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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 421
Marshall classified markets by time into the market period, the short period and the long period. In the MARKET period, price is determined mainly by:
Select an option first.
Correct answer: B — DEMAND, since supply is fixed
Explanation: In the market period the stock in existence cannot be changed at all, so the supply curve is vertical and demand alone fixes the price - which is why perishables can swing so violently in price on a single day. As the period lengthens, cost and supply assume progressively greater influence.
Question 422
In economics, a market means:
Select an option first.
Correct answer: D — Any arrangement by which buyers and sellers are in contact and a price is determined
Explanation: Economists define a market by the CONTACT between buyers and sellers, not by geography - a commodity exchange, a telephone network or an online platform is as much a market as a bazaar. What matters is that one price tends to prevail for the same good throughout it.
Question 423
The distinguishing feature of monopolistic competition is:
Select an option first.
Correct answer: C — Many sellers offering DIFFERENTIATED products
Explanation: Product differentiation - by brand, packaging, quality or service - gives each firm a little monopoly power and hence a downward sloping demand curve, while free entry keeps long-run profits normal. Distractor D describes oligopoly and distractor B perfect competition. Selling costs such as advertising arise only under this market form.
Question 424
A profit-maximising monopolist will never operate on the portion of the demand curve where demand is:
Select an option first.
Correct answer: C — Inelastic
Explanation: Where demand is inelastic, marginal revenue is NEGATIVE, so cutting output would raise revenue and lower cost at the same time - profit must therefore increase. The monopolist consequently always produces where demand is elastic and marginal revenue positive, which is the upper half of a linear demand curve.
Question 425
A natural monopoly arises where:
Select an option first.
Correct answer: C — Economies of scale are so large that one firm can supply the whole market at lower cost than several
Explanation: Water supply, electricity distribution and railways involve heavy fixed costs and falling average cost over the whole range of demand, so duplicating the network would raise costs. Competition being wasteful here, such industries are typically regulated or publicly owned rather than broken up.
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Question 426
Oligopolists often prefer non-price competition because:
Select an option first.
Correct answer: C — Price cuts are usually matched by rivals, leaving all worse off
Explanation: A price cut is easily and immediately matched, so it wins no lasting advantage and merely lowers everyone's margin. Advertising, product improvement and after-sales service are harder to imitate quickly, which is why oligopoly competition tends to take those forms - and why prices stay rigid.
Question 427
Pure competition differs from perfect competition in that pure competition does NOT require:
Select an option first.
Correct answer: A — Perfect knowledge and perfect mobility of factors
Explanation: Pure competition needs only large numbers, a homogeneous product and free entry. PERFECT competition adds the more demanding conditions of perfect knowledge and perfect factor mobility. Perfect competition is therefore the stricter concept, and pure competition the more nearly attainable one.
Question 428
Predatory pricing means setting a price:
Select an option first.
Correct answer: C — BELOW cost temporarily, to drive out rivals and deter entry
Explanation: The strategy sacrifices short-run profit in the expectation of recovering it once rivals have withdrawn and prices can be raised. Because it harms competition rather than resulting from it, it is treated as an abuse of dominance under competition law.
Question 429
Under third degree price discrimination, the monopolist charges the HIGHER price in the market where demand is:
Select an option first.
Correct answer: C — Less elastic
Explanation: Buyers whose demand is inelastic will not greatly reduce purchases when charged more, so profit is maximised by charging them the higher price and the elastic market the lower one. This is why student and off-peak concessions exist: those groups have the more elastic demand.
Question 430
Under price leadership in an oligopoly:
Select an option first.
Correct answer: C — One dominant firm sets the price and the others follow
Explanation: Price leadership is TACIT rather than formal collusion: the leader, usually the largest or lowest-cost firm, changes price and the rest follow without any agreement. It achieves much of what a cartel would, while avoiding the legal exposure of an explicit arrangement.
