100 IMPORTANT MULTIPLE CHOICE QUESTIONS WITH ANSWERS RELATED TO PRICE MECHANISM

What is the price mechanism?
a) The process of setting prices in a centrally planned economy
b) The mechanism through which prices are determined in a market economy
c) A government regulation that sets maximum prices for goods and services
d) The process of price negotiation between buyers and sellers in a barter economy
Answer: b) The mechanism through which prices are determined in a market economy
In a market economy, prices are primarily determined by:
a) The government
b) Consumer preferences
c) Business owners
d) Supply and demand
Answer: d) Supply and demand
The law of demand states that:
a) As price increases, quantity demanded increases
b) As price decreases, quantity demanded increases
c) As price increases, quantity demanded decreases
d) As price decreases, quantity demanded decreases
Answer: c) As price increases, quantity demanded decreases
The law of supply states that:
a) As price increases, quantity supplied increases
b) As price decreases, quantity supplied increases
c) As price increases, quantity supplied decreases
d) As price decreases, quantity supplied decreases
Answer: a) As price increases, quantity supplied increases
Equilibrium price is determined by the point at which:
a) Quantity demanded exceeds quantity supplied
b) Quantity supplied exceeds quantity demanded
c) Quantity demanded equals quantity supplied
d) Quantity demanded and supplied are equal to zero
Answer: c) Quantity demanded equals quantity supplied
What happens if the price of a product is set above the equilibrium price?
a) There will be excess demand
b) There will be excess supply
c) The market will reach a new equilibrium price
d) The price will remain unchanged
Answer: b) There will be excess supply
When there is excess demand in a market, what tends to happen to the price?
a) It decreases
b) It increases
c) It remains unchanged
d) It fluctuates randomly
Answer: b) It increases
When there is excess supply in a market, what tends to happen to the price?
a) It decreases
b) It increases
c) It remains unchanged
d) It fluctuates randomly
Answer: a) It decreases
Elastic demand refers to a situation where:
a) Quantity demanded is very sensitive to changes in price
b) Quantity demanded is not sensitive to changes in price
c) Quantity demanded remains constant regardless of price changes
d) Quantity demanded is perfectly responsive to price changes
Answer: a) Quantity demanded is very sensitive to changes in price
Inelastic demand refers to a situation where:
a) Quantity demanded is very sensitive to changes in price
b) Quantity demanded is not sensitive to changes in price
c) Quantity demanded remains constant regardless of price changes
d) Quantity demanded is perfectly responsive to price changes
Answer: b) Quantity demanded is not sensitive to changes in price
If the price of a good increases, and the quantity demanded decreases by a larger percentage, the demand is:
a) Elastic
b) Inelastic
c) Unit elastic
d) Perfectly elastic
Answer: a) Elastic
If the price of a good increases, and the quantity demanded decreases by a smaller percentage, the demand is:
a) Elastic
b) Inelastic
c) Unit elastic
d) Perfectly inelastic
Answer: b) Inelastic
When supply is more elastic than demand, what happens to the equilibrium price and quantity?
a) Price decreases, and quantity increases
b) Price increases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price increases, and quantity remains unchanged
Answer: a) Price decreases, and quantity increases
When demand is more elastic than supply, what happens to the equilibrium price and quantity?
a) Price decreases, and quantity increases
b) Price increases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price increases, and quantity remains unchanged
Answer: b) Price increases, and quantity decreases
When both supply and demand are inelastic, what happens to the equilibrium price and quantity?
a) Price decreases, and quantity increases
b) Price increases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price remains unchanged, and quantity remains unchanged
Answer: d) Price remains unchanged, and quantity remains unchanged
The price mechanism helps to allocate resources efficiently by:
a) Ensuring equal distribution of resources
b) Maximizing government control over the economy
c) Promoting competition among producers
d) Minimizing consumer choices
Answer: c) Promoting competition among producers
When there is an increase in demand for a product, what tends to happen to the price and quantity?
a) Price increases, and quantity increases
b) Price decreases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price increases, and quantity remains unchanged
Answer: a) Price increases, and quantity increases
When there is a decrease in demand for a product, what tends to happen to the price and quantity?
a) Price increases, and quantity increases
b) Price decreases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price decreases, and quantity remains unchanged
Answer: b) Price decreases, and quantity decreases
When there is an increase in supply of a product, what tends to happen to the price and quantity?
