Question 1

Suppose a firm is producing at a point where its marginal cost (MC) is less than its average total cost (ATC). What does this imply about the behavior of ATC as output increases?

Accepted Answer

ATC is decreasing as output increases.

Question 2

A consumer is choosing between two goods, X and Y. The price of X is $$4, the price of Y is 2$$, and the marginal utility of X is 20 while the marginal utility of Y is 10. According to the utility-maximizing rule, is the consumer maximizing utility?

Accepted Answer

No, because the consumer should buy more of good Y and less of good X.

Question 3

If a production function exhibits constant returns to scale, what happens to output if all inputs are doubled?

Accepted Answer

Output exactly doubles.

Question 4

The slope of an indifference curve at any point is known as the marginal rate of substitution (MRS). If the MRS of good X for good Y is 3, what does this mean?

Accepted Answer

The consumer is willing to give up 3 units of Y for 1 unit of X.

Question 5

Suppose the demand for a product is given by $$Q = 100 - 2P. If $$the price increases from $$20 to$$ $$25$$, what is the change in quantity demanded?

Accepted Answer

$$20$$ unit decrease

Question 6

A firm faces the following total cost function: $$TC = 100 + 5Q + Q^2$. What is the marginal cost (MC) function?

Accepted Answer

$$MC = 5 + 2Q$$

Question 7

If the cross-price elasticity of demand between goods A and B is $$-0.8$$, what can you conclude about the relationship between these goods?

Accepted Answer

They are complements.

Question 8

Which of the following is true for a perfectly competitive firm in the short run?

Accepted Answer

The firm's marginal revenue equals the market price.

Question 9

Suppose a consumer's utility function is $$U(X, Y) = X$$^{0.5}$$Y^{0.5}. If $$the price of X is $$2$$, the price of Y is $$4$$, and the consumer's income is $$120$, how many units of X will the consumer buy at the utility-maximizing bundle?

Accepted Answer

$$20$$

Question 10

If a firm is operating where $$P \u003c AVC ($$price is less than average variable cost), what should the firm do in the short run?

Accepted Answer

Shut down immediately.

Question 11

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

Accepted Answer

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

Question 12

A monopolist faces the demand curve $$P = 100 - Q$$ and has constant marginal cost of $$20. $$What is the profit-maximizing quantity?

Accepted Answer

$$20$$

Question 13

If the price elasticity of demand for a product is $$-0.5$$, what will happen to total revenue if the firm increases the price?

Accepted Answer

Total revenue will increase.

Question 14

Suppose the government imposes a per-unit tax on a good. Which of the following statements is correct regarding the incidence of the tax?

Accepted Answer

The tax burden is shared between consumers and producers depending on the relative elasticities of supply and demand.

Question 15

If two goods are perfect substitutes, which of the following is true about the consumer's indifference curves?

Accepted Answer

They are straight lines with a constant slope.

Question 16

A firm’s total revenue is $$TR = P 	imes Q. If $$the demand curve is linear and downward sloping, what is the relationship between marginal revenue (MR) and price (P)?

Accepted Answer

$$MR is $$less than $$P$$ for all positive quantities.

Question 17

Suppose a firm uses labor (L) and capital (K) to produce output according to $$Q = L$$^{0.5}$$K^{0.5}. If $$the price of labor is $$10$$, the price of capital is $$40$$, and the firm wants to produce $$100$ units at minimum cost, what is the cost-minimizing combination of L and K?

Accepted Answer

$$L = 25, K = 25$$

Question 18

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

Accepted Answer

Products are differentiated.

Question 19

If the marginal product of labor (MPL) is negative, what does this imply about total output?

Accepted Answer

Total output is decreasing.

Question 20

A consumer faces the budget constraint $$2X + 4Y = 100. If $$the consumer spends all income on good X, how many units can be purchased?

Accepted Answer

$$25$$

Microeconomics Study Guide: Production, Costs, and Consumer Choice

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