Q: A firm in perfect competition faces a market price of $$15. Its marginal cost at 100 units is 15$$, average total cost is $$12, and average variable cost is 10. $$What is the firm's economic profit?

$$\displaystyle 100 \times (15 - 12) = 300$$

Question 1

Suppose a consumer has an income of $$100, the price of good X is 20$$, and the price of good Y is $10. What is the equation of the consumer's budget constraint?

Accepted Answer

$$20x + 10y = 100$$

Question 2

If the price of good X falls while income and the price of good Y remain constant, what happens to the budget line?

Accepted Answer

It rotates outward on the X-axis, increasing the X-intercept.

Question 3

A consumer is choosing between two goods, A and B. The marginal benefit of A is 12, its price is 4, the marginal benefit of B is 10, and its price is 2. According to the optimization rule, what should the consumer do?

Accepted Answer

Buy more of good B and less of good A.

Question 4

Suppose the price of a product increases from $$10 to 12$$, and the quantity demanded falls from 100 to 80 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\displaystyle \frac{-22.22\%}{18.18\%} = -1.22$$

Question 5

A firm in perfect competition faces a market price of $$15. Its marginal cost at 100 units is 15$$, average total cost is $$12, and average variable cost is 10. $$What is the firm's economic profit?

Accepted Answer

$$\displaystyle 100 	imes (15 - 12) = 300$$

Question 6

If a competitive firm is producing where $$P = AVC$$ and $$P \u003c ATC$$, what should the firm do in the short run?

Accepted Answer

Be indifferent between producing and shutting down.

Question 7

Which of the following best describes the condition for market efficiency in a perfectly competitive market?

Accepted Answer

Social surplus is maximized and no beneficial trade is omitted.

Question 8

Suppose the cross-price elasticity of demand between goods X and Y is $$+0.8. $$What does this imply about the relationship between X and Y?

Accepted Answer

They are substitutes.

Question 9

A firm’s total cost is $$TC = 500 + 5q$$, where $$q is $$output. What is the firm’s average fixed cost when $$q = 50$$?

Accepted Answer

$$\displaystyle \frac{500}{50} = 10$$

Question 10

If a price ceiling is set below the equilibrium price, what is the most likely immediate result in the market?

Accepted Answer

A shortage, because quantity demanded exceeds quantity supplied.

Question 11

A competitive firm’s marginal cost curve above minimum average variable cost represents:

Accepted Answer

The firm’s short-run supply curve.

Question 12

If the income elasticity of demand for a good is $$-0.5$$, what type of good is it?

Accepted Answer

An inferior good.

Question 13

Suppose a market has buyers with reservation values of $$30, 25$$, and $$20, and sellers with reservation values of 10$$, $$15, and 22. If $$the market price is $18, what is the total social surplus from all trades that occur?

Accepted Answer

$$(30-10) + (25-15) = 30$$

Question 14

A firm’s marginal product of labor decreases as more workers are hired, but remains positive. What economic principle does this illustrate?

Accepted Answer

Diminishing marginal returns.

Question 15

If a firm’s marginal cost is below its average total cost, what is happening to average total cost as output increases?

Accepted Answer

Average total cost is falling.

Question 16

In the long run, if firms in a perfectly competitive market are earning positive economic profit, what will happen?

Accepted Answer

New firms will enter, increasing supply and lowering price until profit is zero.

Question 17

Which of the following is NOT a necessary condition for perfect competition?

Accepted Answer

Firms can set prices above marginal cost.

Question 18

A city introduces surge pricing for ride-sharing after a major event, raising the price from $$15 to 20. As a $$result, the number of rides increases from 15 to 20. What is the main economic function of surge pricing in this context?

Accepted Answer

It allocates rides to those with higher willingness to pay and attracts more drivers.

Question 19

If a government sets a price floor above the equilibrium price, what is the likely effect on the market?

Accepted Answer

A surplus, because quantity supplied exceeds quantity demanded.

Question 20

Which of the following best describes Pareto efficiency?

Accepted Answer

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

Microeconomics Study Guide: Buyer and Seller Optimization, Perfect Competition, and Market Efficiency

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