Question 1

Which of the following best describes the difference between accounting costs and economic costs?

Accepted Answer

Accounting costs include only explicit monetary payments, while economic costs include both explicit and implicit costs.

Question 2

A firm has the following short-run cost data: Total Fixed Cost (TFC) = $$100$$, Total Variable Cost (TVC) = $$200 at an $$output of $$10$$ units. What is the Average Total Cost (ATC) at this output level?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{100 + 200}{10} = 30$$

Question 3

Which of the following is an example of a sunk cost?

Accepted Answer

A non-refundable payment for a business license made last year.

Question 4

Suppose a firm faces the following production function: $$Q = L$$^{0.5}$$K^{0.5}$$, where $$L is $$labor and $$K$ is capital. If the price of labor increases, what happens to the firm's isocost line?

Accepted Answer

The isocost line becomes steeper, indicating labor is now relatively more expensive.

Question 5

Which of the following best describes economies of scope?

Accepted Answer

It is cheaper to produce two or more products together than separately.

Question 6

A perfectly competitive firm faces a market price of $$P = 20. $$Its marginal cost (MC) at $$Q = 50$$ units is $$MC = 20. $$What should the firm do to maximize profit in the short run?

Accepted Answer

Produce 50 units, since $$P = MC at $$this output.

Question 7

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

Accepted Answer

Firms can influence the market price through their individual output decisions.

Question 8

If a perfectly competitive firm is earning positive economic profits in the short run, what will happen in the long run?

Accepted Answer

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

Question 9

Which of the following equations represents the profit ($$\pi) $$for a perfectly competitive firm?

Accepted Answer

$$\pi = TR - TC = PQ - TC$$

Question 10

A perfectly competitive firm will shut down in the short run if:

Accepted Answer

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

Question 11

Which of the following best explains why a monopolist only operates on the elastic portion of its demand curve?

Accepted Answer

Total revenue increases as price decreases only when demand is elastic, maximizing profit.

Question 12

Which of the following is a barrier to entry that can create a monopoly?

Accepted Answer

Ownership of a key resource, such as De Beers and diamonds.

Question 13

Suppose a monopolist faces the demand curve $$P = 100 - 2Q. $$What is the marginal revenue (MR) function?

Accepted Answer

$$MR = 100 - 4Q$$

Question 14

Which of the following statements about long-run cost curves is correct?

Accepted Answer

The long-run average cost curve is typically U-shaped due to economies and diseconomies of scale.

Question 15

In a constant cost industry, what happens to the long-run industry supply curve?

Accepted Answer

It is perfectly elastic (horizontal) at the minimum average cost.

Question 16

A firm’s short-run marginal cost (SMC) curve intersects its average total cost (ATC) curve at:

Accepted Answer

The minimum point of the ATC curve.

Question 17

Which of the following is true about allocative efficiency in perfect competition?

Accepted Answer

Price equals marginal cost, ensuring resources are allocated to their highest valued use.

Question 18

Suppose a firm’s production function is additive: $$Q = L + K. If $$the price of labor doubles, what is the effect on the cost-minimizing input combination for a given output?

Accepted Answer

The firm will substitute capital for labor, using more capital and less labor.

Question 19

If a firm’s total cost function is $$TC = 50 + 10Q + Q^2$, what is the marginal cost (MC) function?

Accepted Answer

$$MC = \frac{dTC}{dQ} = 10 + 2Q$$

Microeconomic Theory: Costs, Perfect Competition, and Monopoly – Exam 2 Study Guide

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