a) Price increases, and quantity increases
b) Price decreases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price decreases, and quantity remains unchanged
Answer: b) Price decreases, and quantity decreases
When there is a decrease in supply of a product, what tends to happen to the price and quantity?
a) Price increases, and quantity increases
b) Price decreases, and quantity decreases
c) Price remains unchanged, and quantity decreases
d) Price increases, and quantity remains unchanged
Answer: a) Price increases, and quantity increases
In a market economy, prices act as signals that:
a) Allocate resources efficiently
b) Discourage production
c) Control consumer behavior
d) Eliminate competition
Answer: a) Allocate resources efficiently
Price ceilings are government-imposed price controls that:
a) Set a maximum price for a good or service
b) Set a minimum price for a good or service
c) Completely eliminate the price mechanism
d) Adjust prices based on inflation rates
Answer: a) Set a maximum price for a good or service
Price floors are government-imposed price controls that:
a) Set a maximum price for a good or service
b) Set a minimum price for a good or service
c) Completely eliminate the price mechanism
d) Adjust prices based on inflation rates
Answer: b) Set a minimum price for a good or service
Price ceilings often lead to:
a) Excess demand and shortages
b) Excess supply and surpluses
c) Equilibrium in the market
d) Decreased consumer demand
Answer: a) Excess demand and shortages
Price floors often lead to:
a) Excess demand and shortages
b) Excess supply and surpluses
c) Equilibrium in the market
d) Decreased consumer demand
Answer: b) Excess supply and surpluses
Which of the following is an example of a price ceiling?
a) Rent control
b) Minimum wage
c) Sales tax
d) Subsidies
Answer: a) Rent control
Which of the following is an example of a price floor?
a) Rent control
b) Minimum wage
c) Sales tax
d) Subsidies
Answer: b) Minimum wage
When the government imposes a price ceiling, it is usually motivated by:
a) Protecting producers
b) Ensuring fairness for consumers
c) Encouraging economic growth
d) Controlling inflation
Answer: b) Ensuring fairness for consumers
When the government imposes a price floor, it is usually motivated by:
a) Protecting producers
b) Ensuring fairness for consumers
c) Encouraging economic growth
d) Controlling inflation
Answer: a) Protecting producers
Which of the following is a disadvantage of price ceilings?
a) Increased consumer surplus
b) Reduced quality of goods and services
c) Efficient allocation of resources
d) Encouragement of competition
Answer: b) Reduced quality of goods and services
Which of the following is a disadvantage of price floors?
a) Increased consumer surplus
b) Reduced quality of goods and services
c) Efficient allocation of resources
d) Increased unemployment
Answer: d) Increased unemployment
When there is a shortage in the market due to a price ceiling, sellers may engage in:
a) Price gouging
b) Price discrimination
c) Black market activities
d) Monopolistic pricing
Answer: c) Black market activities
The price mechanism encourages producers to:
a) Maximize profits
b) Minimize competition
c) Ignore consumer preferences
d) Control market prices
Answer: a) Maximize profits
The price mechanism allows consumers to:
a) Influence government policies
b) Determine production levels
c) Set minimum wage rates
d) Make choices based on their preferences and budget constraints
Answer: d) Make choices based on their preferences and budget constraints
Which of the following is a function of prices in a market economy?
a) Allocating resources efficiently
b) Limiting consumer choices
c) Encouraging government intervention
d) Controlling inflation rates
Answer: a) Allocating resources efficiently
Which of the following statements is true about the price mechanism?
a) It only applies to goods and not services
b) It is influenced by government regulations
c) It operates differently in different countries
d) It is a universal feature of market economies
Answer: d) It is a universal feature of market economies
The price mechanism promotes economic efficiency by:
a) Eliminating competition among producers
b) Allocating resources based on political decisions
c) Discouraging innovation and entrepreneurship
d) Allowing prices to adjust based on supply and demand
Answer: d) Allowing prices to adjust based on supply and demand
When prices are allowed to adjust freely in response to changes in supply and demand, it is known as:
a) Price flexibility
b) Price rigidity
c) Price discrimination
d) Price control
Answer: a) Price flexibility
Which of the following is an example of a market with price rigidity?
a) Stock market
b) Housing market
c) Labor market
d) Commodities market
Answer: b) Housing market
Price discrimination occurs when:
a) Sellers charge different prices to different buyers for the same product
b) Prices for a product remain constant over time
c) Government sets a fixed price for a product
d) Demand and supply are perfectly balanced in the market
Answer: a) Sellers charge different prices to different buyers for the same product
Which of the following is an example of price discrimination?
