VCE-ECON-U12 10.1 📋 Practice Exam 7: Question Paper

Practice Exam 7

VCE Economics | Market Structures, Monopoly and Competition Policy

Question 1

In perfect competition, an individual firm is a ‘price taker’ because:

A) It sets the market price
B) It is small relative to the market and produces an identical product to competitors, so it must accept the prevailing market price
C) Government sets its price
D) It has significant brand loyalty

Question 2

Which market structure is characterised by many firms selling slightly differentiated products with relatively free entry and exit?

A) Perfect competition
B) Monopolistic competition
C) Oligopoly
D) Monopoly

Question 3

A firm producing below the output level that minimises average cost in long-run equilibrium (excess capacity) is most typical of:

A) Perfect competition
B) Monopolistic competition
C) A natural monopoly
D) A perfectly contestable market

Question 4

Which of the following is a significant barrier to entry supporting monopoly power?

A) Freely available technology
B) Ownership of a key patent or exclusive licence
C) Zero fixed costs
D) Perfect substitutes

Question 5

Australia’s domestic airline industry, dominated by a small number of large carriers, is typically characterised by:

A) Many small firms with no market power
B) A small number of large firms whose pricing and output decisions are interdependent
C) A single seller with no competitors
D) Perfect information and identical products

Question 6

First-degree (perfect) price discrimination involves:

A) Charging every customer the same price
B) Charging each individual customer exactly the maximum price they are willing to pay
C) Charging different prices based on production cost differences
D) Selling below marginal cost

Question 7

Second-degree price discrimination is best illustrated by:

A) Charging business travellers more than leisure travellers for the same flight
B) Offering bulk discounts or tiered pricing so customers self-select based on quantity purchased
C) Charging every customer an identical price
D) A cartel fixing prices

Question 8

Collusive behaviour between firms to fix prices or restrict output, such as a cartel, is illegal in Australia under:

A) The Fair Work Act
B) The Competition and Consumer Act 2010
C) The Corporations Act only
D) State consumer protection law only

Question 9

Contestable markets theory suggests that even a market with few firms can behave competitively if:

A) Barriers to entry and exit are low, so the threat of new entrants disciplines incumbent pricing
B) Barriers to entry are very high
C) Firms collude
D) Government sets all prices

Question 10

A firm engaging in predatory pricing:

A) Charges a price that reflects normal profit
B) Deliberately prices below cost in the short run to force rivals out, intending to raise prices once competitors exit
C) Charges different prices to different segments based on elasticity
D) Maximises long-run consumer welfare

Question 11

In the long run, a firm in a perfectly contestable or perfectly competitive market earns:

A) Persistent economic profit
B) Only normal profit, as economic profit attracts entry, or the threat of entry, that drives price down to average cost
C) Negative profit indefinitely
D) Monopoly rents

Question 12

The main welfare cost of monopoly compared with perfect competition is:

A) Higher output and lower prices
B) A deadweight loss arising from restricted output and a higher price than the competitive outcome
C) Zero, as monopoly and competition produce identical welfare outcomes
D) Increased consumer surplus

Question 13

Vertical integration by a dominant firm, such as acquiring a key supplier, may raise competition concerns because it can:

A) Increase competition automatically
B) Foreclose rivals’ access to an essential input or distribution channel, raising barriers to entry
C) Guarantee lower prices for consumers
D) Eliminate all barriers to entry

Question 14

The Herfindahl-Hirschman Index (HHI) is used by competition regulators to:

A) Measure inflation
B) Measure market concentration, helping assess whether a proposed merger may substantially lessen competition
C) Measure GDP growth
D) Set minimum wages

Question 15

A supermarket duopoly in which the two dominant chains rarely compete aggressively on price for staple products, instead relying on loyalty programs and advertising, best illustrates:

A) Perfect competition
B) Non-price competition typical of oligopoly
C) A natural monopoly
D) A perfectly contestable market

Question 16

Game theory concepts such as the Nash equilibrium are particularly useful for analysing:

A) Perfectly competitive markets
B) Strategic interaction between a small number of interdependent firms, as in oligopoly
C) Public goods provision
D) Perfectly inelastic demand

Question 17

A patent granted to a pharmaceutical company for a new drug:

A) Eliminates all barriers to entry
B) Grants temporary monopoly rights, allowing the firm to recoup research and development costs before generic competition is permitted
C) Is illegal under competition law
D) Guarantees the lowest possible price for consumers

Question 18

Which best explains why natural monopolies commonly arise in industries such as electricity transmission networks?

A) High advertising costs
B) Very high fixed infrastructure costs and low marginal costs mean average costs keep falling across the relevant range of output, so one firm can supply the market most efficiently
C) Perfect information
D) Low barriers to entry

Question 19

When the ACCC assesses whether a proposed merger should be blocked, its central legal test is whether the merger would:

A) Increase employment
B) Be likely to substantially lessen competition in a market
C) Increase government tax revenue
D) Reduce the number of products sold

Question 20

The main reason cartels are inherently unstable, even though collusion is mutually beneficial to members, is that:

A) Government subsidises the largest firm
B) Each member has an individual incentive to secretly undercut the agreed price to capture more sales, even though mutual defection leaves everyone worse off than cooperating
C) Cartels are legal and openly enforced by contract
D) Consumers always detect cartels immediately

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)