lower price is charged in the more ELASTIC market, and importing countries commonly respond with anti-dumping duties.
Question 403
A market with a SINGLE BUYER is called:
Select an option first.
Correct answer: C — A monopsony
Explanation: Monopsony is the buying-side counterpart of monopoly - a single employer in a company town, for instance. Duopoly means two SELLERS and oligopsony a few buyers. The prefix mono, duo or oligo gives the number, and the suffix poly or psony tells you which side of the market it refers to.
Question 404
Large economies of scale act as a barrier to entry because:
Select an option first.
Correct answer: C — A new entrant must start large to be cost-competitive, which requires heavy capital and risks depressing the price
Explanation: Entering at small scale means high unit costs; entering at large scale needs enormous capital and adds so much output that the price may collapse. The barrier is economic rather than legal, which is why it persists even where entry is perfectly lawful.
Question 405
A monopolist maximises profit at the output where:
Select an option first.
Correct answer: B — Marginal revenue equals marginal cost, with marginal cost rising
Explanation: The MR = MC rule holds for every market form; what differs is that a monopolist's price EXCEEDS marginal revenue and therefore exceeds marginal cost, which is the source of the welfare loss. The second-order condition that marginal cost be rising at that point is what distinguishes a maximum from a minimum. Maximum total revenue is not maximum profit, since costs are ignored.
Question 406
An INDUSTRY is in equilibrium under perfect competition when:
Select an option first.
Correct answer: D — There is no tendency for firms to enter or leave, all earning only normal profit
Explanation: A firm is in equilibrium when it has no reason to change its own output; the industry is in equilibrium when there is additionally no incentive for entry or exit. The second condition is the stronger, and it is what forces long-run price down to minimum average cost.
Question 407
Under monopolistic competition, long-run equilibrium is characterised by:
Select an option first.
Correct answer: D — Only normal profit, at an output where average cost is still falling
Explanation: Free entry competes away supernormal profit, but because each firm faces a DOWNWARD sloping demand curve, tangency with the average cost curve occurs to the left of its minimum. The firm therefore operates below the most efficient scale - the excess capacity that is the characteristic inefficiency of this market form.
Question 408
A monopoly market is characterised by:
Select an option first.
Correct answer: B — A single seller with no close substitutes and strong barriers to entry
Explanation: With one seller and no close substitute, the firm IS the industry and faces the whole downward sloping market demand curve. Barriers to entry - legal, technical or natural - are essential, since without them supernormal profit would attract rivals and the monopoly would not survive.
Question 409
The defining feature of oligopoly is:
Select an option first.
Correct answer: C — A few sellers whose decisions are mutually INTERDEPENDENT
Explanation: With only a few firms, each must anticipate how rivals will react to its own price or output decision, which is why oligopoly has no single determinate solution. This interdependence explains both the tendency to collude and the prevalence of non-price competition.
Question 410
Which of the following is NOT a feature of perfect competition?
Select an option first.
Correct answer: D — Product differentiation through branding
Explanation: Perfect competition requires an IDENTICAL product, so branding and differentiation are impossible - that feature belongs to monopolistic competition. The other conditions are many buyers and sellers, free entry and exit, perfect knowledge and perfect mobility of factors, which together ensure no single firm can influence price.
Question 411
Product differentiation under monopolistic competition may be based on:
Select an option first.
Correct answer: D — Brand, packaging, quality, design, location and after-sales service
Explanation: Differentiation may be real, resting on genuine differences in quality or design, or imaginary, resting on branding and advertising alone. Either way it makes the products imperfect substitutes and gives each seller a limited monopoly over its own version.
Question 412
Under full cost or cost-plus pricing, a firm sets price by:
Select an option first.
Correct answer: A — Adding a conventional profit margin to average cost
Explanation: This is the rule of thumb many firms actually use, since marginal revenue and marginal cost are hard to estimate in practice. It is criticised for ignoring demand conditions altogether, though the size of the mark-up often reflects them implicitly.
Question 413
Chamberlin's concept of GROUP equilibrium under monopolistic competition refers to equilibrium of:
Select an option first.
Correct answer: B — The whole group of firms producing closely related but differentiated products
Explanation: Because products differ, the firms do not form an industry in the strict sense, so Chamberlin analysed them as a group. Group equilibrium is reached when no firm can improve its position by changing price, product or selling outlay, and entry has driven profits down to the normal level.
Question 414
The long-run supply curve of an INCREASING cost industry slopes upward because:
Select an option first.
Correct answer: B — Expansion of the industry bids up the prices of the factors it uses, raising every firm's costs
Explanation: As the industry draws in more of a specialised input, its price rises and the cost curves of all firms shift upward, so a larger industry output requires a higher long-run price. This is the commonest case in practice.
Question 415
The prisoner's dilemma is used in oligopoly theory to show that:
Select an option first.
Correct answer: C — Each firm acting in its own interest may leave BOTH worse off than if they had cooperated
Explanation: Each firm has an individual incentive to undercut, yet if both do so both end with lower profits than under collusion. This explains both the attraction of cartels and their instability - the very incentive that makes agreement valuable also makes it fragile.
Question 416
Limit pricing is the practice of setting a price:
Select an option first.
Correct answer: A — Low enough to make ENTRY unattractive to potential competitors
Explanation: The established firm forgoes some current profit to protect its position, exploiting a cost advantage that a new entrant could not match. Unlike predatory pricing, the price need not be below cost - it need only be below the entrant's likely cost.
Question 417
A monopolist can determine:
Select an option first.
Correct answer: B — Either price or quantity, but not both independently
Explanation: The monopolist controls supply but not demand, so once he fixes the price the market decides the quantity, and if he fixes the quantity the market decides the price. He chooses a POINT on the demand curve, not the curve itself - which is the precise limit of monopoly power and a favourite examination point.
Question 418
In the LONG period, the normal price of a commodity tends to equal:
Select an option first.
Correct answer: D — The cost of production, including normal profit
Explanation: Given time, supply adjusts fully: if price exceeds cost, entry expands output and pushes price down, and the reverse if price falls short. Marshall therefore called cost of production the dominant force in the long period, with demand dominant in the market period and both active in between.
Question 419
In long-run equilibrium under perfect competition:
Select an option first.
Correct answer: B — Price equals marginal cost and equals minimum average cost
Explanation: Free entry drives price down to the minimum point of the long-run average cost curve, where P = MR = MC = AC. Firms earn only normal profit, produce at the most efficient scale, and price equals marginal cost - which is the condition for ALLOCATIVE efficiency and the reason this market form is the welfare benchmark.
Question 420
When the elasticity of demand equals one, marginal revenue is:
Select an option first.
Correct answer: D — Zero
Explanation: Substituting e = 1 into MR = AR(1 - 1/e) gives MR = AR x 0 = 0. This is the point of maximum total revenue, and it divides the elastic upper portion of the demand curve from the inelastic lower portion where marginal revenue turns negative.
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