1.

Each firm in a perfect competition market:

a. Produces a good that is slightly different from that of the other firms.
b. Has an important influence on the market price of the good or service being
produced.
c. Attains economies of scale so that its efficient size is large compared to the
market as a whole.
d. Produces a good that is identical to that of the other firms.
2. Assume the market for organic produce sold at farmers’ markets is perfectly
competitive. All else being equal, as more farmers choose to produce and sell organic
produce at farmers’ market, what is likely to happen to the equilibrium price of the
produce and profits of the organic farmers in the long run?
a. The equilibrium price is likely to increase, and profits are likely to remain
unchanged
b. The equilibrium price is likely to remain unchanged, and profits are likely to
increase
c. The equilibrium price is likely to decrease, and profits are likely to decrease
d. The equilibrium price is likely to increase, and profits are likely to increase
3. Which of the following is NOT a characteristic of a perfect competition market?
a. There is a very large number of firms that are small compared to the market
b. All firms sell identical products
c. There are no restrictions to entry by new firms
d. None of above (i.e. All of the above are characteristics of a perfect
competition market)
4. Both individual buyers and sellers in a perfect competition market
a. Can influence the market price by their own individual actions
b. Can influence the market price by joining with a few of their competitors
c. Have to take the market price as a given
d. Have the market price dictated to them by the government
5. Which of the following is NOT a reason why a monopolistically competitive firm
might be able to maintain economic profits in the long run?
a. Creating value for customers
b. Charging a higher price than competitors to generate more sales revenue
c. Achieving lower average costs of production than competitors
d. None of the above (i.e. All above are valid reasons why a firm in a
monopolistic competition market can maintain economic profits in the long
run).
 6. Consider a firm in a monopolistic competition market. Which of the following
statements is NOT true?
a. The firm’s output is at where marginal cost equals to average total cost so that
cost production can be minimised
b. The firm sells at a price which equals its average total cost
c. The firm sells at a price which is greater than its marginal cost
d. None of the above (i.e. All of the above statements are correct).
7. Under monopolistic competition, the differentiation of products implies that:
a. Individual firms face downward sloping demand curves
b. Both marginal cost and marginal revenue will increase as output increases
c. Individual firms will make economic profits even in the long run
d. Individual firms will produce at minimum average cost in the long run
8. When a firm faces a downward-sloping demand curve, marginal revenue
a. must exceed price because the price effect outweighs the output effect.
b. is less than price because a firm must lower its price to sell more.
c. equals price because the firm sells a standardised product.
d. must exceed price because the output effect outweighs the price effect.
9. An oligopoly industry is characterised by all of the following EXCEPT:
a. the existence of entry barriers.
b. the possibility of reaping long-run economic profits.
c. firms pursuing aggressive business strategies, independent of rivals' strategies.
d. production of standardised products.
10. Jake K Carrier and Timothy F Tourister are the only two luggage retailers in the town
of Swinville. Each of them is contemplating whether to spend more on advertising to
attract new customers. The payoff matrix below summarises all possible outcomes for
Jake K and Timothy F.
Timothy F
More advertising Leave advertising the same

More advertising Timothy F: $30,000 profit Timothy F: $20,000

Jake K: $30,000 profit Jake K: $40,000
Jake K Leave advertising the same Timothy F: $40,000 Timothy F: $50,000
Jake K: $20,000 Jake K: $50,000
Which of the following statements is correct?
a. Timothy F has a dominant strategy, that is, to spend more on advertising.
Meanwhile, Jake K does not have a dominant strategy
b. Jake K has a dominant strategy, that is, to spend more on advertising.
Meanwhile, Timothy F does not have a dominant strategy
c. Both Timothy F and Jake K have a dominant strategy, that is, to spend more
on advertising
d. Neither Timothy F nor Jake K has a dominant strategy
11. There is much evidence to suggest that airlines are more likely to match price cuts
than price increases. Which of the following best explains this evidence?
a. The law of demand, which states that an increase in price leads to a decrease
in quantity demanded
b. No one airline wants to be the first to renege on a tacit collusive agreement in
which all airlines implicitly agree to match price cuts but not price increases
c. An airline fears that if it does not match a price cut, its sale may fall
considerably, but it does not match a price increase, it will be able to attract
customers away from its rivals
d. Airlines have different costs of production, and therefore it is more difficult to
agree on a price increase than on a price decrease
12. The study of how people make decisions in situations in which attaining their goals
depends on their interaction with others is called:
a. Game theory
b. Oligopoly
c. Competitive analysis
d. Strategic analysis
13. When economies of scale are present at all relevant levels of output, the market is:
a. A perfect competition market
b. A monopolistic competition market
c. A natural monopoly
d. An oligopoly
14. Encouraging firms to invest in research and development and individuals to engage in
creative endeavours such as writing novels is one justification for:
a. Government-created monopolies
b. Resource monopolies
c. Natural monopolies
d. Monopolistic competition
15. Refer to the figure below:

