Test: Market : Price Determination In Diff Markets - CA Foundation MCQ

Perfect competition is a market structure where individual firms have no control over the price of their products. This is due to several key characteristics:

• Many Sellers: There are numerous firms in the market, each selling identical products.
• Homogeneous Products: The products offered by different firms are virtually the same, making them perfect substitutes.
• Free Entry and Exit: Firms can enter or exit the market without significant barriers, ensuring competition remains high.
• Price Taker: Each firm accepts the market price as given and cannot influence it by changing its output.

Due to these factors, firms in a perfectly competitive market focus on efficiency rather than pricing power, as they must operate at the prevailing market price.

To find the Marginal Revenue (MR) given the Average Revenue (AR) and the Elasticity of Demand, we can use the formula:

• MR = AR × (1 - (1/Elasticity))

In this case:

• AR = 5
• Elasticity = 2

Substituting the values into the formula:

• MR = 5 × (1 - (1/2))
• MR = 5 × (1 - 0.5)
• MR = 5 × 0.5
• MR = 2.5

Thus, the calculated Marginal Revenue is +2.5.

Price discrimination in a monopoly is influenced by several factors:

• Elasticity of demand: This measures how sensitive consumers are to price changes. A higher elasticity means consumers will reduce their purchases significantly if prices rise.
• Elasticity of supply: This reflects how quickly a producer can respond to changes in price. If supply is elastic, producers can increase output quickly when prices rise.
• Size of the market: A larger market allows for more segmentation and varied pricing strategies, which can enhance a monopolist's ability to discriminate prices effectively.

All these factors collectively determine how a monopoly sets different prices for the same product or service.

Average revenue curve is often referred to as the demand curve. This concept is crucial in understanding how revenue correlates with the quantity sold at various price levels. Here are some key points about the average revenue curve:

• The demand curve illustrates the relationship between price and quantity demanded.
• As price decreases, the quantity demanded typically increases, reflecting consumer behaviour.
• The average revenue is calculated by dividing total revenue by the quantity sold.
• In a perfectly competitive market, the average revenue curve is horizontal, indicating that price remains constant regardless of the quantity sold.

This relationship is vital for businesses to set pricing strategies and predict sales performance based on consumer demand.

In perfect competition, a firm is a price taker. The corresponding curve that represents this is a straight line. This is because the firm cannot influence the market price and must accept it as given.

• The marginal revenue curve aligns with the price level in perfect competition.
• As a result, it remains a horizontal line at the market price.
• Since firms sell additional units at the same price, their marginal revenue is constant.
• This characteristic is crucial for understanding how firms operate in a perfectly competitive market.

Thus, the answer is that the marginal revenue curve is a straight line.

Marketing Management is a blend of skills and strategies focused on:

• Choosing target markets effectively.
• Attracting, retaining, and expanding customer bases.
• Creating and delivering exceptional customer value.
• Communicating this value to customers clearly.

This field combines both art and science:

• The art involves understanding customer emotions and preferences.
• The science relies on data analysis and market research.

Thus, marketing management is not just about creativity or analysis alone, but rather the integration of both to achieve success.

Pure competition is characterised by several essential conditions, with one notable exception:

• Large number of buyers and sellers: This ensures that no single buyer or seller can influence the market price.
• Homogeneous product: Products offered by different suppliers are identical, making them interchangeable.
• Freedom of entry: New firms can easily enter the market without barriers, promoting competition.
• Absence of transport cost: This is not a requirement of pure competition. In reality, transport costs can affect market dynamics, but they do not define pure competition.

Therefore, while the first three conditions are essential to the concept of pure competition, the absence of transport costs is not a critical factor.

Market structures with two firms are known as:

• Oligopoly: A market structure where a few firms dominate the market, but more than two firms exist.
• Duopoly: A specific type of oligopoly where only two firms compete in the market.
• Monopsony: A market situation where there is only one buyer for many sellers.
• Oligopsony: A market with a few buyers and many sellers.

The correct term for a market with two firms is duopoly.

The marginal revenue (MR) of a unit is a crucial concept in economics, representing the additional revenue generated from selling one more unit of a product. The formula for calculating MR can be expressed in various ways, depending on the relationship between total revenue (TR) at different units.

• Formula A: This formula is the ratio of total revenue from the current unit to the total revenue from the previous unit: TR_n / TR_n-1.
• Formula B: This approach adds the total revenues of the current and previous units: TR_n + TR_n-1.
• Formula C: This formula calculates the difference between the total revenues of the current and previous units: TR_n - TR_n-1.

Understanding these formulas is essential for analysing how revenue changes with different levels of output. The most commonly used formula in practical applications is Formula C, as it directly measures the change in revenue attributable to the additional unit sold.

A firm will close down in the short period if its Average Revenue (AR) is less than:

• Average Cost (AC): This is the total cost divided by the quantity of output. If AR is less than AC, the firm is not covering its costs.
• Average Variable Cost (AVC): This is the variable cost per unit of output. A firm will shut down if AR falls below AVC, as it cannot cover even its variable costs.
• Marginal Cost (MC): This is the cost of producing one more unit of output. While important for decision-making, it is not the direct threshold for shutdown.

In summary, for a firm to remain operational in the short term, its AR must at least meet or exceed AVC. If it does not, the firm will incur losses that are unsustainable, leading to a shutdown.

When marginal revenue exceeds marginal cost, a firm should take the following actions:

• Expand output to increase profits, as producing more will boost revenue.

• Work towards balancing marginal revenue and marginal cost to optimise efficiency.

• Consider adjusting prices if necessary to maintain market competitiveness.

In summary, the primary focus should be on increasing production when marginal revenue is higher, as this indicates a potential for greater profit.

Logically it follows then that the total profit of a firm become the maximum at the output level at which MC=MR, in which case the extra cost balances extra revenue. This is so because when MR=MC, a firm's marginal profit is zero when its total profit is maximum (constant)

The marginal revenue (MR) is calculated as the change in total revenue divided by the change in quantity sold. In this case, the total revenue changes from Rs. 3,000 to Rs. 3,100 as the quantity sold increases from 50 to 52 units. Therefore, the marginal revenue is (3,100 - 3,000) / (52 - 50) = Rs. 50.00. The correct answer is indeed option 2.

For a discriminating monopolist, the equilibrium condition is crucial for understanding market dynamics.

• The monopolist seeks to maximise profits by adjusting output where marginal revenue (MR) equals marginal cost (MC).
• In this context, the condition MR_a = MR_b = MC is essential, as it indicates that the revenue generated from selling an additional unit in each market equals the cost incurred.
• This approach allows the monopolist to set different prices in different markets based on demand elasticity, thus enhancing overall profit.

In summary, the equilibrium condition for a discriminating monopolist is achieved when:

• Revenue from each segment of the market is equal, ensuring maximum profitability.
• All marginal revenues align with marginal costs, indicating optimal production levels.