VCE-ECON-U12 6.1 📋 Practice Exam 3: Question Paper

Practice Exam 3

VCE Economics | Market Structures, Monopoly and Competition Policy

Question 1

A perfectly competitive market is characterised by:

A) Many buyers but only a few sellers
B) Many buyers and sellers, identical products, free entry and exit, and perfect information
C) Differentiated products and significant brand loyalty
D) High barriers to entry and a single seller

Question 2

In the long run, a perfectly competitive firm earns:

A) Economic profit
B) Only normal profit (zero economic profit) due to free entry and exit
C) Monopoly profit
D) Losses

Question 3

A monopoly is best defined as:

A) A firm that maximises profit
B) The only seller in a market with no close substitutes and high barriers to entry
C) A firm with a large market share only
D) A market with two sellers

Question 4

A monopolist maximises profit by producing where:

A) Price equals average total cost
B) Marginal revenue equals marginal cost (MR = MC)
C) Total revenue is maximised
D) Average revenue equals zero

Question 5

Compared to a perfectly competitive market, a monopolist produces:

A) More output at a lower price
B) Less output at a higher price — creating deadweight welfare loss
C) The same output at the same price
D) More output at a higher price

Question 6

Natural monopoly arises when:

A) A firm controls all natural resources
B) A single firm can supply the entire market at lower cost than two or more firms — due to significant economies of scale (high fixed costs, low marginal costs)
C) Government grants monopoly rights
D) The market has very inelastic demand

Question 7

Price discrimination occurs when:

A) A monopolist charges different prices to different customers based on their willingness to pay (not cost differences)
B) Prices vary due to production cost differences
C) Firms in a competitive market all charge different prices
D) A firm charges a price above marginal cost

Question 8

An oligopoly is a market structure with:

A) One dominant firm
B) A small number of large interdependent firms — each firm’s actions affect the others
C) Many firms with differentiated products
D) Perfect competition with some differentiation

Question 9

The kinked demand curve model of oligopoly predicts:

A) Firms constantly change their prices
B) Prices are relatively stable — competitors match price cuts (elastic above kink) but don’t follow price rises (inelastic below kink)
C) Oligopolists always collude
D) Perfect competition occurs in oligopoly

Question 10

Barriers to entry in a monopolistic market can include:

A) Low fixed costs
B) Economies of scale, patents, government licensing, control of key resources, and strong brand loyalty
C) Easy replication of products
D) Perfect information for consumers

Question 11

Monopolistic competition is characterised by:

A) A single dominant firm
B) Many firms selling differentiated products with relatively easy entry and exit
C) Firms earning economic profit in the long run
D) Perfect information and identical products

Question 12

The ACCC (Australian Competition and Consumer Commission) regulates markets primarily to:

A) Set prices for all goods
B) Promote competition, prevent anti-competitive conduct (such as cartels and mergers reducing competition) and protect consumers
C) Run nationalised industries
D) Set minimum wages

Question 13

A cartel is:

A) A formal agreement between firms in a competitive market to set prices and output as a monopolist would — illegal under competition law
B) A type of price floor
C) A government-controlled industry
D) A natural monopoly

Question 14

The deadweight welfare loss from monopoly represents:

A) The profit earned by the monopolist
B) The loss of consumer and producer surplus from the allocatively inefficient reduction in output below the competitive level
C) The cost of government regulation
D) The loss of revenue from taxation

Question 15

Third-degree price discrimination involves:

A) Charging each customer exactly their willingness to pay
B) Dividing customers into two or more groups and charging each group a different price based on their different demand elasticities
C) Charging a two-part tariff
D) Bundling products together

Question 16

Predatory pricing is:

A) Setting prices to earn normal profits
B) Deliberately setting prices below cost to drive competitors out, intending to raise prices once the market is captured
C) A form of price discrimination
D) Charging high prices due to monopoly power

Question 17

A firm in monopolistic competition faces a demand curve that is:

A) Perfectly elastic (horizontal)
B) Downward sloping but more elastic than a pure monopoly — due to product differentiation
C) Perfectly inelastic
D) Upward sloping

Question 18

When a natural monopoly is publicly regulated, the most efficient regulated price would be:

A) Profit-maximising price (MR = MC)
B) Marginal cost pricing (P = MC) — allocatively efficient but may cause losses
C) Average cost pricing (P = ATC) — allows normal profit but some inefficiency
D) Price set at zero

Question 19

Game theory is useful in oligopoly analysis because:

A) It applies only to perfect competition
B) Oligopolists must consider how rivals will react to their decisions — strategic interdependence requires game-theoretic analysis
C) It explains monopoly pricing
D) It assumes firms act independently

Question 20

The prisoner’s dilemma in oligopoly illustrates that:

A) Cartels are always stable
B) Even if collusion would benefit all firms, individual incentives to defect (cheat) make cartels unstable — the dominant strategy for each firm is to compete
C) Oligopolists always cooperate
D) Perfect competition always prevails in the long run

Question 1 (4 marks)

Question 2 (4 marks)

Question 3 (4 marks)

Question 4 (4 marks)

Question 5 (4 marks)

Question 6 (4 marks)

Question 7 (4 marks)

Question 8 (4 marks)

Extended Response 1(a) (6 marks)

Extended Response 1(b) (3 marks)

Extended Response 2(a) (5 marks)

Extended Response 2(b) (3 marks)