a) Student discounts at movie theaters
b) Government-imposed price controls
c) Fixed exchange rates between currencies
d) Minimum wage laws
Answer: a) Student discounts at movie theaters
Price discrimination can be beneficial for sellers because it allows them to:
a) Maximize consumer surplus
b) Increase market competition
c) Target different market segments
d) Eliminate price fluctuations
Answer: c) Target different market segments
Which of the following is a characteristic of perfect competition?
a) A large number of buyers and sellers
b) High barriers to entry
c) Complete control over market prices
d) Limited product differentiation
Answer: a) A large number of buyers and sellers
In a perfectly competitive market, prices are determined by:
a) Government regulations
b) Producers’ preferences
c) Negotiations between buyers and sellers
d) The interaction of supply and demand
Answer: d) The interaction of supply and demand
Which of the following is a characteristic of a monopoly market?
a) Multiple sellers offering similar products
b) Low barriers to entry
c) Limited control over market prices
d) One seller with no close substitutes
Answer: d) One seller with no close substitutes
In a monopoly market, the monopolist can influence prices by:
a) Adjusting supply to meet demand
b) Engaging in price discrimination
c) Promoting competition among sellers
d) Following the price mechanism
Answer: b) Engaging in price discrimination
Oligopoly is a market structure characterized by:
a) Many small firms producing identical products
b) A single dominant firm with no competition
c) A small number of large firms
d) A large number of buyers and sellers
Answer: c) A small number of large firms
In an oligopoly market, prices are often determined through:
a) Government regulations
b) Negotiations between buyers and sellers
c) Collusion among firms
d) The price mechanism
Answer: c) Collusion among firms
Which of the following is a characteristic of monopolistic competition?
a) One seller with complete control over prices
b) A large number of firms producing differentiated products
c) Limited consumer choices
d) High barriers to entry
Answer: b) A large number of firms producing differentiated products
In monopolistic competition, firms can differentiate their products through:
a) Branding and marketing
b) Price controls imposed by the government
c) Collusion with other firms
d) Following the price mechanism
Answer: a) Branding and marketing
Which of the following is an example of a market with monopolistic competition?
a) Electricity supply industry
b) Pharmaceutical industry
c) Agricultural industry
d) Fast food industry
Answer: d) Fast food industry
Market failure occurs when:
a) Prices are too high
b) Prices are too low
c) Resources are not allocated efficiently
d) Government intervenes in the market
Answer: c) Resources are not allocated efficiently
Externalities are:
a) Costs or benefits imposed on third parties not involved in a transaction
b) Prices that are set by the government
c) Regulations imposed on market activities
d) Costs or benefits incurred by producers or consumers
Answer: a) Costs or benefits imposed on third parties not involved in a transaction
Negative externalities occur when:
a) Costs are borne by third parties not involved in a transaction
b) Prices are higher than the equilibrium price
c) There is excess demand in the market
d) Demand exceeds supply
Answer: a) Costs are borne by third parties not involved in a transaction
Positive externalities occur when:
a) Costs are borne by third parties not involved in a transaction
b) Prices are lower than the equilibrium price
c) There is excess supply in the market
d) Demand exceeds supply
Answer: b) Prices are lower than the equilibrium price
Which of the following is an example of a negative externality?
a) A beekeeper pollinating crops in a nearby farm
b) A factory polluting a nearby river
c) A consumer buying a new car
d) A student studying for an exam
Answer: b) A factory polluting a nearby river
Which of the following is an example of a positive externality?
a) A beekeeper pollinating crops in a nearby farm
b) A factory polluting a nearby river
c) A consumer buying a new car
d) A student studying for an exam
Answer: a) A beekeeper pollinating crops in a nearby farm
Public goods are characterized by:
a) Rivalry in consumption and exclusion
b) Rivalry in consumption and non-exclusion
c) Non-rivalry in consumption and exclusion
d) Non-rivalry in consumption and non-exclusion
Answer: d) Non-rivalry in consumption and non-exclusion
Which of the following is an example of a public good?
a) Private healthcare services
b) Public transportation system
c) Cable television subscription
d) Exclusive club membership
Answer: b) Public transportation system
Common resources are characterized by:
a) Rivalry in consumption and exclusion
b) Rivalry in consumption and non-exclusion
c) Non-rivalry in consumption and exclusion
d) Non-rivalry in consumption and non-exclusion
Answer: b) Rivalry in consumption and non-exclusion
Which of the following is an example of a common resource?
