According to the theory of the firm, which of the following statements describes an oligopoly?
C Rationale: A is one of the conditions for a perfect market, B is a monopoly and D is monopolistic
Which of the following is not a substitute for carpets?
C Rationale: Carpet underlay is a complement to carpet.
Which of the following is not a complement to cars?
C Rationale: An increase in demand for cars will lead to an increase in demand for petrol and tyres.
It will not increase the demand for holidays although people may use their cars to go on holiday.
The demand for fashion goods is not influenced by:
B Rationale: This is a supply-side factor.
If the price of coffee falls, which one of the following outcomes would be expected to occur?
D Rationale: Coffee and tea are substitute products. Thus, a fall in the price of coffee will result in
higher demand for coffee and lower demand for its substitute product, tea. The price of tea might
therefore fall. Demand for drinking cups is probably insufficiently related to the consumption of
coffee to make them a complementary product to coffee. Even so, lower coffee prices would be
likely to raise the demand for drinking cups rather than reduce it.
Consider the price and demand for flower vases. The price of cut flowers goes up sharply. Which of the
following would you expect to happen?
D Rationale: It is assumed that cut flowers and flower vases are complementary goods. The rise in
price of cut flowers will have an adverse effect on demand for flower vases, and the demand
curve for flower vases will shift to the left. Given no change in supply conditions for vases, the
new equilibrium price for vases will be lower.
Consider the price and demand for tickets to travel by sea ferry. The price of travelling by hovercraft (a
substitute form of travel) goes up. Which of the following would you expect to happen?
B Rationale: As sea ferry tickets and hovercraft tickets are substitute goods, an increase in the price
of hovercraft tickets will cause a shift to the right (increase in demand) for sea ferry tickets. Given
no change in supply conditions, the consequence will be an increase in the number of sea ferry
tickets sold, at a higher price than before.
The summer demand for hotel accommodation in London comes mainly from foreign tourists. Demand
for hotel rooms in London in summer could be reduced by a fall in the price or value of which of the
1 US dollars
2 Aeroplane tickets
A Rationale: A fall in the price of sterling would make London hotels cheaper for foreign tourists. A
fall in the price of aeroplane tickets would make London cheaper to visit for foreign tourists.
Events 2 and 3 would lead to a rise in demand for hotel rooms. In contrast, a fall in the value of
the US dollar would make the UK more expensive to visit for US tourists and tourists from other
countries where the US dollar is widely used, and demand for hotel rooms in London would fall.
ABC produces a variety of soft drink. It has two competitors but all three producers use product differentiation to distinguish themselves from each other. What type of market is this?
C Rationale: This is an example of monopolistic competition.
Suppose that, in a certain advanced industrialised country, the government has applied price controls
over rents of both public and private rented accommodation for a number of years, and a serious
problem of widespread homelessness has built up. Just recently, the rent price controls have been
eased. Which of the following consequences should now occur?
1 An increase in homelessness
2 In the longer term, an increase in new building work
3 The provision of more rented accommodation
4 Fewer owner-occupied dwellings
B Rationale: When rent controls are eased, the effect is similar to raising or removing minimum
prices in the rented housing market. We should expect higher rents, more supply of housing, and
a closing of the gap between demand for rented housing and supply of rented accommodation.
Changes 2 and 3 should therefore occur. The reverse of Change 1 should happen, and
homelessness should decrease. Given widespread homelessness, it is unlikely that the easing of
rent controls will have any effect on demand for owner-occupied dwellings.