1. In the diagram, YL and YM show two budget lines for a consumer of a product, X, when its price
changes. IC₁ and IC₂ are two indifference curves, representing the consumer’s preferences
between product X and spending on other goods.

What is not a valid statement?
A Product X must be a Giffen good, since the consumer spends more on other goods after the
price change.
B The consumer has greater satisfaction at E₂ than at E₁.
C The prices of other goods are assumed to be held constant when drawing the budget lines.
D The shift from YL to YM represents a fall in the price of product X.

2. The list provides characteristics of the market in which firm X operates.
● Firms in the market spend a lot of money on advertising.
● Firms in the market experience a high level of uncertainty.
● Start-up costs for new firms entering the market are relatively high.
● The largest five firms in the market control 85% of total sales.
In which market structure is firm X operating?
A monopoly
B monopolistic competition
C oligopoly
D perfect competition

3. What explains why, in long-run equilibrium in monopolistic competition, firms make only normal
profits?
A consumer resistance
B decreasing returns to scale
C differentiated products
D freedom of entry and exit

4. The diagram shows four possible output levels of a firm.
At its current level of output, the firm’s product has a price elasticity of demand of exactly –1.
Which output is the firm selling?

5. Which conditions enable price discrimination?
1 The firm can separate the total market into different sub-markets.
2 There are different price elasticities of demand (PED) in each separate sub-market.
3 The marginal revenue curve is the same in each separate market.
A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3

Answers