CA Foundation P4 · Chapter 4
Price Determination in Different Markets MCQs with Answers
15 multiple-choice questions on Price Determination in Different Markets for CA Foundation P4 Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The demand curve facing an individual firm under perfect competition is:
- A) Perfectly elastic (horizontal) at the market price
- B) Downward sloping
- C) Perfectly inelastic (vertical)
- D) Kinked at the prevailing price
Show answer & explanation
Answer: A) Perfectly elastic (horizontal) at the market price
A perfectly competitive firm is a price taker: it can sell any quantity at the price set by industry demand and supply. Its demand (AR = MR) curve is therefore horizontal. A kinked demand curve is associated with oligopoly.
Question 2
A monopolist faces the demand curve P = 50 - 2Q. At Q = 10, total revenue and marginal revenue respectively are:
- A) Rs. 300 and Rs. 30
- B) Rs. 300 and Rs. 10
- C) Rs. 500 and Rs. 10
- D) Rs. 300 and Rs. 20
Show answer & explanation
Answer: B) Rs. 300 and Rs. 10
At Q = 10, P = 50 - 20 = 30, so TR = 30 x 10 = Rs. 300. TR = 50Q - 2Q^2, hence MR = 50 - 4Q = 50 - 40 = Rs. 10. Rs. 30 is the price (AR), not MR. For a linear demand curve MR has twice the slope of AR.
Question 3
If average revenue is Rs. 60 and price elasticity of demand is 3, marginal revenue is:
- A) Rs. 20
- B) Rs. 40
- C) Rs. 90
- D) Rs. 180
Show answer & explanation
Answer: B) Rs. 40
MR = AR x (1 - 1/e) = 60 x (1 - 1/3) = 60 x 2/3 = Rs. 40. Rs. 20 results from computing AR/e (60/3) and stopping there; Rs. 90 applies the inverse relation AR x e/(e - 1) = 60 x 3/2, which gives AR from MR; Rs. 180 simply multiplies AR by e.
Question 4
Market demand is Qd = 200 - 5P and market supply is Qs = 50 + 10P. The equilibrium price and quantity are:
- A) P = Rs. 15, Q = 125 units
- B) P = Rs. 10, Q = 100 units
- C) P = Rs. 10, Q = 150 units
- D) P = Rs. 30, Q = 50 units
Show answer & explanation
Answer: C) P = Rs. 10, Q = 150 units
At equilibrium Qd = Qs: 200 - 5P = 50 + 10P, so 150 = 15P and P = 10. Q = 200 - 5(10) = 150 (check: 50 + 10(10) = 150).
Question 5
In the short run, a perfectly competitive firm will shut down if the market price falls below:
- A) Minimum average variable cost
- B) Minimum average total cost
- C) Minimum average fixed cost
- D) Marginal revenue
Show answer & explanation
Answer: A) Minimum average variable cost
In the short run fixed costs must be paid whether or not the firm produces. The firm continues as long as price covers average variable cost, since any excess contributes to fixed costs. Below minimum AVC it minimises losses by shutting down. Price below minimum ATC but above AVC means a loss, but production continues.
Question 6
In long-run equilibrium under perfect competition, each firm:
- A) Earns supernormal profit protected by barriers to entry
- B) Operates with excess capacity
- C) Earns only normal profit, with price equal to minimum long-run average cost
- D) Charges a price above marginal cost
Show answer & explanation
Answer: C) Earns only normal profit, with price equal to minimum long-run average cost
Free entry and exit eliminate supernormal profits and losses in the long run. Equilibrium occurs where P = MR = LMC = minimum LAC, so firms produce at optimum scale and earn normal profit. Excess capacity is a feature of monopolistic competition.
Question 7
Which statement about a profit-maximising monopolist is correct?
- A) It never produces on the inelastic portion of its demand curve when marginal cost is positive
- B) It always charges the highest price buyers are willing to pay for the first unit
- C) It always earns supernormal profit in the short run
- D) Its supply curve is the rising portion of MC above AVC
Show answer & explanation
Answer: A) It never produces on the inelastic portion of its demand curve when marginal cost is positive
Profit maximisation requires MR = MC. With MC > 0, MR must be positive, and MR is positive only where elasticity exceeds one, so output lies on the elastic part of demand. A monopolist can incur short-run losses, and it has no unique supply curve because price and quantity are determined jointly with demand.