a) Private beachfront property
b) Public park
c) Timber in a forest
d) Satellite television service
Answer: c) Timber in a forest
Which of the following is a potential solution to address market failures?
a) Price controls imposed by the government
b) Increased government intervention in the market
c) Encouraging competition among producers
d) Eliminating the price mechanism entirely
Answer: c) Encouraging competition among producers
Market-based solutions for externalities include:
a) Government regulations and restrictions
b) Subsidies and tax breaks for producers
c) Cap-and-trade systems and pollution permits
d) Price controls and minimum wage laws
Answer: c) Cap-and-trade systems and pollution permits
Which of the following is a characteristic of a command economy?
a) Prices are determined by the market forces
b) Government controls all economic decisions
c) There is no private ownership of resources
d) Consumers have complete freedom of choice
Answer: b) Government controls all economic decisions
In a command economy, prices are typically:
a) Determined by supply and demand
b) Regulated by the government
c) Negotiated between buyers and sellers
d) Not relevant to the economic system
Answer: b) Regulated by the government
Which of the following is a disadvantage of a command economy?
a) Inefficiency due to lack of competition
b) Excessive consumer choices
c) Limited government control over the economy
d) Inequality in the distribution of resources
Answer: a) Inefficiency due to lack of competition
Mixed economies combine elements of:
a) Command and traditional economies
b) Market and command economies
c) Market and traditional economies
d) Market and barter economies
Answer: b) Market and command economies
In a mixed economy, prices are influenced by:
a) Government regulations and market forces
b) Producers’ preferences only
c) Negotiations between buyers and sellers
d) Tradition and customs
Answer: a) Government regulations and market forces
Which of the following is a characteristic of a traditional economy?
a) Government control over economic decisions
b) Private ownership of resources
c) Economic activities based on customs and traditions
d) Prices determined by supply and demand
Answer: c) Economic activities based on customs and traditions
In a traditional economy, prices are typically:
a) Determined by supply and demand
b) Regulated by the government
c) Negotiated between buyers and sellers
d) Not relevant to the economic system
Answer: d) Not relevant to the economic system
In a market economy, prices act as:
a) Inflexible guidelines for producers
b) Tools for government intervention
c) Signals for buyers and sellers
d) Barriers to entry for new firms
Answer: c) Signals for buyers and sellers
The price elasticity of demand measures:
a) The responsiveness of quantity demanded to changes in price
b) The percentage change in quantity demanded relative to the percentage change in income
c) The relationship between supply and demand in the market
d) The ability of sellers to set prices in the market
Answer: a) The responsiveness of quantity demanded to changes in price
When demand is price elastic, a decrease in price will result in:
a) A smaller percentage increase in quantity demanded
b) No change in quantity demanded
c) A larger percentage increase in quantity demanded
d) A decrease in quantity demanded
Answer: c) A larger percentage increase in quantity demanded
When supply is price elastic, an increase in price will result in:
a) A larger percentage increase in quantity supplied
b) No change in quantity supplied
c) A smaller percentage increase in quantity supplied
d) A decrease in quantity supplied
Answer: a) A larger percentage increase in quantity supplied
When supply is price inelastic, a decrease in price will result in:
a) A smaller percentage decrease in quantity supplied
b) No change in quantity supplied
c) A larger percentage decrease in quantity supplied
d) An increase in quantity supplied
Answer: a) A smaller percentage decrease in quantity supplied
Cross-price elasticity of demand measures the:
a) Responsiveness of quantity demanded to changes in price
b) Relationship between supply and demand for a specific product
c) Percentage change in quantity demanded of one good relative to the percentage change in price of another good
d) Ability of producers to set prices in the market
Answer: c) Percentage change in quantity demanded of one good relative to the percentage change in price of another good
If the cross-price elasticity of demand between two goods is positive, it indicates that the goods are:
a) Complements
b) Substitutes
c) Inferior goods
d) Luxury goods
Answer: b) Substitutes
If the cross-price elasticity of demand between two goods is negative, it indicates that the goods are:
a) Complements
b) Substitutes
c) Inferior goods
d) Normal goods
Answer: a) Complements
Income elasticity of demand measures the:
a) Responsiveness of quantity demanded to changes in income
b) Relationship between supply and demand for a specific product
