Economics · Commerce Accountancy

Microeconomics and Pricing

1,413 Questions

Microeconomics and pricing analyze market structures, consumer utility, marginal cost, and strategic pricing models like predatory pricing. These foundational economic concepts are regularly featured in civil services and state administrative examinations. Solve these practice questions to understand market equilibrium, demand elasticity, and competitive firm behavior.

Market equilibrium pricingIncome elasticity of demandMarginal cost conceptsUtility functions analysisPredatory pricing strategiesOligopoly market structures

Microeconomics and Pricing Questions

Multiple choice

The new Altis Delight, Altis Auto’s flagship electric-gas hybrid automobile, is considered so efficient by Altis that the company plans to sell the Delight to consumers for no payment other than the difference between what the consumer paid for gasoline for the past three years of driving their previous vehicle and what they will pay for gasoline while driving the Delight for the next three years. Consumers will make an initial down payment, and then pay any remaining fees after fuel costs have been assessed at the end of the three year period.

Which of the following, if true, would most significantly disadvantage Altis Auto based on their proposed payment system?

  1. Most drivers own only one automobile.

  2. Other car manufacturers are planning to introduce similar fuel-efficient vehicles.

  3. Drivers interested in the Delight tend to drive significantly more miles annually than the average driver.

  4. The price of gasoline is expected to rise dramatically over the next three years.

  5. The annual amount spent on gasoline by drivers can be accurately determined based on the number of miles driven in a specific make of automobile.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

(1) Most drivers own only one automobile.

If is is assumed that drivers own only one automobile, then it could be either Altis Delight or any other brand. Either ways there won’t be any disadvantage for Altis Auto. If they own some other brand, then there is no question of this payment plan and if the drivers own Altis Delight, then the payment plan is applicable, which could be well thought of.
(2) Other car manufacturers are planning to introduce similar fuel-efficient vehicles.
Altis Delight is already purchased, so competitor is not a problem.
(3) Drivers interested in the Delight tend to drive significantly more miles annually than the average driver.
The payment is structured around the price differential of gasoline and the price incurred on this car. So distance has no bearing on the payment system to disadvantage Altis Auto.
(4) The price of gasoline is expected to rise dramatically over the next three years.
If the price of gasoline increases, then the savings would deplete and Altis Auto will receive significantly less payment, which is a disadvantage.
(5) The annual amount spent on gasoline by drivers can be accurately determined based on the number of miles driven in a specific make of automobile. Number of miles has no bearing on the savings. So this doesn’t disadvantage Altis Auto.

Multiple choice

The term 'Price Rigidity' is a feature of

  1. perfect competitive market

  2. monopoly

  3. oligopoly

  4. monopolistic competition

  5. imperfect competition
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It is a situation in which a particular market is controlled by a small group of firms.

Multiple choice

If both the supply and the demand show good increase, the market price will ____________.

  1. rise only in the case of an inelastic supply function

  2. fall only in the case of an inelastic supply function

  3. not be predictable with only these facts

  4. rise only in the case of an inelastic demand function

  5. none of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

This is correct answer, because without additional information about the extent of the change, the effect on price is not determinable.

Multiple choice

The requirement is to identify which of the situations indicates inelastic demand. Elasticity of demand is measured by the percentage change in the quantity demanded divided by the percentage change in price. If the quotient is greater than one, demand for product is price elastic, and if it less than one, demand for the product is price inelastic. A quotient of exactly one indicates unitary elasticity. In which of the following situations would there be inelastic demand?

  1. A 5% price increase results in 3% decrease in the quantity demanded.

  2. A 4% price increase results in a 6% decrease in the quantity demanded.

  3. A 4% price increase results in a 4% decrease in the quantity demanded.

  4. A 3% price decrease results in 5% increase in the quantity demanded.

  5. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Correct, because the price elasticity quotient is equal to 0.6 (3%/5%).

Multiple choice

The requirement is to determine the immediate effect on one product of an increase in the price of a substitute good. The demand and price of substitute products are directly related. If the price of a good increases, the demand for its substitute will also increase. X and Y are substitute products. If the price of product Y increases, the immediate impact on product X is ____________.

  1. price will increase

  2. quantity demanded will increase

  3. quantity supplied will increase

  4. price, quantity demanded and supply will increase

  5. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Correct, because the demand and price of substitute products are directly related. If the price of a good increases, the demand for its substitute will also increase. It depicts this relationship.

Multiple choice

The requirement is to apply the concept of price-elasticity of demand. If demand is inelastic an increase in price will increase total revenue. As a business owner if one has determined that the demand for his product is inelastic. Based upon this assessment it is understood that _________.

  1. increasing the price of the product will increase total revenue

  2. decreasing the price of the product will increase total revenue

  3. increasing the price of the product will have no effect on total revenue

  4. increasing the price of your product will increase competition

  5. none of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Correct, because it accurately states the rule that if demand is inelastic an increase in price will increase total revenue.

Multiple choice

The requirement is to identify the price elasticity of an essential product with no substitutes. In the pharmaceutical industry where a diabetic must have insulin no matter the cost and where there is no other substitute, the diabetic’s demand curve is best described as ___________.

  1. perfectly elastic

  2. perfectly inelastic

  3. elastic

  4. inelastic

  5. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Demand for the product is perfectly inelastic because the diabetic will purchase the product regardless of the price.

Multiple choice

The requirement is to describe market conditions in a competitive market when both demand and supply increase. In a competitive market, the market will always clear at the equilibrium price. If there is an equal increase in both demand and supply, the equilibrium price may increase, decrease or remain the same. However, there will be more units sold. In any competitive market, an equal increase in both demand and supply can be expected to always ____________.

  1. increase both price and market-clearing quantity

  2. decrease both price and market-clearing quantity

  3. increase market-clearing quantity

  4. increase price

  5. none of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

In a competitive market, the market will always clear at the equilibrium price. If there is an equal increase in both demand and supply, the equilibrium price may increase, decrease or remain the same. However, there will be more units sold.

Multiple choice

The requirement is to identify the effect on total revenue of a decrease in price of a price elastic product. If a product’s demand is elastic and there is a decrease in price, the effect will be ___________.

  1. a decrease in total revenue

  2. no change in total revenue

  3. a decrease in total revenue and the demand curve shifts to the left

  4. an increase in total revenue

  5. none of these
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Correct, because if a product’s demand is price elastic, a decrease in price will lead to an even larger percentage increase in quantity demanded. Therefore, the total revenue will increase.

Multiple choice

The requirement is to describe the law of diminishing marginal utility. The law states that marginal utility declines as consumers acquire more of a particular good. The law of diminishing marginal utility states that ___________.

  1. marginal utility will decline as a consumer acquires additional units of a specific product

  2. total utility will decline as a consumer acquires additional units of a specific product

  3. declining utilities causes the demand curve to slope upwards

  4. consumers want will diminish with the passage of time

  5. none of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The law states that marginal utility declines as consumers acquire more of a particular good.