4.1.5.8 The dynamics of competition and competitive market processes Quiz: AQA Economics, Unit 1

The 20 questions

1. Competition between firms is not only about price. Firms also compete by:

   • Improving products, reducing costs and raising the quality of service
   • Restricting entry through licensing requirements, which keeps the number of firms in the market fixed and so protects each incumbent
   • Reducing output to keep prices high
   • Colluding to fix prices at the same level, so that rivals agree not to compete on any feature of their products or services at all

2. The short-run benefits of competition for consumers include:

   • Permanent barriers to entry protecting incumbents
   • Reduced choice because products become standardised, so that buyers can no longer find the range of goods they wanted in the market
   • Guaranteed abnormal profit for all firms in the market
   • Lower prices and greater pressure on existing firms to be efficient

3. The long-run benefits of competition include:

   • Greater concentration of market share among the largest firms
   • Permanently higher prices to fund heavy advertising
   • Fewer firms in the market because profits are always low
   • Incentives to invest and innovate, improving products and processes over time

4. Which firm behaviour is most likely to be encouraged by the threat of new entry into a market earning high profits?

   • Firms raising prices to deter entrants permanently
   • Firms investing in cost reduction and innovation to defend their position
   • Firms merging to reduce the number of competitors to one
   • Firms reducing quality to cut their costs

5. A monopolist earning large profits faces the possibility of new entry. What is the most likely incentive for entrants?

   • Entry only occurs in perfectly competitive markets
   • Large profits attract entrants, who may innovate to overcome the existing barriers to entry
   • Profits are protected by law, so entry is never attractive
   • Entrants prefer markets that earn no profit at all

6. A firm cuts its costs by 10% after a rival launches a cheaper service. Which competitive process is illustrated?

   • Abnormal profit being protected by high barriers to entry
   • Competition forcing firms to reduce costs and improve efficiency
   • Predatory pricing to force the firm out of the market
   • Collusion with the rival to share costs equally

7. Competitive market processes are useful because they:

   • Allocate resources and encourage firms to respond to consumer preferences
   • Guarantee each firm an equal share of the market
   • Remove all risk from business decisions
   • Eliminate the need for any firm to make a profit

8. Which evaluation best addresses whether competition always benefits consumers in the long run?

   • Competition always lowers quality because firms cut costs without limit
   • Competition makes long-run investment unnecessary for all firms
   • Competition often brings lower prices and innovation, but intense rivalry can squeeze profits so far that investment falls
   • Competition only benefits firms and never consumers

9. A firm's market share falls after a rival improves its product quality. Its best response is most likely to be:

   • Ignoring the rival, since quality does not affect demand in most markets and buyers switch only when prices change by a large amount
   • Investing in product improvement or cost reduction to win back customers
   • Leaving the market at once without analysing its options
   • Raising its price sharply to signal higher quality

10. Which statement correctly describes the dynamic process of competition?

    • Competition only exists between firms with equal market share
    • Dynamic competition excludes any role for innovation
    • Competition ends once a market reaches its equilibrium price
    • Firms and products are constantly challenged and replaced over time

11. A new entrant offers a lower price and faster delivery. What is the most likely effect on incumbents?

    • Incumbents must raise prices to offset the entry
    • Incumbents may need to improve service, lower costs or cut prices to keep customers
    • Incumbents are protected because the entrant cannot match their costs
    • Incumbents are forced to merge because entry is illegal

12. Why might competitive pressure matter more than a static analysis of market structure suggests?

    • It forces firms to innovate and adjust over time, which a fixed snapshot of structure does not capture
    • Static analysis shows that competition never changes market outcomes
    • Competitive pressure only affects prices, never products
    • Static models already include all innovation

13. A firm with monopoly power faces new innovators. What is the likely long-run effect on its power?

    • It is always exempt from competition policy, so no regulator can ever examine its conduct or challenge the power it holds in the market
    • It may be eroded over time as entrants and innovators challenge its position
    • It is protected permanently from any innovation
    • It is required by law to fund its rivals' research

14. A firm invests £2 million in research that reduces its unit costs by £1. Which concept is it primarily pursuing?

    • Dynamic efficiency through cost reduction and innovation over time
    • Allocative efficiency achieved by setting price equal to marginal cost
    • Static productive efficiency achieved by moving to minimum average cost
    • Hit-and-run competition as a short-term entry strategy

15. Which is the best justification for policy that promotes competition?

    • Policy should protect incumbents from entrants, since existing firms are the most important source of jobs
    • Competition can raise efficiency, innovation and consumer welfare across markets
    • Competition matters only because it raises firm profits
    • Competition removes the need for regulation in all markets

16. A market has three firms each earning £200 million in profit. A new technology lowers the cost of entry. What is the likely effect?

    • Entry decreases because profits are already high
    • Entry increases and competition gradually erodes the abnormal profits
    • Profit rises permanently because entry costs have fallen
    • The three firms merge at once to protect their profit

17. What does the word 'process' in 'competitive market processes' emphasise?

    • Competition exists only at the point of sale
    • Competition unfolds over time through rivalry, entry and innovation rather than being a fixed state
    • Competition is completed once prices are set, which means that later changes in quality
    • Competition is a single equilibrium outcome that never changes

18. Which is the most likely result of intense price competition among firms with identical costs and products?

    • Prices rise above average cost as firms coordinate
    • Firms merge to maintain high prices
    • Consumer surplus falls as prices are raised, because buyers lose the value that they once received from lower prices in the period
    • Prices fall towards marginal cost, leaving little profit

19. Competition encourages firms to improve service quality rather than compete on price alone. Which concept describes this?

    • Price discrimination
    • Collusive oligopoly
    • Predatory pricing
    • Non-price competition

20. Which of these is an example of firms competing on quality rather than on price?

    • A firm cutting its price below cost to drive a rival out of the market
    • Firms sharing a single price list that is set by the government for the whole sector
    • Two firms agreeing to raise their prices by the same amount in the same month
    • A firm advertising faster delivery and better after-sales service than its rivals

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