Suppose the grocery store market in Brisbane is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the
relevant demand and cost curves. When the market is perfectly competitive, the price
of a kilogram of steak is ____. And when it is a monopoly, the price of a kilogram of
steak is ____.
a. $4, $20
b. $4, $12
c. $4, $8
d. $8, $12
16. An example of a government-imposed barrier to entry gives a firm the exclusive right
to a new product for a period of 20 years from the date the product is invented. This
entry barrier is known as:
a. A copyright
b. A patent
c. An exclusive marketing arrangement
d. A tariff
17. Refer to the figure below

The figure above illustrates the marginal private cost and the marginal social cost to
the city of Geelong for each rock concert that is offered. It also illustrates the marginal
private benefit. There is no external benefit. The efficient number of concerts in
Geelong is:
a. 5
b. 15
c. 10
d. 20
18. Internalising a positive externality will cause a(n) ____ in the effective price of the
relevant product as paid by consumers, and a(n) ____ in the quantity consumed
a. Increase; increase
b. Increase; decrease
c. Decrease; increase
d. Decrease; decrease
19. A market supply curve reflects the
a. External costs of producing a good or service
b. External benefits of producing a good or service
c. Social costs of producing a good or service
d. Private costs of producing a good or service
20. Which of the following would result in a positive externality?
a. A local government establishes a price ceiling on rental apartments
b. An electric utility burns coal that causes acid rain
c. Medical research results in a cure for malaria
d. McDonald’s adds new fat-free items to its menu
21. Which of the following is not a major function of the Reserve Bank of Australia?
a. Maintaining the integrity of the financial system
b. Monitoring credit growth
c. Determining taxation rates
d. Controlling the cash rate
22. Which of the following is the main goal of monetary policy in Australia?
a. Lowering the rate of unemployment
b. Increasing the value of the Australian dollar relative to other currencies
c. Generating economic growth
d. None of the above is the top priority in the execution of monetary policy in
Australia.
23. Which of the following characterises the ability of the Reserve Bank of Australia
(RBA) to prevent recessions?
a. The RBA is able to “fine tune” the economy and entirely eliminate recessions
b. The RBA is incapable of changing aggregate demand through its monetary
policy tools
c. The RBA may be able to keep a recession shorter and milder than it would
otherwise be
d. The RBA may be able to eliminate the business cycle and achieve absolute
price stability
24. If the Reserve Bank sells government securities to commercial banks, other things
being equal, commercial banks’ reserves will ____ and the cash rate will ____
a. Increase, increase
b. Increase, decrease
c. Decrease, decrease
d. Decrease, increase
25. Which of the following situations is one in which the Reserve Bank of Australia will
potentially pursue expansionary monetary policy?
a. Potential GDP is forecast to be higher than equilibrium GDP
b. Aggregate demand is growing too fast to keep the economy at full
employment
c. Aggregate demand is growing too slowly and the economy is in danger of
producing GDP above full employment
d. None of the above
26. A federal budget deficit acts as an automatic stabiliser because
a. Government tax revenues decrease during a recession
b. Unemployment benefit payments decrease during a recession
c. Tax receipts decrease during expansionary periods
d. Medicare payments increase during expansionary periods
27. Crowding out results in:
a. Higher interest rates, a lower exchange rate, and lower net exports
b. Higher interest rates, a higher exchange rate, and lower net exports
c. Lower interest rates, a lower exchange rate, and lower net exports
d. Lower interest rates, a higher exchange rate, and lower net exports
28. Which of the following is an example of discretionary fiscal policy?
a. An increase in the number of unemployment benefit payments during a
recession due to rising unemployment
b. An increase in income tax receipts during an expansion because incomes are
rising
c. Tax increases to combat rising inflation
d. All of the above
29. Suppose real GDP is $300 billion and potential GDP is $350 billion. What should be
done for the economy to achieve potential GDP?
a. The government conducts expansionary fiscal policy by increasing
government purchases by $50 billion
b. The government cuts interest rates, resulting in cheaper credit available to
households and businesses. Consumption and investment, as a result, increase
by $50 billion
c. The government increases the personal income tax rates. This helps raise
funds for more government purchases.
d. None of the above.
30. If government purchases decrease by $10 billion, and at the same time income taxes
also decrease by $10 billion, there will probably be:
a. A rise in real GDP
b. A fall in real GDP
c. No change in real GDP
d. All of the above are equally likely
1. D
2. C
3. D
4. C
5. B
6. A
7. A
8. B
9. C
10. D
11. C
12. A
13. C
14. A
15. D
16. B
17. C
18. C
19. D
20. C
21. C
22. D
23. C
24. D
25. A
26. A
27. B
28. C
29. D
30. B