Economics Multiple Choice Questions

When the price of a good falls the effect on the quantity demanded is the result of an income effect and a substitution effect. Which statement about these effects is correct?

• For inferior goods the income effect and the substitution effect work in the same direction.

• For inferior, but not Giffen, goods the income effect outweighs the substitution effect.

• For normal goods the income effect and substitution effect work in the same direction.

• For normal goods the income effect outweighs the substitution effect.

What would not affect the budget line of an individual consumer?

• the individual’s preference for various goods

• the level of income tax

• the money prices of goods

• the wages earned by the individual

Which is not a source of market failure?

• imperfect information

• income inequality

• monopoly

• non-excludability

The government wants to regulate the consumption of a demerit good in order to increase society’s net welfare. In which situation will society’s net welfare increase?

• The fall in the marginal social benefit is greater than the fall in the marginal social cost.

• The fall in the marginal social cost is greater than the fall in the marginal social benefit.

• The fail in the total social benefit is greater than the fall in the total social cost.

• The fall in the total social cost is greater than the fall in the total social benefit.

In the year ending July 2016, airline fuel prices fell by 20.4% while the price of passenger aircraft increased by around 1.1%. Assuming no other changes in the passenger airline industry, what was the outcome for fixed costs and variable costs?

• decreased decreased

• decreased increased

• increased decreased

• increased increased

Which feature of oligopoly is being assumed when the demand curve for an individual firm is as shown?

• price discrimination

• price leadership by the dominant firm

• interdependence between firms

• collusion between firms

Many public utilities can be described as ‘natural’ monopolies. Which statement best describes the situation leading to a ‘natural’ monopoly?

• There are high fixed costs and falling average costs over all outputs demanded.

• There are legal restrictions on new entrants.

• A single firm controls the supply of raw materials.

• The firm has a patent on an essential process.

Increased advertising by a firm in an imperfectly competitive industry leads to an increase in demand for the industry’s product but a fall in the firm’s profits. What could help to explain this?

• Production is subject to diseconomies of scale.

• Rival firms respond by increasing their advertising outlays.

• The demand for the industry’s product is price-inelastic.

• The increase in demand for the firm’s output is entirely at the expense of other firms.

An industry consists of a dominant firm, which acts as a price leader, and a large number of small firms. Which statement about the profit-maximising output of the small firms is correct?

• Average cost is equal to average revenue.

• Average cost is minimised.

• Marginal cost is equal to price.

• Marginal revenue is zero.

There are two firms in an industry. Firm X faces a choice. It can either act independently or work with its rival. If it acts independently its profit could be $900 a week but it could be only $400 a week depending on what its rival does. If it works with its rival the joint profit of the two firms together would be $1400, $700 each. It has no knowledge of what the rival’s policy will be. Which concept describes this situation?

• contestable market

• kinked demand curve

• principal agent problem

• prisoner’s dilemma