Question 431
Under the kinked demand curve model, price remains unchanged even when costs change because:
Select an option first.
Correct answer: C — The marginal revenue curve has a DISCONTINUITY within which marginal cost can move freely
Explanation: The kink in demand produces a vertical gap in the marginal revenue curve. So long as marginal cost shifts within that gap, the MR = MC output and hence the price are unchanged. This is the model's explanation of why oligopoly prices are sticky even as costs move.
Question 432
Producer surplus is:
Select an option first.
Correct answer: B — The excess of what a producer receives over the minimum he would have accepted
Explanation: Measured as the area between the price line and the supply curve, producer surplus mirrors consumer surplus on the buyer's side. Together the two measure the total gain from trade in a market, and both are reduced when a tax drives a wedge between the price paid and the price received.
Question 433
A regulator wishing to achieve ALLOCATIVE efficiency in a monopoly would set price equal to:
Select an option first.
Correct answer: B — Marginal cost
Explanation: Pricing at marginal cost equates the value of the last unit to its cost, which is the efficiency condition. The practical difficulty with a natural monopoly is that average cost is still falling there, so marginal cost lies below average cost and the firm makes a loss requiring subsidy.
Question 434
The relationship between marginal revenue, average revenue and elasticity of demand is:
Select an option first.
Correct answer: C — MR = AR multiplied by (1 - 1/e)
Explanation: The formula shows why MR falls below AR whenever demand slopes downward: with e finite, the bracket is less than one. If e is infinite, as under perfect competition, the bracket becomes one and MR equals AR - which is exactly the perfectly competitive case emerging from the general rule.
Question 435
Under monopoly, marginal revenue is:
Select an option first.
Correct answer: B — Always LESS than average revenue
Explanation: To sell an extra unit the monopolist must lower the price on ALL units, so the revenue gained from the extra unit is less than its price by the amount lost on the earlier units. Hence MR lies below AR throughout, and the MR curve falls twice as steeply as a straight-line AR curve.
Question 436
Under perfect competition, price is equal to:
Select an option first.
Correct answer: B — Both marginal revenue and average revenue
Explanation: Because every unit sells at the same unchanging price, the revenue per unit and the revenue from one more unit are both that price, so P = AR = MR. Under monopoly or monopolistic competition the price must be cut to sell more, which makes marginal revenue fall BELOW average revenue - the key structural difference between the market forms.
Question 437
Selling costs such as advertising are a distinguishing feature of:
Select an option first.
Correct answer: A — Monopolistic competition
Explanation: Advertising is worth incurring only where the product can be DIFFERENTIATED from close rivals, which is exactly the condition under monopolistic competition. Under perfect competition the product is identical and any firm can sell all it wishes at the ruling price, so advertising would be pure waste.
Question 438
Selling costs differ from production costs in that selling costs are incurred to:
Select an option first.
Correct answer: A — SHIFT the demand curve for the firm's product outward
Explanation: Production costs move the firm ALONG a given output, while selling costs such as advertising aim to alter demand itself. Chamberlin's inclusion of selling costs was a major addition to price theory, since perfect competition has no place for them at all.
Question 439
In the SHORT RUN, a firm under perfect competition may:
Select an option first.
Correct answer: A — Earn supernormal profit, normal profit, or incur a loss
Explanation: In the short run entry and exit cannot occur, so the ruling price may lie above, at, or below average cost and all three outcomes are possible. Only in the LONG RUN does free entry compete away supernormal profit and exit eliminate losses, leaving every firm with normal profit alone.
Question 440
In the LONG RUN a firm will leave the industry if price is below:
Select an option first.
Correct answer: B — Average total cost
Explanation: In the long run there are no fixed costs to be recovered, so any price below average total cost means the resources would earn more elsewhere and the firm exits. In the SHORT run it continues so long as price covers average variable cost - the difference between the two decisions is the presence of sunk fixed cost.
Question 441
Which of the following is a source of monopoly power?
