CBSE Class–12 economics

Important Questions - Micro Economics 06

Non Competitive Markets

VERY SHORT ANSWER QUESTIONS (1 Mark)

Q1. Which of the following is not the feature of an imperfect competition?

1) Large number of buyers
2) Single seller
3) Homogeneous products
4) Price maker
Ans. (3)

Q2. The demand curve of oligopoly is?

a) Kinked
b) Vertical
c) Horizontal
d) Rising left to right
Ans. (a)

Q3. A monopolist is a price

a) Acceptor
b) Taker
c) Giver
d) Maker
Ans. (b)

Q4. In perfect competition, when the marginal revenue and marginal cost are
equal, profit is?

a) Zero
b) Average
c) Maximum
d) Negative
Ans. (c)

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Q5. In perfect competition, a firm earns abnormal profit when __________
exceeds the _____________?

a) Total cost, total revenue

b) Average revenue, average cost

c) Total revenue, total fixed cost

d) Marginal cost, marginal revenue

Ans. (b)

Q6. Which of the following type of competition is just a theoretical economic

concept, not a realistic case where actual competition and trade take
place?
a) Oligopoly
b) Monopoly
c) Monopolistic competition
d) Perfect competition
Ans. (d)

Q7. In monopolistic competition, which of the following curves generally lies

below the demand curve and slopes downward?
a) Marginal cost
b) Average cost
c) Average revenue
d) Marginal revenue
Ans. (d)

Q8. The concept of supply curve is relevant only for?

a) Oligopoly
b) Monopoly
c) Monopolistic competition
d) Perfect competition
Ans. (d)

Q9. In the case of a negatively sloping straight line demand curve, the total

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 revenue curve is
a) A rectangular hyperbola
b) Convex to the origin
c) An inverted vertical parabola
d) Concave to the origin
Ans. (c)

Q10. The market structure in which the number of sellers is small and there is
interdependence in decision making by the firms is known as
a) Oligopoly
b) Monopolistic competition
c) Monopoly
d) Perfect competition
Ans. (a)

Q11. Cartels exist in

a) Oligopoly
b) Duopoly
c) Monopoly
d) Perfect Competition
Ans. (c)

Q12. Marginal revenue for any quantity level can be measured by the slope of
the total revenue curve.

a) False
b) True
c) Can’t say
d) None of these
Ans. (b)

Q13. In monopolistic competition the goods are

a) Durable
b) Differentiated
c) Heterogeneous

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 d) Homogeneous
Ans. (b)

Q14. Oligopoly having identical products is known as

a) Pure oligopoly
b) Collusive oligopoly
c) Independent oligopoly
d) None of above
Ans. (a)

Q15. Which market have characteristic of product differentiation

a) Monopolistic competition
b) Oligopoly
c) Monopoly
d) Perfect competition
Ans. (a)

SHORT ANSWER QUESTIONS (3/4 Marks)

Q16. Equilibrium price of an essential medicine is too high. What can be done to
bring the price down only through market forces? Explain the series of
changes that will occur in the market.
Ans. One possible step can be to reduce tax on medicine or subsidy which will
eventually help to bring down the price and in turn increase the supply.
Demand remaining unchanged, a situation of excess supply will emerge
which will lead to competition between sellers. This will lead to fall in price
of the medicine.

Q17. Market for a necessary good is competitive in which the existing firms are
earning supernormal profits. How can the policy of liberalisation by the
government help in making the market more competitive in the interest of
the consumers? Explain.

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Ans. The policy of liberalization encourages new firms to enter the industry. This
raises output of the industry as a whole. Total market demand remains
unchanged and price starts falling. At the end result, consumers get goods
at much cheaper price.

Q18. Explain the effects of a ‘price ceiling’.

Ans. Black marketing may be termed as a direct consequence of price ceiling. It

implies a situation whereby the commodity under the government’s control
policy is illegally sold at a higher price than the one fixed by the government.
It may primarily arise due to the presence of consumers who may be willing
to pay higher price for the commodity than to go without it.

Q19. Explain the effects of a ‘price floor’.

Ans. Buffer stock is an important tool in the hands of government to ensure price
floor or minimum support price. If in case the market price is lower than
what the government feels should be given to the farmers or producers.
This will make them purchase the commodity at higher price from the
farmers or producers so as to maintain stock of the commodity with itself
to be released in case of shortage of the commodity in future.

Q20. Market for a good is in equilibrium. Demand for the good “increases”.
Explain the chain effects of this change.

