Giffen's paradox as an exception to the law of demand includes

The correct answer is D. Perfect competition assumes a homogeneous product, very many buyers and sellers, perfect knowledge and free entry and exit, and the visible result of all this is a single ruling price: the same good cannot sell at two prices at the same moment, because any buyer would move to the cheaper seller at once. Option A is wrong because product differentiation is the mark of monopolistic competition, where each firm sells a branded version of the good. Option B is wrong because a multiplicity of prices for identical products is the opposite of the single price rule and happens only where knowledge is imperfect. Option C is wrong because perfect competition needs many buyers as well as many sellers; if the buyers were few, they would influence the price and the firm would no longer be a price taker.

The correct answer is A, the cigarette industry. An oligopoly is a market in which a few large firms supply the whole output, so each must watch how the others will react to its price, and the cigarette industry is the standard example because a handful of companies hold almost the entire market. Option B is wrong because barber shops are very numerous and each offers a slightly differentiated service in its own locality, which makes the trade an example of monopolistic competition. Option C is wrong for the same reason, as welding shops are many, small and locally competing. Option D is wrong because wheat growing farmers are countless and sell an identical product at a price none of them can influence, which is the closest real approach to perfect competition. Fix the examples as oligopoly for cigarettes, cement and airlines, and perfect competition for farm produce.

The correct answer is D, monopolistic competition. This form, analysed by Edward Chamberlin, keeps two features of perfect competition, a large number of firms and free entry and exit, but drops the third: each firm sells a differentiated or branded product, so it faces a downward sloping demand curve and has a little control over its own price, and selling costs such as advertising become important. Soap, toothpaste and restaurants are the usual examples. Option A is wrong because a monopsony is a market with a single buyer, not many firms. Option B is wrong because an oligopoly has only a few sellers, and entry is usually difficult. Option C is wrong because a monopoly has exactly one seller with no close substitute, which contradicts both the large number and the free entry given in the question.

The correct answer is B. The law of demand records an inverse relationship: at a higher price buyers take less of a good and at a lower price they take more, which is why the demand curve slopes downward from left to right. Three reasons support it, the income effect that leaves more purchasing power when a price falls, the substitution effect that draws buyers away from costlier alternatives, and the law of diminishing marginal utility that makes each additional unit worth less. Option A states a direct relationship, which describes the law of supply instead. Option C is wrong because an unchanging quantity is only the special case of perfectly inelastic demand, not the general law. Option D is wrong because income shifts the whole demand curve but the law of demand speaks of price with income held constant.

The correct answer is B. When only the price of the good itself changes, the buyer simply moves to another point on the same demand curve, and a move to a larger quantity at a lower price is called an extension of demand, while the reverse is a contraction. Options A and C are wrong because an increase or a decrease in demand, which shifts the entire curve, is caused by a change in something other than the price of the good, such as income, tastes, the price of a substitute or complement, or the number of buyers. Option D is wrong because quantity demanded does change with price for all normal goods; only perfectly inelastic demand leaves it untouched. This distinction between a movement along the curve and a shift of the curve is among the most frequently tested points of the chapter.