c) Percentage change in quantity demanded relative to the percentage change in price
d) Ability of producers to set prices in the market
Answer: a) Responsiveness of quantity demanded to changes in income
If the income elasticity of demand for a good is greater than zero, the good is considered:
a) A normal good
b) An inferior good
c) Price elastic
d) Price inelastic
Answer: a) A normal good
If the income elasticity of demand for a good is less than zero, the good is considered:
a) A normal good
b) An inferior good
c) Price elastic
d) Price inelastic
Answer: b) An inferior good
When supply is price inelastic, an increase in price will result in:
a) A larger percentage decrease in total revenue
b) No change in total revenue
c) A larger percentage increase in total revenue
d) An increase in quantity supplied
Answer: c) A larger percentage increase in total revenue
In a competitive market, long-run equilibrium occurs when:
a) Quantity demanded exceeds quantity supplied
b) Quantity supplied exceeds quantity demanded
c) Price is above the equilibrium price
d) Price is at the equilibrium price
Answer: d) Price is at the equilibrium price
In a competitive market, if the quantity supplied exceeds the quantity demanded, there will be:
a) A shortage
b) Excess demand
c) A surplus
d) Price controls imposed by the government
Answer: c) A surplus
In a competitive market, if the quantity demanded exceeds the quantity supplied, there will be:
a) A shortage
b) Excess supply
c) A surplus
d) Price controls imposed by the government
Answer: a) A shortage
Price ceilings are government-imposed maximum prices set:
a) Below the equilibrium price
b) Above the equilibrium price
c) Equal to the equilibrium price
d) Based on the preferences of producers
Answer: a) Below the equilibrium price
Price floors are government-imposed minimum prices set:
a) Below the equilibrium price
b) Above the equilibrium price
c) Equal to the equilibrium price
d) Based on the preferences of producers
Answer: b) Above the equilibrium price
Price ceilings are typically implemented to:
a) Prevent market shortages
b) Increase market competition
c) Support producers’ profits
d) Generate government revenue
Answer: a) Prevent market shortages
Price floors are typically implemented to:
a) Prevent market shortages
b) Increase market competition
c) Support producers’ profits
d) Generate government revenue
Answer: c) Support producers’ profits
When a price ceiling is set below the equilibrium price, it may result in:
a) A surplus
b) Excess demand
c) A decrease in consumer surplus
d) Increased market efficiency
Answer: b) Excess demand
When a price floor is set above the equilibrium price, it may result in:
a) A shortage
b) Excess supply
c) A decrease in producer surplus
d) Increased market efficiency
Answer: b) Excess supply
Deadweight loss refers to:
a) The loss of consumer surplus and producer surplus due to market inefficiency
b) The transfer of surplus from consumers to producers
c) The government revenue generated from price controls
d) The equilibrium price in the market
Answer: a) The loss of consumer surplus and producer surplus due to market inefficiency
When a market is in equilibrium, consumer surplus is:
a) Maximized
b) Minimized
c) Eliminated
d) Irrelevant to market outcomes
Answer: a) Maximized
When a market is in equilibrium, producer surplus is:
a) Maximized
b) Minimized
c) Eliminated
d) Irrelevant to market outcomes
Answer: a) Maximized
In a market with perfect competition, economic efficiency is achieved because:
a) Producers have complete control over prices
b) Consumers have complete control over prices
c) Prices reflect the true value of goods and services
d) Government regulates all market transactions
Answer: c) Prices reflect the true value of goods and services
In a market with monopolistic competition, firms have some control over prices because:
a) There are no barriers to entry in the market
b) There is only one seller in the market
c) Firms produce differentiated products
d) Prices are determined solely by market forces
Answer: c) Firms produce differentiated products
In a market with monopolistic competition, firms may engage in product differentiation to:
a) Increase market competition
b) Achieve economies of scale
c) Maximize consumer surplus
d) Create a perceived uniqueness for their products
Answer: d) Create a perceived uniqueness for their products
Oligopoly refers to a market structure characterized by:
a) A large number of firms competing with differentiated products
b) A single seller dominating the market
c) A small number of firms dominating the market
d) Perfect competition among a large number of small firms
Answer: c) A small number of firms dominating the market
In an oligopoly, firms often engage in strategic behavior, which includes:
a) Price-setting based on market forces
b) Collaboration to maximize market competition
c) Collusion to restrict competition
d) Production of homogeneous goods
Answer: c) Collusion to restrict competition