Q: A firm faces the following cost structure: $$TC = FC + VC = 100 + 5Q. If $$the firm produces 10 units, what is its average total cost (ATC)?

$$ATC = \frac{100 + 5 \times 10}{10} = \frac{150}{10} = 15$$

Question 1

Suppose the price of corn increases due to a drought in Albion. Using comparative statics, what is the most likely effect on the market for wheat in Albion, assuming corn and wheat are substitutes?

Accepted Answer

The demand for wheat will increase, causing the price of wheat to rise.

Question 2

A firm faces the following cost structure: $$TC = FC + VC = 100 + 5Q. If $$the firm produces 10 units, what is its average total cost (ATC)?

Accepted Answer

$$ATC = \frac{100 + 5 	imes 10}{10} = \frac{150}{10} = 15$$

Question 3

Which of the following best describes the principle of diminishing marginal benefit?

Accepted Answer

As more of a good is consumed, the marginal benefit from each additional unit decreases.

Question 4

A monopolist faces the following demand curve: $$P = 20 - Q. $$What is the marginal revenue (MR) curve for this monopolist?

Accepted Answer

$$MR = 20 - 2Q$$

Question 5

If the price elasticity of demand for a product is $$-2$$, what will happen to total revenue if the firm increases the price?

Accepted Answer

Total revenue will decrease.

Question 6

Suppose a firm in perfect competition faces a market price of $$P = 10$$ and has average total cost $$ATC = 8 at $$its profit-maximizing output. What is the firm's profit per unit?

Accepted Answer

$$Profit\ per\ unit = P - ATC = 10 - 8 = 2$$

Question 7

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

There are significant barriers to entry.

Question 8

A consumer faces the budget constraint $$I = Px \cdot X + Py \cdot Y. If $$income $$I$$ increases, what happens to the budget line?

Accepted Answer

The budget line shifts outward, parallel to the original.

Question 9

Suppose the government imposes a price floor above the equilibrium price in the market for milk. What is the most likely result?

Accepted Answer

A surplus of milk.

Question 10

If a firm’s marginal cost (MC) is given by $$MC = 2Q$$, and its marginal revenue (MR) is $$MR = 10 - Q$$, what is the profit-maximizing output?

Accepted Answer

$$2Q = 10 - Q \implies 3Q = 10 \implies Q = \frac{10}{3}$$

Question 11

Which of the following best describes a public good?

Accepted Answer

A good that is non-rival and non-excludable.

Question 12

A firm’s total revenue is $$TR = P 	imes Q. If$$ $$P = 5$$ and $$Q = 20$$, what is the firm’s total revenue?

Accepted Answer

$$TR = 5 	imes 20 = 100$$

Question 13

Which of the following is an example of a negative externality?

Accepted Answer

A factory emitting pollution that affects nearby residents.

Question 14

In the context of game theory, what is a Nash Equilibrium?

Accepted Answer

A situation where no player can improve their payoff by changing their strategy, given the strategies of others.

Question 15

Suppose a monopolistically competitive firm is earning positive economic profits in the short run. What is likely to happen in the long run?

Accepted Answer

New firms will enter the market, driving profits to zero.

Question 16

If the present value of $$100$$ received in $$2$$ years at an interest rate of $$5\% is $$calculated, which formula should be used?

Accepted Answer

$$PV = \frac{100}{(1 + 0.05)^2$}$$

Question 17

Which of the following mechanisms can help avoid the tragedy of the commons?

Accepted Answer

Establishing property rights over the resource.

Question 18

If a firm’s marginal product of labor (MPL) is decreasing as more labor is hired, which principle does this illustrate?

Accepted Answer

Principle of diminishing marginal product.

Question 19

Suppose the average elasticity of demand between two points is calculated using the formula $$\frac{Q_2$ - Q_1$}{(Q_2$ + Q_1$)/2} \div \frac{P_2$ - P_1$}{(P_2$ + P_1$)/2}. If$$ $$Q_1 = 10$, Q_2$ = 14$$, $$P_1 = 8$, and P_2$ = 6$$, what is the average elasticity?

Accepted Answer

$$\frac{14 - 10}{(14 + 10)/2} \div \frac{6 - 8}{(6 + 8)/2} = \frac{4}{12} \div \frac{-2}{7} = \frac{1}{3} \div -\frac{2}{7} = -\frac{7}{6}$$

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