Question 1

Suppose a consumer's utility-maximizing bundle changes from 4 units of good X and 6 units of good Y to 6 units of good X and 4 units of good Y after the price of good X falls. Which of the following best describes the substitution effect?

Accepted Answer

The consumer buys more of good X and less of good Y because good X is now relatively cheaper.

Question 2

If the Engel curve for a good is downward sloping, what does this imply about the good?

Accepted Answer

It is an inferior good.

Question 3

A consumer faces the following demand function for good X: $$Q_X = 20 - 2P_X. If $$the market consists of 100 identical consumers, what is the market demand function?

Accepted Answer

$$Q = 2000 - 200P_X$$

Question 4

Which of the following best describes a Giffen good?

Accepted Answer

A good for which the quantity demanded increases as its price increases, due to a strong negative income effect.

Question 5

If the price elasticity of demand for a product is $$-1$$, what happens to total expenditure on the product if the price increases?

Accepted Answer

Total expenditure remains unchanged.

Question 6

A positive network externality is most likely to result in which of the following market phenomena?

Accepted Answer

Bandwagon effect, where more people buy a good as others do.

Question 7

A firm’s production function is $$Q = L$$^{0.5}$$K^{0.5}. If $$both labor ($$L) $$and capital ($$K) $$are doubled, what happens to output ($$Q$)?

Accepted Answer

Output is doubled (constant returns to scale).

Question 8

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

Accepted Answer

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

Question 9

Suppose a firm’s marginal cost is given by $$MC = \frac{w}{MPL}$$, where $$w is $$the wage rate and $$MPL is $$the marginal product of labor. If the wage rate increases and $$MPL$$ remains constant, what happens to marginal cost?

Accepted Answer

Marginal cost increases.

Question 10

Which of the following best distinguishes between fixed costs and sunk costs?

Accepted Answer

Fixed costs must be paid even if output is zero, but sunk costs cannot be recovered once incurred.

Question 11

A firm uses two inputs, labor and capital, in production. If the marginal rate of technical substitution (MRTS) of labor for capital is 2, what does this mean?

Accepted Answer

The firm can substitute 2 units of capital for 1 unit of labor and keep output constant.

Question 12

If a firm’s average total cost (ATC) is decreasing as output increases, what can be said about marginal cost (MC)?

Accepted Answer

Marginal cost is less than average total cost.

Question 13

Which of the following is an example of a negative network externality?

Accepted Answer

The snob effect, where some consumers buy less of a good as more people buy it.

Question 14

Suppose a technological improvement shifts the isoquant for a given level of output inward. What does this imply?

Accepted Answer

The firm can produce the same output with fewer inputs.

Question 15

If a firm’s production function is $$Q = 2L + 3K$$, what type of input relationship does this represent?

Accepted Answer

Perfect substitutes.

Question 16

A consumer is willing to pay $$\10$ for the first unit of a good, but the market price is $$\$$7. $$What is the consumer surplus for this unit?

Accepted Answer

$$\3$

Question 17

If the income consumption curve for a good is upward sloping, what does this indicate about the good?

Accepted Answer

It is a normal good.

Question 18

Which of the following statements about accounting cost and economic cost is correct?

Accepted Answer

Economic cost includes both explicit and implicit costs, while accounting cost includes only explicit costs.

Question 19

Suppose a firm experiences increasing returns to scale. If all inputs are doubled, what happens to output?

Accepted Answer

Output more than doubles.

Question 20

If a firm’s total cost function is $$TC = 100 + 5Q + Q^2$, what is the marginal cost (MC) function?

Accepted Answer

$$MC = 5 + 2Q$$

Microeconomics Study Guide: Individual and Market Demand, Production, and Cost of Production

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