Ans. ‘Given equilibrium, demand increases’, the chain effects of the change are
as follows:-

1. Price remaining unchanged, excess demand emerges

2. This leads to competition among buyers causing price to rise
3. Rise in price causes fall or contraction in demand and rise or expansion in
supply
4. The price continues to rise till the market is in equilibrium again at a higher
price

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 LONG ANSWER QUESTIONS (6 Marks)

Q21. Distinguish between collusive and non-collusive oligopoly. Explain how the
oligopoly firms are interdependent in taking price and output decisions.

Ans. Below mentioned points focused on the difference between collusive and
non-collusive oligopoly:-

Basis of
Collusive Oligopoly Non-collusive Oligopoly
Difference

In this, firms decide to collude

In this, firms do not collude but
Meaning together and not to compete with
they compete with each other
each other

In this, all firms behave as a

Behaviour of In this, all firms behave
single entity or they show
firms independent identity
monopolistic behaviour

This aims at maximising own

This aims at maximising collective
Aim profits and decides how much
profits than individual profits
quantity to be produced

Also under oligopoly, there is a high degree of interdependence between the firms.
Price and output policy of one firm has an important impact on the price and output
policy of the rival firms in the market. Reason is there are few firms which are huge
in size. When one company lowers its price, the rival firms may also lower the price
to beat the competition. On the other side, if one company raises the price of a
particular commodity, the rival firms may take decision accordingly. Companies
while taking any decision on price and output, always keep in mind the possible
reaction of the prevailing rival companies in the market.

Q22. Explain the implications of the following features of oligopoly market.

(i) Few firms (ii) Barriers to the entry of firms

Ans. The implications are as follows:

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 1. When there are few firms in the market, this is called oligopoly. However,
each firm is so big that it controls a specific consumer segment in the market.
It is so important that price or output policy of one firm directly affect the
price and output policy of rivals. Hence, it is also not possible to draw a
specific demand curve for an oligopoly firm. We have seen that oligopoly
firms tend to form trusts and cartels with a view to avoid price competition
in the market. In this way they enjoy monopoly profits. But this is very few
in the overall market.

2. When there are barriers to the entry of firms, it is always more. These barriers
are almost similar to those under monopolistic situations. Entry of a new firm
is extremely difficult, but possible. These barriers can be natural like
requirements of huge capital or operating at minimum average cost of
artificial barriers like patent rights. They mainly prevent new entrants in the
market.

Q23. Explain the implications of the following:

(i) Products under monopolistic competition

(ii) Large number of sellers under perfect competition

Ans.

1. Implication when products are under monopolistic competition. It is a very

distinct feature. A product is often differentiated by way of trade marks or
brand name, size, quantity etc. the differentiated product are close
substitutes of each other. E.g. Bagh bakri tea and Tajmahal tea. Because of
product differentiation, each firm can decide its price policy independently.
So, each firm has a partial control over price of its product. This is done to
attract buyers of rival companies. Also because these firms produce extra
quantity, their products are different, they have always some loyal customer
who buy these products and purchase them only.

2. When there are large number of sellers in the market. There are always more
number of buyers and sellers in an economy. As a result, size of each

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 economic agent is so small as compared to the market that they cannot
influence the price through their individual actions.

Q24. Distinguish between perfect competition and monopolistic competition

Ans. Following are the difference between perfect competition and monopolistic
competition:-

Basis of
Perfect competition Monopolistic competition
difference

Number of In this, there are huge In this, there are many buyers and
buyers and numbers of buyers and sellers sellers, but not like perfect
sellers in the market competitive market

Products Mainly homogeneous products Mainly different kinds of product

Slopes of firm’s In this, there is horizontal In this, it slops downward with high
DD curve straight line (AR = MR) elasticity (AR > MR)

In this, there is perfect In this, there is an imperfect

Mobility
mobility mobility

In this, it is not very In this, it is very significant as it

Selling cost
important, it is almost identical enjoys monopoly prices

Degree of price There is absolutely no control

Here, it is partially controlled
control over priced

Q25. Explain the implications of the following features of perfect competition.

(i) Homogenous products

(ii) Freedom of entry and exit to firms.

Ans.

1. When there are homogenous products, its implications are great. This
literally means the products are identical in nature, quality, size, shape and
colour. So no producer is in a position to charge a different price of the
product. A uniform price prevails in the market. In a perfectly competitive
market, commodity must be always identical. Thus, it gives consumer or

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 buyers absolutely no reason to prefer any particular product of one seller
above another.
2. When there is freedom of entry and exit of firms. This completely depends on
any firm when to exit or entry in the market. In this situation, firms in the
long run can earn only normal profits, say TC=TR, AR=MR & P=MC. In extra
cases, normal profits are earned, new firms will join the industry thus
resulting in increase of market supply. Marek price will fall, extra normal
profits will be wiped out. In case of extra normal losses, some of the exiting
firms will leave the industry. Marek supply will decrease, and market price of
that commodity will increase. Extra normal losses will be wiped out.

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