Question 1

Suppose the price of oil increases by 10%, and the quantity demanded decreases by 2%. What is the price elasticity of demand for oil?

Accepted Answer

$$Ep = \frac{-2\%}{10\%} = -0.2$$

Question 2

A government sets a price ceiling below the market equilibrium price for rental apartments. What is the most likely outcome?

Accepted Answer

A shortage of apartments and the development of non-price rationing mechanisms

Question 3

If the cross price elasticity of demand between two goods is negative, what does this indicate about the relationship between the goods?

Accepted Answer

The goods are complements

Question 4

Which of the following best describes the law of diminishing marginal utility?

Accepted Answer

As more units of a good are consumed, the additional satisfaction from each extra unit decreases

Question 5

A consumer spends all their income on two goods, A and B. At the consumer optimum, which condition must be satisfied?

Accepted Answer

$$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$

Question 6

If a firm’s total revenue is $$TR = 5000$$ and its total costs are $$TC = 4000$$, what is its economic profit?

Accepted Answer

$$Economic\ Profit = TR - TC = 5000 - 4000 = 1000$$

Question 7

Which of the following is an example of an implicit cost for a firm?

Accepted Answer

The foregone salary the owner could earn working elsewhere

Question 8

A firm’s average fixed cost (AFC) is calculated as:

Accepted Answer

$$AFC = \frac{Total\ Fixed\ Cost}{Quantity\ of\ Output}$$

Question 9

If the marginal product of labor begins to decrease as more workers are hired, which economic principle is being illustrated?

Accepted Answer

Law of diminishing marginal product

Question 10

Suppose a firm faces the following costs: Total Fixed Cost = $$1000$$, Total Variable Cost = $$4000$$, and it produces $$500$$ units. What is the average total cost (ATC)?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{1000 + 4000}{500} = 10$$

Question 11

Which of the following would most likely cause a firm to experience economies of scale?

Accepted Answer

Increasing production allows the firm to use more efficient machinery

Question 12

If a price floor is set above the market equilibrium price, what is the likely result?

Accepted Answer

A surplus of the good

Question 13

Which formula correctly calculates total revenue for a firm?

Accepted Answer

$$TR = P 	imes Q$$

Question 14

A consumer’s real income decreases when:

Accepted Answer

The price of goods increases, reducing purchasing power

Question 15

If the income elasticity of demand for a good is negative, what type of good is it?

Accepted Answer

Inferior good

Question 16

Which of the following best describes producer surplus?

Accepted Answer

The amount a seller is paid for a good minus the seller’s cost of production

Question 17

A firm’s marginal cost (MC) is defined as:

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta Q}$$

Question 18

If the price elasticity of demand for a product is greater than 1, demand is considered:

Accepted Answer

Elastic

Question 19

Which of the following is NOT a variable cost for a firm?

Accepted Answer

Rent for factory space

Question 20

A consumer faces the following marginal utilities per dollar spent: $$MU_A/P_A = 8$$, $$MU_B/P_B = 5. $$What should the consumer do to maximize utility?

Accepted Answer

Consume more of good A and less of good B

Microeconomics Study Notes: Surplus, Elasticity, Utility, and Costs of Production

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