CXC CXC - Caribbean Examinations Council Economics: Market Structures 2 — Questions and Answers
Question 1: What is the main reason monopolistic competition leads to excess capacity in the long run?
- Firms produce beyond the efficient scale to maximize profit
- Firms produce below minimum average cost because demand curves slope downward (Correct answer)
- Firms have no incentive to reduce costs
- Government restrictions limit production
Correct answer: Firms produce below minimum average cost because demand curves slope downward
In monopolistic competition, the downward-sloping demand curve means firms operate below the minimum average cost, resulting in excess capacity.
Question 2: Which market structure best describes the airline industry in the Caribbean?
- Perfect competition
- Monopoly
- Oligopoly (Correct answer)
- Monopolistic competition
Correct answer: Oligopoly
The Caribbean airline industry is dominated by a small number of large carriers, making it an oligopoly characterized by strategic interdependence.
Question 3: What is allocative efficiency in a market?
- Producing output at the lowest possible cost
- Producing the quantity where price equals marginal cost (Correct answer)
- Maximizing total revenue for producers
- Minimizing consumer surplus
Correct answer: Producing the quantity where price equals marginal cost
Allocative efficiency is achieved when resources are distributed so that price equals marginal cost, meaning goods are produced at the value consumers place on them.
Question 4: Barriers to entry in a monopoly market include all of the following EXCEPT:
- Exclusive ownership of key resources
- Patent rights
- Many small competing firms (Correct answer)
- High start-up costs
Correct answer: Many small competing firms
Having many small competing firms is a feature of perfect competition, not a barrier to entry that protects a monopoly.
Question 5: When firms in an oligopoly secretly agree to fix prices, this is known as:
- Price leadership
- Collusion (Correct answer)
- Price discrimination
- Product differentiation
Correct answer: Collusion
Collusion occurs when oligopolistic firms secretly cooperate to set prices or output levels, reducing competition to maximize joint profits.
Question 6: What is consumer surplus?
- The profit earned by firms above normal profit
- The difference between what consumers are willing to pay and what they actually pay (Correct answer)
- The tax paid by consumers on purchases
- The total revenue minus total cost for consumers
Correct answer: The difference between what consumers are willing to pay and what they actually pay
Consumer surplus is the economic benefit consumers receive when they pay less for a good than the maximum they would have been willing to pay.
CXC CXC - Caribbean Examinations Council Economics: Market Structures 2
What is the main reason monopolistic competition leads to excess capacity in the long run?