# Free Non-Competitive Markets 03 Practice Test - 11th Grade - Commerce

See the MC and MR curves for a firm given below and identify the profit-maximizing level of output. A.

4

B.

10

C.

12

D.

24

#### SOLUTION

Solution : B

Profit maximization occurs when MC=MR. This occurs at an output level of 10 units where the MC and MR curves intersect.

If the price is Rs 10, quantity supplied is 20 and the average total cost is Rs 3, then calculate profit.

A.

Rs 100

B.

Rs 140

C.

Rs 160

D.

Rs 200

#### SOLUTION

Solution : B

Profit =(P-ATC) ×q=7×20=Rs 140

The demand curve for a monopoly firm is p= 80-0.5q. If the MC is constant at Rs 10, find the profit-maximizing level of output.

A.

35

B.

50

C.

70

D.

80

#### SOLUTION

Solution : C

Given that demand curve is p= 80-0.5 q
The slope of demand curve = 0.5
Slope of MR curve = 2 × 0.5= 1

The equation of the MR curve is MR = 80-q
Equating MR=MC, we get 80 -q = 10
Hence, the profit-maximizing output is 70

In which of the following cases is the social surplus minimum?

A.

monopoly

B.

oligopoly

C.

cartel

D.

perfect competition

#### SOLUTION

Solution : A and C

The consumer surplus is minimum in the case of monopoly and cartels. Effectively, a cartel formed by a collusion of firms functions as a monopoly. In an oligopoly, there is some competition between firms and this leads to greater consumer surplus. In perfect competition, the social surplus is maximized.

Cartels are inherently unstable because ___

A.

firms in a collusion have the incentive to sell at lower than agreed prices and drive up profits.

B.

forming cartels and price fixing is illegal

C.

all firms in the market have to agree to form cartels and when a new firm enters the market, the cartelisation has to happen again.

D.

All of these

#### SOLUTION

Solution : D

All of the listed reasons contribute to the instability of cartels.

The supply curve for a monopolist is

A.

upward sloping

B.

downward sloping

C.

horizontal

D.

none of these

#### SOLUTION

Solution : D

Monopolists are price makers i.e. they decide the price at which to sell a product. Hence, the concept of the supply curve is not applicable for a monopolist.

In the long run, firms under monopoly or oligopoly must only earn normal profits. State true or false.

A.

True

B.

False

#### SOLUTION

Solution : B

Monopolies and oligopolies have the freedom to adjust prices and hence, their long-run equilibrium profits are non-zero.

Which of the following markets closely resembles a perfectly competitive market?

A.

Stock market

B.

Markets for agricultural products

C.

Markets for petroleum and natural gas

D.

All of the above

#### SOLUTION

Solution : B

Markets for agricultural products like rice, wheat etc resemble perfectly competitive markets because there are a large number of producers, free entry and exit and products are identical.

What is the profit maximization rule for monopolistic competition?

A.

MC=MR=P

B.

P >MC = MR

C.

MC=AR=P

D.

MC=AR >  P

#### SOLUTION

Solution : B

Profit maximization rule for a monopolistic competition is the same as that of a monopoly.
P >MC = MR

The market demand curve for monopolistic competition is flatter than the demand curve for monopoly. State true or false.

A.

True

B.

False

#### SOLUTION

Solution : A

In case of monopolistic competition, the demand is more elastic as competition is more i.e. products have more substitutes. Hence, the demand curve is flatter.