Question 1

Suppose a consumer has an income of $$100 and faces prices P_X = 10$ for good X and P_Y = 20$ for good Y. Which of the following equations correctly represents the consumer's budget constraint?

Accepted Answer

$$10X + 20Y = 100$$

Question 2

If the price of coffee increases from $$2 to$$ $$2.20$$ and the quantity demanded falls from $$100 to$$ $$90$$, what is the arc price elasticity of demand? Use the midpoint formula.

Accepted Answer

$$-1.05$$

Question 3

Which of the following best describes the law of diminishing returns?

Accepted Answer

As more of a variable input is added to a fixed input, the marginal product of the variable input eventually decreases.

Question 4

A firm in a perfectly competitive market faces a market price of $$P = 50. If $$the firm's marginal cost at its current output is $$MC = 60$$, what should the firm do to maximize profit in the short run?

Accepted Answer

Decrease output until $$MC = P$$

Question 5

If the cross-price elasticity of demand between two goods is $$1.5$$, what does this imply about the relationship between the goods?

Accepted Answer

They are substitutes.

Question 6

Which of the following is true about producer surplus?

Accepted Answer

It is the difference between the market price and the seller's reservation value, summed over all units sold.

Question 7

A price ceiling set below the equilibrium price will likely result in which of the following?

Accepted Answer

A shortage and deadweight loss

Question 8

If a good has an income elasticity of demand of $$-0.8$$, what type of good is it?

Accepted Answer

Inferior good

Question 9

Which of the following is a condition for a perfectly competitive market?

Accepted Answer

Firms are price takers.

Question 10

Suppose a firm’s total cost function is $$TC = 100 + 5Q + Q^2$. What is the marginal cost function?

Accepted Answer

$$MC = 5 + 2Q$$

Question 11

If a firm’s total revenue is $$TR = 2000$$, explicit costs are $$1500$$, and implicit costs are $$400$$, what is the economic profit?

Accepted Answer

$$100$$

Question 12

Which of the following best describes Pareto efficiency?

Accepted Answer

No one can be made better off without making someone else worse off.

Question 13

If the supply of a product is perfectly inelastic, what does the supply curve look like?

Accepted Answer

A vertical line

Question 14

Which of the following is an example of a coordination problem in a command economy?

Accepted Answer

Central planners cannot efficiently allocate resources due to lack of information.

Question 15

A firm is considering shutting down in the short run. Which condition must be true for shutdown to be optimal?

Accepted Answer

Price is less than average variable cost at all output levels.

Question 16

If a subsidy is given to producers in a competitive market, what is the likely effect on equilibrium quantity and price?

Accepted Answer

Equilibrium quantity increases and equilibrium price decreases.

Question 17

Which of the following best describes the concept of opportunity cost?

Accepted Answer

The value of the next best alternative forgone.

Question 18

If a good is a normal good, what happens to its demand when consumer income increases?

Accepted Answer

Demand increases.

Question 19

Suppose the market for apartments in a city is in equilibrium. The city government imposes a rent control (price ceiling) below the equilibrium rent. What is the most likely outcome?

Accepted Answer

A shortage of apartments and reduced quality of available units.

Question 20

Which of the following is true about the invisible hand in market economies?

Accepted Answer

It leads self-interested individuals to promote social welfare through market transactions.

Microeconomics Exam 2 Review: Consumer and Producer Behavior, Market Equilibrium, and Efficiency

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