MEcon Master of Economics Microeconomics and Market Structure 1 — Questions and Answers
Question 1: In a perfectly competitive market, a firm's long-run equilibrium occurs where price equals:
- Marginal cost only
- Average total cost only
- Both marginal cost and minimum average total cost (Correct answer)
- Marginal revenue only
Correct answer: Both marginal cost and minimum average total cost
Long-run perfect competition equilibrium requires P = MC (efficiency) and P = min ATC (zero economic profit), ensuring both productive and allocative efficiency.
Question 2: A monopolist maximizes profit by producing where:
- Price equals average cost
- Marginal revenue equals marginal cost (Correct answer)
- Price equals marginal cost
- Average revenue equals average cost
Correct answer: Marginal revenue equals marginal cost
All profit-maximizing firms, including monopolists, produce where MR = MC; the monopolist then sets price above MC using its market power.
Question 3: Price discrimination requires that a firm have market power AND be able to:
- Lower costs for bulk buyers
- Prevent resale between customer segments (Correct answer)
- Collude with competitors
- Set prices below marginal cost
Correct answer: Prevent resale between customer segments
Without the ability to prevent arbitrage (resale), buyers in the cheap segment would resell to buyers in the expensive segment, eliminating the price gap.
Question 4: Consumer surplus is defined as the difference between:
- The price paid and the marginal cost
- The willingness to pay and the price actually paid (Correct answer)
- Total revenue and total cost
- Market price and the producer's price floor
Correct answer: The willingness to pay and the price actually paid
Consumer surplus is the aggregate gain to buyers — the area under the demand curve above the market price, representing value received beyond what was paid.
Question 5: The concept of 'deadweight loss' in economics refers to:
- Loss of government tax revenue
- Reduction in total surplus due to market inefficiency (Correct answer)
- Producer losses from competition
- Consumer losses from higher prices alone
Correct answer: Reduction in total surplus due to market inefficiency
Deadweight loss represents the total surplus destroyed by a market distortion (monopoly, tax, price control) — transactions that would have been mutually beneficial but do not occur.
Question 6: In oligopoly, the kinked demand curve model predicts:
- Constant price changes in response to cost shifts
- Price rigidity because rivals match price cuts but not price increases (Correct answer)
- Firms always acting as price-takers
- Prices equal to monopoly levels
Correct answer: Price rigidity because rivals match price cuts but not price increases
The kink arises because rivals follow price decreases (making demand inelastic below current price) but ignore price increases (making demand elastic above), creating a discontinuous MR and sticky prices.
MEcon Master of Economics Microeconomics and Market Structure 1
In a perfectly competitive market, a firm's long-run equilibrium occurs where price equals: