Forms of Market and Price Determination MCQ Quiz - Objective Question with Answer for Forms of Market and Price Determination - Download Free PDF

The correct answer is monopolistic competition.

Key Points

• Monopolistic Competition is a market structure in which there is a large number of sellers in the market of a commodity, but the product of each seller differs in some respect from the product of the other sellers.
• Thus, product differentiation is the cornerstone of Monopolistic Competition.
• Monopolistic competition is like an amalgam of monopoly and perfect competition, and hence the name Monopolistic Competition.
• According to J.S. Bains, “Monopolistic Competition is a market structure where there is a large number of sellers, selling differentiated but close substitute products.”
• In a monopolistically competitive market, there are many firms that sell slightly differentiated products.
• The free entry and exit of firms suggests a competitive market, but the non-homogeneity (or differentiation) of goods introduces a degree of monopoly power for each firm.

The correct answer is Perfectly elastic.

Key Points

• In a liquidity trap, the demand for speculative money becomes infinitely responsive to changes in the interest rate.
• As interest rates approach zero, people prefer holding cash rather than bonds, leading to perfectly elastic demand for money.
• Any additional supply of money in this scenario is held as cash, with no effect on interest rates.
• This phenomenon means that changes in the money supply do not affect the interest rates or stimulate the economy.

Additional Information

• Liquidity Trap:
  • A situation where monetary policy becomes ineffective because the nominal interest rate is close to zero.
  • People prefer holding cash instead of investing in bonds or other securities.
• Interest Rate:
  • The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.
  • In a liquidity trap, the interest rate is at or near zero.
• Speculative Demand for Money:
  • The demand for money based on the anticipation of changes in interest rates.
  • In a liquidity trap, speculative demand becomes perfectly elastic.
• Monetary Policy:
  • The process by which a central bank manages money supply and interest rates to influence the economy.
  • In a liquidity trap, traditional monetary policy tools become less effective.

The correct answer is Perfectly elastic.

Key Points

• In a liquidity trap, the demand for speculative money becomes infinitely responsive to changes in the interest rate.
• As interest rates approach zero, people prefer holding cash rather than bonds, leading to perfectly elastic demand for money.
• Any additional supply of money in this scenario is held as cash, with no effect on interest rates.
• This phenomenon means that changes in the money supply do not affect the interest rates or stimulate the economy.

Additional Information

• Liquidity Trap:
  • A situation where monetary policy becomes ineffective because the nominal interest rate is close to zero.
  • People prefer holding cash instead of investing in bonds or other securities.
• Interest Rate:
  • The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.
  • In a liquidity trap, the interest rate is at or near zero.
• Speculative Demand for Money:
  • The demand for money based on the anticipation of changes in interest rates.
  • In a liquidity trap, speculative demand becomes perfectly elastic.
• Monetary Policy:
  • The process by which a central bank manages money supply and interest rates to influence the economy.
  • In a liquidity trap, traditional monetary policy tools become less effective.

The correct answer is Duopoly.

Key Points

• A duopoly is a type of oligopoly where only two firms dominate the market.
• These two firms produce identical or similar goods and services.
• Duopolies can lead to competitive or collusive behaviors between the two firms.
• Market outcomes in a duopoly can be analyzed using game theory, particularly the Cournot and Bertrand models.
• Duopolistic markets often exhibit significant barriers to entry, preventing other firms from entering the market.

Additional Information

• Perfect Competition
  • This is a market structure characterized by a large number of small firms, homogenous products, and easy entry and exit from the market.
  • In perfect competition, no single firm can influence the market price.
• Monopoly
  • A monopoly is a market structure where a single firm dominates the entire market.
  • This firm is the sole provider of a particular good or service, with high barriers to entry preventing other firms from entering the market.
• Monopsony
  • In a monopsony, there is only one buyer in the market, giving this buyer substantial control over prices and terms of purchase.
  • This market structure is the opposite of a monopoly, which features a single seller.

The correct answer is There is a fixed geographical location.

Key Points

• The primary market is where securities are created and offered for the first time.
• It involves the issuance of new securities directly from the company to investors, either directly or through an intermediary.
• The primary market is primarily concerned with the sale of new securities and does not involve the resale of securities.
• Prices of the securities in the primary market are determined by the management of the company issuing them.
• Unlike the secondary market, the primary market does not have a fixed geographical location. Transactions can occur over various platforms and locations.

 Additional Information

• Securities are sold by the company to the investor directly (or through an intermediary).
  • In the primary market, companies raise capital by selling new securities directly to investors, often through intermediaries like investment banks.
  • This process allows companies to obtain funds needed for expansion, operations, or other business activities.
• Only buying of securities takes place in the primary market, securities cannot be sold there.
  • The primary market is where investors can purchase new securities directly from the issuer. Once these securities are bought, they can be traded in the secondary market.
• Prices are determined and decided by the management of the company.
  • The company issuing the securities determines the price based on factors like market conditions, demand, and the company’s financial health.

The correct answer is option 4, i.e. Same price for same things at one time.

Key Points

• Perfect competition is the situation in the market where all the elements of monopoly are absent.
• In this type of market price of a commodity is beyond the control of individual buyers and seller.
• There are many features of perfect competitions - 
  • Numbers of buyers and sellers are very large and they compete with each other. 
  • Buyers and sellers do not control the price of the commodity due to a large number of influences.
  • The commodity sold or brought is homogenous in nature which means goods produced by different firms are identical in nature and a perfect substitute for one another.
  • Firms and industry can enter and exit freely.
• In the condition of perfect competition buyers and sellers have perfect knowledge, so if a seller tries to raise the price, he loses customers.

The correct answer is Commission for Agricultural Costs and Prices.

Key Points

• The government announces Minimum Support Prices (MSP) for agricultural commodities each year in both Crop seasons after taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP). 
• As of now, CACP recommends MSPs of 23 commodities, which comprise: 
  • 7 kinds of cereal (paddy, wheat, maize, sorghum, pearl millet, barley, and ragi),
  • 5 kinds of pulses (gram, tur, moong, urad, lentil),
  • 7 kinds of oilseed (groundnut, rapeseed-mustard, soybean, sesamum, sunflower, safflower, nigerseed),
  • 4 commercial crops (copra, sugarcane, cotton, and raw jute).
• Though the MSP is decided by the Commission for Agricultural Costs and Prices the final announcement of the MSP is made by the cabinet committee on economic affairs of the finance ministry.
• The Food and Agriculture Organization (FAO) is a specialized agency of the United Nations that leads international efforts to defeat hunger. 
  • Qu Dongyu of China is the Director-General of FAO.
• The Food Corporation of India was set up under the Food Corporation Act of 1964 as the main objective of the distribution of food grains throughout the country for the public distribution system.
• Arjun Munda  is the current Minister of Agriculture & Farmers Welfare. 

The Correct Answer is Oligopoly.

Key Points

• In the ordinary sense, the term market refers to a place where buyers and sellers meet for exchange. However, the Market need not be the place of exchange.
• Types of Market Structure
  • Perfect Competition:
    • Participants are high both buyers and sellers.
    • Products have many substitutes and no marketing or selling cost is incurred.
    • Knowledge of participants for entering into the market is perfect.
    • The seller is a Price taker, not a price maker.
    • A buyer willing to buy all at a certain price but none at price higher. So he is a price maker.
  • Monopoly:
    • Buyers are many but the seller is one.
    • Product has no substitute or no close substitute
    • Other competitors cant enter the market due to laws or patents.
    • Price discrimination is seen between poor and rich. Seller is a Price maker.
    • Relative Price inelastic increase means demand decreases by less than X% for an X% increase in price.
• A natural monopoly is when there is an extremely high fixed cost of distribution e.g. gas, water, electricity.

Additional Information

• Monopolistic competition:
  • Many buyers and sellers but each selling its differentiated version of good.
  • Marketing selling cost is high. Goods are of different brands where brand loyalty is seen to a limit but many substitutes are available.
  • Unrestricted and free entry.
  • Seller is Price maker to a level.
  • Price increases by x% but demand decreases by less than x% - relatively inelastic. But more elastic than monopoly.
• Oligopoly:
  • Buyers many but sellers few with intense competition.
  • Product has close substitutes and intense competition amongst sellers. If one seller introduces change others have to follow. High cost of marketing and selling.
  • Entry of new sellers tough due to economies of scale.
  • The seller is a price maker.
• Monopsony:
  • The monopoly of the buyer but multiple sellers present.
  • Entry closed for other buyers
  • Seen where the government wants to make a defense-related purchase and multiple sellers are bidding for it.
  • The Buyer is a price maker.