Select an option first.
Correct answer: B — Exclusive control over a key raw material, or a patent
Explanation: Monopoly persists only where entry is blocked - by patents and copyrights, statutory licence, exclusive control of an input, or the huge scale economies that create a NATURAL monopoly in utilities. Free entry and perfect knowledge are conditions of perfect competition and would destroy monopoly power.
Question 442
The short-run supply curve of a firm under perfect competition is:
Select an option first.
Correct answer: B — The portion of its marginal cost curve lying above minimum average variable cost
Explanation: The firm equates price with marginal cost, so the MC curve traces the quantity supplied at each price - but only above the shut-down point, since below that it produces nothing at all. This is why the supply curve begins abruptly at the minimum of average variable cost rather than at the origin.
Question 443
A monopolist has:
Select an option first.
Correct answer: A — No supply curve in the usual sense, since price and quantity depend on the demand curve it faces
Explanation: A supply curve presupposes a unique quantity supplied at each given price, which holds only for a price taker. A monopolist chooses a point on its demand curve, so the same marginal cost can yield different prices depending on the shape of demand - and no single supply curve exists.
Question 444
A perfectly competitive firm breaks even when price equals:
Select an option first.
Correct answer: B — Minimum average total cost
Explanation: At the minimum of average total cost, total revenue exactly covers total cost and the firm earns NORMAL profit - which in economics is already counted as a cost. Distractor A is the shut-down point, where losses equal total fixed cost. The two points are often confused, and the difference is average fixed cost.
Question 445
Under perfect competition an individual firm is:
Select an option first.
Correct answer: D — A price taker facing a perfectly elastic demand curve
Explanation: With a large number of firms selling an identical product, no single firm can influence the ruling price, so it can sell any quantity at that price but nothing at all above it - a horizontal, perfectly elastic demand curve. The INDUSTRY demand curve still slopes downward; it is only the individual firm's curve that is horizontal.
Question 446
The kinked demand curve hypothesis is used to explain:
Select an option first.
Correct answer: B — Price rigidity under oligopoly
Explanation: The model assumes rivals will match a price CUT but ignore a price RISE, so demand is elastic above the ruling price and inelastic below it. This produces a discontinuity in marginal revenue, within which marginal cost can move without disturbing the profit-maximising price - which is why oligopoly prices tend to stay put even as costs change.
Question 447
A firm under perfect competition should shut down in the short run if price falls below:
Select an option first.
Correct answer: A — Average variable cost
Explanation: So long as price covers average variable cost, the excess contributes something towards fixed costs, which must be borne whether or not the firm operates - so continuing reduces the loss. Once price falls below average variable cost, every unit produced adds to the loss and shutting down is better. The minimum of AVC is therefore the shut-down point.
Question 448
Total revenue is at its maximum at the output where marginal revenue is:
Select an option first.
Correct answer: B — Zero
Explanation: Total revenue rises while marginal revenue is positive and falls once it turns negative, so it peaks exactly where marginal revenue is zero - the point of unitary elasticity on the demand curve. Note that maximum revenue is NOT maximum profit, which requires MR = MC and takes costs into account.
Question 449
Under monopoly, total revenue is at its maximum at the output where:
Select an option first.
Correct answer: B — Elasticity of demand is unity
Explanation: Total revenue peaks where marginal revenue is zero, and marginal revenue is zero exactly where elasticity equals one. Above that output demand is inelastic and further sales reduce revenue; below it demand is elastic. Note that this is not the profit-maximising output, which requires MR = MC.
Question 450
Under perfect competition, the total revenue curve of a firm is:
Select an option first.
Correct answer: D — An upward sloping STRAIGHT LINE through the origin
Explanation: Because every unit sells at the same fixed price, revenue rises in exact proportion to quantity, giving a straight line whose slope IS the price. Under monopoly the price must fall to sell more, so total revenue rises, peaks and then falls - the inverted U of distractor A.
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