Question 1

Suppose a country can produce either 10 units of wine or 20 units of cheese with the same resources. Another country can produce either 8 units of wine or 16 units of cheese. According to the theory of comparative advantage, which country should specialize in cheese production?

Accepted Answer

The second country, because it has a lower opportunity cost for cheese.

Question 2

A firm faces the following costs: Total Fixed Cost (TFC) = $$100$$, Total Variable Cost (TVC) = $$200 at an $$output of $$10$$ units. What is the Average Total Cost (ATC)?

$$ATC = \frac{TC}{Q}$$

Accepted Answer

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

Question 3

If the price of coffee increases and, as a result, the demand for tea increases, what is the relationship between coffee and tea?

Accepted Answer

They are substitutes.

Question 4

A firm is considering shutting down in the short run. Its price per unit is $$5$$, and its Average Variable Cost (AVC) is $$6. $$According to the shutdown rule, what should the firm do?

Accepted Answer

Shut down because $$P \u003c AVC.$$

Question 5

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

Accepted Answer

The next best alternative foregone when making a choice.

Question 6

Suppose the price elasticity of demand for a product is $$-2. If $$the price increases by $$10\%$$, what happens to the quantity demanded?

Accepted Answer

It decreases by $$20\%.$$

Question 7

A market is in equilibrium when:

Accepted Answer

Quantity demanded equals quantity supplied.

Question 8

A price ceiling is set below the equilibrium price in a market. What is the likely result?

Accepted Answer

A shortage of the good.

Question 9

If a firm’s Marginal Revenue (MR) is greater than its Marginal Cost (MC), what should the firm do to maximize profit?

Accepted Answer

Increase output.

Question 10

Which of the following is an example of an externality?

Accepted Answer

A factory pollutes a river, affecting nearby residents.

Question 11

A monopolist faces the following demand and cost conditions: $$P = 100 - 2Q$$, $$TC = 20Q + 100. $$What is the profit-maximizing output? (Hint: $$MR = MC$$)

$$TR = P 	imes Q$$
$$MR = \frac{d(TR)}{dQ}$$
$$MC = \frac{d(TC)}{dQ}$$

Accepted Answer

$$Q = 16$$

Question 12

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

Accepted Answer

As more of a good is consumed, the additional satisfaction from each extra unit decreases.

Question 13

A firm’s total revenue is $$500$$, and its explicit costs are $$300. $$The implicit costs are $$100. $$What is the economic profit?

$$	ext{Economic Profit} = TR - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Accepted Answer

$$100$$

Question 14

Which of the following is most likely to be a public good and subject to the free rider problem?

Accepted Answer

National defense.

Question 15

If a firm in perfect competition is producing where $$P = ATC$$, what is its profit?

Accepted Answer

Zero (break-even).

Question 16

Suppose the government imposes a price floor above the equilibrium price in the wheat market. What is the most likely outcome?

Accepted Answer

A surplus of wheat.

Question 17

Which of the following best illustrates the fallacy of composition?

Accepted Answer

If one person stands up at a concert, they can see better, so if everyone stands up, everyone will see better.

Question 18

A firm’s total cost increases from $$400 to$$ $$450$$ when output increases from $$20 to$$ $$25$$ units. What is the marginal cost of the 5 additional units?

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

Accepted Answer

$$MC = \frac{450 - 400}{25 - 20} = 10$$

Question 19

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

Accepted Answer

Money spent on non-refundable advertising last year.

Question 20

If the cross-price elasticity of demand between two goods is positive, what does this indicate?

Accepted Answer

The goods are substitutes.

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