A2 MCQ PRACTICE 0CT23-31

What is the effect on total satisfaction of consuming extra units of the good if the marginal utility from consuming additional goods is positive and diminishing?

• Total satisfaction falls at a decreasing rate.

• Total satisfaction falls at an increasing rate.

• Total satisfaction rises at a decreasing rate.

• Total satisfaction rises at an increasing rate.

Answer explanation

Total satisfaction rises at a decreasing rate because although consuming extra units increases satisfaction, the marginal utility diminishes over time.

If the price of good X increases from $2 to $3, what will be the new budget line?

• A) b→b1

• B) b→b2

• C) b→b3

• D) b→b4

Answer explanation

The new budget line shifts parallelly to the right, so the correct answer is B) b→b2.

Which market structures are contestable?

• Perfect competition: yes, Monopolistic competition: yes, Pure monopoly: no

• Perfect competition: no, Monopolistic competition: yes, Pure monopoly: yes

• Perfect competition: no, Monopolistic competition: no, Pure monopoly: yes

• Perfect competition: yes, Monopolistic competition: no, Pure monopoly: no

Answer explanation

The correct answer is Perfect competition: yes, Monopolistic competition: no, Pure monopoly: no because only perfect competition allows for contestability due to low barriers to entry and exit.

Between levels of output OL and OM, which statement is not correct?

• Average fixed costs are falling.

• Economies of scale are being experienced.

• The law of diminishing returns is operative.

• There are decreasing returns to scale.

Answer explanation

Between levels of output OL and OM, the statement 'There are decreasing returns to scale' is not correct because economies of scale are being experienced, indicating increasing returns to scale.

Which combination of reactions by rivals results in a kinked demand curve for an oligopolist when a price is changed?

• copying both a price rise and a price fall

• copying a price rise and ignoring a price fall

• ignoring a price rise and copying a price fall

• ignoring both a price rise and a price fall

Answer explanation

Ignoring a price rise and copying a price fall by rivals results in a kinked demand curve for an oligopolist when a price is changed.

What is a key condition for effective price discrimination?

• The product cannot be resold to another consumer.

• The product must be price inelastic.

• The profits from one market can be used to subsidise another market.

• There are low barriers to entry into the market.

Answer explanation

The key condition for effective price discrimination is that the product cannot be resold to another consumer.

Which combination of cost conditions is most likely to act as a barrier to entry to a new firm wanting to join an industry?

• High fixed costs, low output, high sunk costs

• High fixed costs, high output, high sunk costs

• Low fixed costs, high output, low sunk costs

• Low fixed costs, low output, low sunk costs

Answer explanation

High fixed costs, high output, high sunk costs are likely to act as a barrier to entry due to the significant financial investment required and the risk of unrecoverable costs.

How is dynamic efficiency represented on a diagram?

• A downward move to the minimum point of a long-run average cost curve

• A downward shift in the long-run average cost curve

• A move from a point inside a production possibility curve to a point on it

• A reduction in marginal revenue so that it equals long-run marginal cost

Answer explanation

Dynamic efficiency is represented by a downward shift in the long-run average cost curve.

A city council is considering building a passenger terminal at its port so that the city can benefit from large cruise ships that could then dock there. It undertakes a cost–benefit analysis. What would be included as an external cost in the city council’s cost–benefit analysis?

• The cost of a ticket for a passenger to travel on a cruise ship

• The cost of fuel to operate the cruise ships

• The costs paid by cruise ships when they dock at the port

• The cost to a fishing fleet of relocating to another port

Answer explanation

The cost to a fishing fleet of relocating to another port is considered an external cost in the city council's cost-benefit analysis.

What best describes the total costs incurred by the oil companies in circumstances where they are required to repair environmental damage?

• External costs

• Private costs plus external costs

• Social costs plus external costs

• Social costs plus private costs

Answer explanation

The total costs incurred by oil companies in repairing environmental damage consist of private costs (costs directly borne by the companies) and external costs (costs imposed on society).