Question 1

Suppose a consumer has an income of $$I = 120$$, the price of good $$X is$$ $$P_X = 10$$, and the price of good $$Y is$$ $$P_Y = 20. $$What is the equation for the consumer's budget constraint?

Accepted Answer

$$120 = 10x + 20y$$

Question 2

If the price of good $$X$$ falls while income and the price of good $$Y$$ remain unchanged, what happens to the consumer's budget constraint?

Accepted Answer

It pivots outward along the $$X-$$axis, increasing the $$X-$$intercept.

Question 3

A consumer faces prices $$P_1 = 5$, P_2$ = 10$$, and has income $$I = 100. $$What is the opportunity cost of consuming one more unit of good 1 in terms of good 2?

Accepted Answer

Give up $$0.5$$ units of good 2 for each unit of good 1.

Question 4

Suppose a consumer's marginal benefit per dollar for apples is $$MB_A/P_A = 2$$ and for bananas is $$MB_B/P_B = 1.5. $$What should the consumer do to maximize utility?

Accepted Answer

Buy more apples and fewer bananas.

Question 5

If the price of a good increases from $$P_0 = 8$ to P_1$ = 10$$, and quantity demanded falls from $$Q_0 = 200$ to Q_1$ = 150$$, what is the arc price elasticity of demand (using the midpoint formula)?

Accepted Answer

$$-1.5$$

Question 6

Which of the following goods is most likely to have a perfectly inelastic demand curve?

Accepted Answer

A life-saving medication with no substitutes.

Question 7

If the cross-price elasticity of demand between two goods is $$+0.8$$, what does this indicate?

Accepted Answer

The goods are substitutes.

Question 8

A consumer's demand for ramen noodles falls by $$20\%$$ when their income rises by $$25\%. $$What is the income elasticity of demand, and what type of good is ramen?

Accepted Answer

$$\varepsilon_I = -0.8$$, ramen is an inferior good.

Question 9

If a firm’s marginal product of labor increases as more workers are hired, what is the most likely explanation?

Accepted Answer

Workers are able to specialize, leading to increasing returns.

Question 10

A firm’s total cost increases from $$TC_1 = 400$ to TC_2$ = 460 as $$output increases from $$Q_1 = 20$ to Q_2$ = 25. $$What is the marginal cost of the additional units?

Accepted Answer

$$12$$

Question 11

At an output of $$Q = 30$$, a firm’s average total cost is $$ATC = 8$$ and average variable cost is $$AVC = 5. $$What is the firm’s total fixed cost?

Accepted Answer

$$90$$

Question 12

Which of the following best describes the long-run average total cost (LRATC) curve?

Accepted Answer

It is the lower envelope of all possible short-run ATC curves.

Question 13

A perfectly competitive firm faces a market price of $$P = 20. At $$its profit-maximizing output, $$ATC = 18$$ and $$Q = 100. $$What is the firm’s economic profit?

Accepted Answer

$$200$$

Question 14

In the short run, a perfectly competitive firm will shut down if:

Accepted Answer

Price falls below minimum average variable cost.

Question 15

If the market price is $$P = 15$$, a firm’s minimum $$AVC = 12$$, and minimum $$ATC = 16$$, what will the firm do in the short run and what is its profit?

Accepted Answer

Produce at a loss smaller than fixed cost.

Question 16

Suppose the price of a good rises from $$P_0 = 10$ to P_1$ = 12$$, and the quantity supplied increases from $$Q_0 = 100$ to Q_1$ = 130. $$What is the price elasticity of supply (using the midpoint formula)?

Accepted Answer

$$1.43$$

Question 17

What is the main reason perfectly competitive markets are considered efficient?

Accepted Answer

They maximize social surplus, so no one can be made better off without making someone else worse off.

Question 18

A government imposes a quota that reduces the quantity traded below equilibrium. What is the deadweight loss (DWL) formula for this scenario?

Accepted Answer

$$\frac{1}{2} 	imes (Q_{efficient} - Q_{actual}) 	imes (P_{demand} - P_{supply\ at\ Q_{actual}})$$

Question 19

Which of the following is NOT a reason why a perfectly competitive market might fail to be Pareto efficient?

Accepted Answer

All buyers and sellers have perfect information.

Microeconomics Study Guide: Consumer and Producer Behavior, Market Efficiency (Ch. 5–7)

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