1. What is a characteristic of monopolistic competition?
A abnormal profits in the long run
B advertising supporting product differentiation
C all firms charge the same price
D barriers to entry are high

2. The diagram shows the marginal cost (MC), average variable cost (AVC) and average total cost
(ATC) curves of a profit maximising firm in a perfectly competitive market.

Which market price would mean the firm would operate in the short run but not in the long run?
A P₁ B P₂ C P₃ D P₄

3. The table shows the average incomes of the richest 20% of households and the poorest 20% of
households in the UK (2015–2016), and the effects of government taxation and benefits on
average income.

	Average income (£) of richest 20%	Average income (£) of poorest 20%
Before taxes and benefits	85000	7000
After direct taxes and cash benefits	68000	13000
After all taxes (direct and indirect) and all benefits	63000	17000

What can be concluded from the information in the table?
A The effects of direct taxation have affected the rich less than the poor.
B The government’s policy achieved income equality across households.
C The government redistributed all income taken from the rich to the poor.
D The government’s policy reduced the income inequality between the poor and the rich.

4. Assuming there are no externalities, where would a nationalised firm set output to maximise
social welfare?
A where average revenue equals average cost
B where average revenue equals marginal cost
C where marginal revenue equals marginal cost
D where marginal revenue is zero

5. What is the specific advantage of pollution permits, when compared with an alternative policy of
taxes levied on the quantity of pollutants emitted by firms?
A firms have a financial incentive to reduce pollution
B no monitoring of firm’s emissions is required
C pollution levels can be reduced to zero
D the reduction in the level of pollution is more predictable

Answers