Question 1

Suppose a consumer has a budget of $$100 to spend on two goods: apples and oranges. The price of apples is 2 $$each and the price of oranges is $4 each. If the marginal utility of the last apple consumed is 10 and the marginal utility of the last orange consumed is 20, is the consumer maximizing utility? If not, what should the consumer do?

Accepted Answer

Yes, because $$\frac{MU_{apple}}{P_{apple}} = 5$$ and $$\frac{MU_{orange}}{P_{orange}} = 5$$, so utility is maximized.

Question 2

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

Accepted Answer

As a consumer consumes more of a good, marginal utility decreases.

Question 3

A consumer's indifference curve is downward sloping and convex to the origin. What does this imply about the consumer's preferences?

Accepted Answer

The consumer is willing to substitute one good for another, but at a decreasing rate.

Question 4

If the price of a normal good falls, which of the following best describes the substitution and income effects?

Accepted Answer

Both the substitution and income effects increase quantity demanded.

Question 5

Suppose a consumer is willing to pay $$50 for a concert ticket, but the market price is 30. $$What is the consumer surplus?

Accepted Answer

$20

Question 6

Which of the following is an example of an implicit cost for a firm?

Accepted Answer

The owner’s forgone salary from working elsewhere

Question 7

A firm’s total cost is $$500 when producing 100 units. If fixed costs are 200$$, what is the average variable cost (AVC)?

Accepted Answer

$3

Question 8

Which of the following best describes the law of diminishing returns?

Accepted Answer

As more of a variable input is added to a fixed input, marginal product eventually decreases.

Question 9

If a perfectly competitive firm faces a market price of $$10, and its marginal cost (MC) at 50 units is 10$$, what should the firm do to maximize profit?

Accepted Answer

Maintain output at 50 units.

Question 10

Which of the following is true about the long-run average total cost (LRATC) curve?

Accepted Answer

It shows the lowest possible average cost for each output level when all inputs are variable.

Question 11

A firm in perfect competition is earning zero economic profit in the long run. Which of the following is true?

Accepted Answer

Total revenue equals total cost, including both explicit and implicit costs.

Question 12

If a firm’s marginal product (MP) of labor is 20 and the average product (AP) of labor is 15, what will happen to AP if the firm hires one more worker?

Accepted Answer

AP will increase.

Question 13

Which of the following is NOT a characteristic of perfect competition?

Accepted Answer

Products are differentiated.

Question 14

Suppose a firm’s total revenue is $$1,000, explicit costs are 700$$, and implicit costs are $400. What is the firm’s economic profit?

Accepted Answer

$-100

Question 15

If a firm’s average total cost (ATC) is $$8, average variable cost (AVC) is 5$$, and output is 100 units, what is the total fixed cost (TFC)?

Accepted Answer

$300

Question 16

Which of the following best explains why firms experience economies of scale?

Accepted Answer

Average costs decrease as output increases due to factors like specialization and bulk buying.

Question 17

A firm’s marginal cost (MC) curve intersects its average total cost (ATC) curve at:

Accepted Answer

The minimum point of the ATC curve.

Question 18

If a firm’s total revenue is less than its variable costs in the short run, what should the firm do?

Accepted Answer

Shut down immediately.

Question 19

Which of the following is true about a firm’s short-run supply curve in perfect competition?

Accepted Answer

It is the portion of the marginal cost curve above average variable cost.

Question 20

Suppose a firm’s marginal cost (MC) is given by $$MC = 2q + 10$$, and the market price is $$30. $$What is the profit-maximizing output level?

Accepted Answer

$$q = 10$$

Microeconomics Study Guide: Consumer and Producer Theory, Costs, and Competitive Markets

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