Question 1

Suppose a consumer has an income of $$100 to spend on goods X and Y. The price of X is 10 $$and the price of Y is $20. What is the equation for the consumer's budget constraint?

Accepted Answer

$$10X + 20Y = 100$$

Question 2

If the marginal utility per dollar spent on good X is greater than that for good Y, what should a rational consumer do to maximize utility?

Accepted Answer

Buy more of good X and less of good Y

Question 3

Which of the following best describes the Law of Diminishing Marginal Utility?

Accepted Answer

As a consumer consumes more of a good, the additional satisfaction from each additional unit decreases.

Question 4

A consumer's budget constraint shifts outward parallel to itself. What is the most likely cause?

Accepted Answer

An increase in the consumer's income

Question 5

If the wage rate increases in the work-leisure model, which of the following is true about the substitution and income effects?

Accepted Answer

The substitution effect encourages more labor supplied, while the income effect may encourage more leisure.

Question 6

Which of the following is the correct formula for Marginal Cost (MC)?

Accepted Answer

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

Question 7

A firm in a perfectly competitive market is producing at a level where $$P = MC = ATC. $$What is the firm's economic profit?

Accepted Answer

Zero economic profit

Question 8

Which of the following best explains why the demand curve slopes downward?

Accepted Answer

The substitution and income effects both lead consumers to buy more as price falls.

Question 9

If a firm’s total fixed cost is $100 and it produces 10 units, what is its average fixed cost (AFC)?

Accepted Answer

$$AFC = \frac{100}{10} = 10$$

Question 10

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

Accepted Answer

Firms can influence the market price

Question 11

If the marginal product of labor (MPL) is increasing, what happens to marginal cost (MC)?

Accepted Answer

MC decreases

Question 12

A firm faces the following costs: Total Variable Cost (TVC) = $$200, Total Fixed Cost (TFC) = 100$$, and it produces 10 units. What is its Average Total Cost (ATC)?

Accepted Answer

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

Question 13

In the short run, when should a perfectly competitive firm shut down?

Accepted Answer

When price is less than average variable cost ($$P \u003c AVC)$$

Question 14

Which of the following best describes economies of scale?

Accepted Answer

Long-run average total cost decreases as output increases

Question 15

If existing firms in a perfectly competitive market are earning above-normal profits, what will happen in the long run?

Accepted Answer

New firms will enter, increasing market supply and lowering price until profits are normal

Question 16

Which of the following is the correct relationship between marginal product of labor (MPL) and marginal cost (MC)?

Accepted Answer

$$MC = \frac{w}{MPL}$$, where $$w is $$the wage rate

Question 17

A firm’s long-run average cost curve (LRAC) is downward sloping between outputs Q1 and Q2. What does this indicate?

Accepted Answer

The firm is experiencing economies of scale between Q1 and Q2

Question 18

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

Accepted Answer

Economic profit subtracts both explicit and implicit costs, while accounting profit subtracts only explicit costs

Question 19

If a perfectly competitive firm is producing where $$P \u003e ATC$$, what is true about the firm's profit?

Accepted Answer

The firm is earning a positive economic profit

Question 20

Which of the following best explains the difference between diminishing returns and returns to scale?

Accepted Answer

Diminishing returns occur in the short run with variable input, while returns to scale refer to long-run changes when all inputs are variable

Microeconomics Study Guide: Consumer Choice, Production, Costs, and Perfect Competition

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