Question 1

Suppose a firm's long-run average cost (LRAC) curve is U-shaped. Which of the following best explains why LRAC decreases at first and then increases as output increases?

Accepted Answer

Economies of scale at low output levels and diseconomies of scale at high output levels.

Question 2

Given the long-run cost functions $$LRMC(q) = 20 + 2q$$ and $$LRAC(q) = \frac{169}{q} + 20 + q$$, what is the break-even price for the firm?

Accepted Answer

$$46$$

Question 3

In the short run, a firm's supply curve is the portion of the marginal cost (MC) curve that is:

Accepted Answer

Above the average variable cost (AVC) curve.

Question 4

If the market price falls below the minimum of the average variable cost (AVC) in the short run, what should a profit-maximizing firm do?

Accepted Answer

Shut down and produce zero output.

Question 5

A perfectly competitive market maximizes total surplus at equilibrium. Which condition must hold at the equilibrium quantity $$Q^*$$?

Accepted Answer

$$MWTP = MC$$

Question 6

A tax imposed on a good creates deadweight loss because:

Accepted Answer

It leads to under-transaction compared to the efficient quantity.

Question 7

If a government sets a price ceiling below the equilibrium price, what is the likely effect on total surplus?

Accepted Answer

Total surplus decreases due to deadweight loss from under-transaction.

Question 8

Which of the following is true about the long-run market supply curve in a perfectly competitive industry with free entry and exit?

Accepted Answer

It is horizontal at the break-even price.

Question 9

Suppose the marginal cost (MC) of producing the third unit is $$3$$, and the market price is $$4. $$What is the producer surplus from selling three units?

Accepted Answer

$$6$$

Question 10

A negative externality in production causes the market equilibrium quantity to be:

Accepted Answer

Greater than the socially optimal quantity.

Question 11

According to the Coase Theorem, what is necessary to achieve the socially optimal outcome in the presence of externalities?

Accepted Answer

Clearly specified and tradable property rights.

Question 12

If a positive externality exists in the consumption of a good, what is the likely market outcome without government intervention?

Accepted Answer

Under-consumption compared to the social optimum.

Question 13

Which of the following best describes the effect of a subsidy on total surplus?

Accepted Answer

It can create deadweight loss due to over-transaction.

Question 14

If the short-run marginal cost (MC) curve intersects the average cost (AC) curve at $$q_a$$ and the average variable cost (AVC) curve at $$q_b$$, which of the following is true?

Accepted Answer

MC = AC at $$q_a$$ and MC = AVC at $$q_b.$$

Question 15

A tariff on imports will generally:

Accepted Answer

Harm domestic consumers, benefit domestic producers, and create deadweight loss.

Question 16

Which formula correctly expresses producer surplus (PS) when a producer sells $$Q$$ units at price $$p$$ and the marginal costs for each unit are $$MC_1$$, $$MC_2$$, ..., MC_Q$$?

Accepted Answer

$$PS = p 	imes Q - (MC_1$ + MC_2$ + ... + MC_Q)$$

Question 17

Which of the following is NOT a property of a perfectly competitive market in the long run?

Accepted Answer

Firms earn positive economic profit.

Question 18

If the government wants to correct a negative externality, what is the optimal unit tax to impose?

Accepted Answer

A tax equal to the marginal externality at the socially optimal quantity.

Question 19

Which of the following best describes the effect of a price floor set above the equilibrium price?

Accepted Answer

It creates deadweight loss due to under-transaction.

Microeconomics Study Guide: Costs, Supply, Surplus, and Externalities

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