Question 8
Under third-degree price discrimination, a profit-maximising monopolist will charge:
- A) A higher price in the market where demand is less elastic
- B) A higher price in the market where demand is more elastic
- C) The same price in all markets
- D) A lower price in the market where demand is less elastic
Show answer & explanation
Answer: A) A higher price in the market where demand is less elastic
The discriminating monopolist equates MR in each market with overall MC. Since MR = P(1 - 1/e), equal MRs require a higher price where e is lower. Buyers with fewer alternatives (less elastic demand) are charged more.
Question 9
A monopolist sells in two separate markets. Price elasticity of demand is 2 in market A and 4 in market B. If the profit-maximising price in market B is Rs. 40, the price in market A will be:
- A) Rs. 60
- B) Rs. 20
- C) Rs. 80
- D) Rs. 53.33
Show answer & explanation
Answer: A) Rs. 60
In equilibrium MRA = MRB. MR = P(1 - 1/e). So PA(1 - 1/2) = PB(1 - 1/4), i.e., 0.5 PA = 0.75 x 40 = 30, giving PA = Rs. 60. Rs. 80 assumes prices are proportional to the ratio of elasticities (2 x 40), which is incorrect.
Question 10
Product differentiation and selling costs are distinguishing features of:
- A) Perfect competition
- B) Pure monopoly
- C) Perfect oligopoly with a homogeneous product
- D) Monopolistic competition
Show answer & explanation
Answer: D) Monopolistic competition
Under monopolistic competition many firms sell close but differentiated products (brands, design, packaging) and incur selling costs such as advertising to attract buyers. Perfect competition has homogeneous products and no need for advertising.
Question 11
In long-run equilibrium under monopolistic competition, the firm:
- A) Earns normal profit and operates with excess capacity
- B) Earns supernormal profit and operates at minimum LAC
- C) Earns normal profit and operates at minimum LAC
- D) Earns supernormal profit protected by barriers to entry
Show answer & explanation
Answer: A) Earns normal profit and operates with excess capacity
Free entry drives profits to normal, so the downward-sloping demand curve becomes tangent to LAC. Because the tangency is on the falling part of LAC, output is less than the cost-minimising level - this unused capacity is called excess capacity.
Question 12
The kinked demand curve model of oligopoly is used mainly to explain:
- A) Price leadership by a dominant firm
- B) Price rigidity in oligopolistic markets
- C) Formation of cartels
- D) Why oligopolists earn only normal profit
Show answer & explanation
Answer: B) Price rigidity in oligopolistic markets
Sweezy's kinked demand curve assumes rivals match price cuts but ignore price increases. This produces a kink at the prevailing price and a gap (discontinuity) in the MR curve, so MC can change within the gap without altering price or output - explaining sticky prices.
Question 13
The most distinctive feature of an oligopoly is:
- A) A very large number of small sellers
- B) Interdependence of decision-making among a few large firms
- C) Complete freedom of entry and exit
- D) A single seller with no close substitutes
Show answer & explanation
Answer: B) Interdependence of decision-making among a few large firms
With only a few sellers, each firm's price and output decisions affect its rivals, who are likely to react. This mutual interdependence makes oligopoly behaviour complex. Many small sellers characterise perfect or monopolistic competition, and a single seller is a monopoly.
Question 14
A formal agreement among oligopolistic firms to fix prices or share output, in order to act like a monopoly, is called:
- A) Price leadership
- B) A cartel
- C) A kinked demand arrangement
- D) Product differentiation
Show answer & explanation
Answer: B) A cartel
A cartel is an explicit collusive arrangement in which members jointly set price and output (often by quotas) to maximise joint profits. Price leadership is a form of tacit collusion where one firm sets the price and others follow, without a formal agreement.
Question 15
A perfectly competitive firm faces a market price of Rs. 25. At its profit-maximising output of 400 units, its average total cost is Rs. 21. Its total profit is:
- A) Rs. 10,000
- B) Rs. 8,400
- C) Rs. 4
- D) Rs. 1,600
Show answer & explanation
Answer: D) Rs. 1,600
Profit = (P - ATC) x Q = (25 - 21) x 400 = Rs. 1,600. Equivalently TR = 25 x 400 = 10,000 and TC = 21 x 400 = 8,400, so profit = 10,000 - 8,400 = 1,600. Rs. 4 is only profit per unit.