Question 1

In a perfectly competitive market with free entry and identical firms, why do firms earn zero economic profit in the long run?

Accepted Answer

Because entry and exit of firms drive the market price to the point where total revenue equals total cost, including opportunity cost.

Question 2

Which of the following best describes 'economic rent' as used in microeconomics?

Accepted Answer

A payment to the owner of an input beyond the minimum necessary for the factor to be supplied.

Question 3

Suppose the market demand for roses is given by $$Q_D = 100 - 2P$$ and the market supply is $$Q_S = 2P. $$What is the equilibrium price and quantity?

Accepted Answer

Equilibrium price $$P^* = 25$$, equilibrium quantity $$Q^* = 50$$

Question 4

Consumer surplus is best represented by which area on a standard supply and demand graph?

Accepted Answer

The area under the demand curve and above the market price up to the quantity bought.

Question 5

If the government imposes a specific sales tax on a good, which of the following is a likely outcome?

Accepted Answer

The price consumers pay rises, producer surplus falls, and there is a deadweight loss.

Question 6

A deadweight loss occurs when:

Accepted Answer

The net reduction in welfare from a loss of surplus by one group is not offset by a gain to another group due to a market distortion.

Question 7

Suppose the government sets a price ceiling below the competitive equilibrium price. What is the most likely effect on the market?

Accepted Answer

Quantity demanded exceeds quantity supplied, leading to a shortage.

Question 8

Which of the following best explains why competition maximizes welfare in a market?

Accepted Answer

Because at the competitive equilibrium, price equals marginal cost, ensuring allocative efficiency.

Question 9

If a government introduces a quota on imports, what is the likely effect on domestic producer surplus and total welfare?

Accepted Answer

Domestic producer surplus rises, but total welfare falls due to deadweight loss.

Question 10

A market has the following demand and supply: $$Q_D = 80 - P$$, $$Q_S = P - 20. If $$the government imposes a price floor at $$P = 70$$, what is the resulting surplus or shortage?

Accepted Answer

Surplus of 10 units

Question 11

Which of the following is an example of a barrier to entry?

Accepted Answer

A large sunk cost that only new firms must pay to enter the market.

Question 12

If the government provides a specific subsidy to producers, what is the likely effect on equilibrium price, quantity, and welfare?

Accepted Answer

Equilibrium price falls, quantity rises, and there may be a deadweight loss if the cost of the subsidy exceeds the welfare gain.

Question 13

Which of the following statements about rent seeking is correct?

Accepted Answer

Rent seeking involves expenditures to gain profit from government actions such as tariffs or quotas.

Question 14

Suppose a specific tax $$t is $$imposed on a good with a relatively inelastic demand curve. Compared to a good with a more elastic demand curve, the deadweight loss from the tax will be:

Accepted Answer

Smaller for the inelastic demand curve.

Question 15

Producer surplus can be calculated as:

Accepted Answer

The area above the supply curve and below the market price up to the quantity sold.

Question 16

If a government bans all imports of a good, what is the likely effect on domestic consumer surplus and producer surplus?

Accepted Answer

Consumer surplus falls, and producer surplus rises.

Question 17

Which of the following best describes the effect of a price support (such as a deficiency payment) in the soybean market?

Accepted Answer

It raises the market price, increases producer surplus, and creates a deadweight loss.

Question 18

A market is initially in equilibrium. If the supply curve shifts upward due to a new regulation, what happens to consumer surplus?

Accepted Answer

Consumer surplus decreases because the price rises.

Question 19

Which of the following is true about the relationship between profit and producer surplus?

Accepted Answer

Producer surplus equals profit plus fixed cost, or $$PS = \pi + F.$$

Question 20

If a government sets a tariff on imported goods, which of the following is NOT a likely effect?

Accepted Answer

Consumer surplus increases.

Applying the Competitive Model: Welfare Analysis and Policy Impacts

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