Question 1

Which of the following best describes the concept of opportunity cost?

Accepted Answer

The value of the next best alternative that is forgone when a choice is made.

Question 2

Refer to the circular flow diagram. In the diagram, what do the arrows from 'Firms' to 'Goods markets' and from 'Goods markets' to 'Individuals' represent?

Accepted Answer

Goods and services produced by firms and purchased by individuals.

Question 3

Suppose the price of public transit increases. According to the cross-price elasticity formula $$\eta_{XY} = \frac{	ext{Percentage change in quantity demanded of good X}}{	ext{Percentage change in price of good Y}}$$, what would you expect to happen to the demand for cars if $$\eta_{XY} \u003e 0$$?

Accepted Answer

The demand for cars will increase because they are substitutes.

Question 4

If the marginal utility per dollar spent on good X is less than that of good Y, i.e., $$\frac{MU_X}{P_X} \u003c \frac{MU_Y}{P_Y}$$, what should a rational consumer do to maximize utility?

Accepted Answer

Buy more of good Y and less of good X.

Question 5

Which of the following statements about price elasticity of demand is correct?

Accepted Answer

If demand is inelastic, a price increase will increase total expenditure.

Question 6

A binding price ceiling set below the equilibrium price in the rental housing market will likely result in:

Accepted Answer

A shortage of rental units.

Question 7

If the government imposes an excise tax on a product, who bears the greater burden of the tax when the demand for the product is more inelastic than the supply?

Accepted Answer

Consumers bear the greater burden.

Question 8

Which of the following is true about the law of diminishing marginal returns?

Accepted Answer

It states that as more units of a variable input are added to fixed inputs, the marginal product of the variable input will eventually decrease.

Question 9

Given the short-run cost curves, what happens to the marginal cost (MC) and average total cost (ATC) curves if the price of a variable input increases?

Accepted Answer

Both MC and ATC curves shift upward.

Question 10

A firm in a perfectly competitive market should shut down in the short run if:

Accepted Answer

Price is less than average variable cost.

Question 11

Which of the following is a necessary condition for cost minimization in the long run?

Accepted Answer

$$\frac{MP_L}{P_L} = \frac{MP_K}{P_K}$$

Question 12

If a monopolist is maximizing profit, which of the following conditions must hold?

Accepted Answer

Marginal revenue equals marginal cost.

Question 13

Which of the following is a characteristic of monopolistic competition?

Accepted Answer

Products are differentiated.

Question 14

Suppose the income elasticity of demand for a good is negative. What type of good is this?

Accepted Answer

An inferior good.

Question 15

If the cross-price elasticity of demand between two goods is negative, what does this imply?

Accepted Answer

The goods are complements.

Question 16

Which of the following best explains why the long-run average cost curve (LRAC) is typically saucer-shaped?

Accepted Answer

Because of economies of scale at low output and diseconomies of scale at high output.

Question 17

Which of the following is NOT a requirement for a firm to successfully price discriminate?

Accepted Answer

The firm must be a price taker.

Question 18

In the context of game theory and oligopoly, what is a Nash equilibrium?

Accepted Answer

A situation where no player can improve their payoff by changing their strategy, given the strategies of others.

Question 19

If a firm is producing at a level where marginal cost is below average total cost, what is happening to average total cost as output increases?

Accepted Answer

Average total cost is decreasing.

Question 20

Which of the following is an example of a positive statement?

Accepted Answer

"An increase in the minimum wage will lead to higher unemployment among teenagers."

Microeconomics: Core Concepts and Applications – Study Notes

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