The correct answer is option 1, i.e. The cigarette industry.
Key Points

• An oligopoly is a market where industry or sales are dominated by a small group of sellers.
• It can result in collusion between sellers that reduces the market competition and leads to a higher price for consumers.
• Oligopoly markets share some common features and less concentrated than monopoly and more concentrated than a competition system.
• The cigarette industry is an oligopoly that is dominated by a handful of players in domestic and international markets.
  • As a result, competition is rare in the industry, and the incentive for innovation is also low.
• Other examples of oligopoly: automobile industry, airlines, soft-drink companies, etc.

The correct answer is monopolistic competition.

Key Points

• Monopolistic Competition is a market structure in which there is a large number of sellers in the market of a commodity, but the product of each seller differs in some respect from the product of the other sellers.
• Thus, product differentiation is the cornerstone of Monopolistic Competition.
• Monopolistic competition is like an amalgam of monopoly and perfect competition, and hence the name Monopolistic Competition.
• According to J.S. Bains, “Monopolistic Competition is a market structure where there is a large number of sellers, selling differentiated but close substitute products.”
• In a monopolistically competitive market, there are many firms that sell slightly differentiated products.
• The free entry and exit of firms suggests a competitive market, but the non-homogeneity (or differentiation) of goods introduces a degree of monopoly power for each firm.

The correct answer is Mixed Economy.

Key Points

• In a capitalist economy, production is done on the basis of demand and it is distributed on the basis of purchasing power. If people have resources then only they can afford the goods in a capitalist society. The state has no role in this. At the time of independence poverty and inequality were prevalent in India that’s why it was avoided.
• Such a society did not appeal to Jawaharlal Nehru, for it meant that the great majority of people of the country would be left behind without the chance to improve their quality of life.
•  In a socialist society, the government decides what goods are to be produced according to the needs of society.
• The government assumes to know what is good for the people of the country and so the desires of consumers are not given much importance. The government decides about production and distribution.

Additional Information

• The Indian economy has a socialist tilt but it is not a socialist economy as the public sector has been present only in the essential sector, others have been left open to the private sector.
• Most economies are today mixed economies, i.e. the government and then market together answer the three questions of what to produce, how to produce, and how to distribute what is produced.
• In a mixed economy, the market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.

The correct answer is Consumer Price Index

Key Points

• CPI is a metric that measures the change in the price level of goods consumed by retail consumers, who are on the demand side of the economy. For the same reason, it can be interpreted that CPI measures the purchasing power of an economy’s currency.

• CPI is calculated for a fixed basket of goods and services that may or may not be altered by the government from time to time. It is a macroeconomic indicator that measures inflation. It is used as an essential economic tool by central and state governments, the Reserve Bank of India, which is the central bank of our country for maintaining money supply, price stability.
• Measuring the price of a basket of goods and services that an average Indian consumes is a tedious process. This just does not include food, clothing. This will consist of transportation, medical care, electricity, education, and almost everything that requires an expenditure of money.

Additional Information

• CPI = (Cost of a Fixed Basket of Goods and Services in the Current Year/cost of a Fixed Basket of Goods and Services in the Base Year) * 100

The correct answer is Minimum Support Price.

The minimum support price is the price is declared by the government to insure agricultural producers against any sharp fall in farm prices.

Additional Information

• It is announced by the government of India every year before the sowing season and provides incentives to the farmers for raising the production of their crops.
• The crops were selected based on the recommendations of the commission for agricultural costs and Prices(CACP).
• If the market price for the commodity falls below the minimum support price due to the issues in the market, government agencies purchase the entire quantity at the announced minimum price.
• In India, there are twenty-two crops covered under Minimum Support Price.
• The 22 mandated crops under MSP consist of 14 Kharif crops, 6 rabi crops, and two other commercial crops.
• Some important minimum support price crops in India are:
  • Paddy, wheat, barley, jowar, bajra, maize, and ragi.
  • Gram, arhar/tur, moong, urad and lentil.
  • Groundnut, mustard, sunflower seed, sesamum, and safflower seed.

The correct option is 4 i.e., Consumer Price Index (CPI).

• Consumer Price Index (CPI) is used to monitor changes in the cost of living over time.
• Consumer Price Index (CPI) is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
• Wholesale Price Index (WPI) is an indicator of price changes in the wholesale market. 
• WPI measures the changes in commodity prices at selected stages before goods reach the retail level.
• Producer Price Index is an index that measures the average price change received by the producer excluding the indirect taxes.