Question 1

Suppose a firm uses labor (L) and capital (K) to produce output. The wage rate is $$w$$ and the rental rate of capital is $$r. If $$the marginal product of labor is $$MPL$$ and the marginal product of capital is $$MPK$$, which condition must hold for the firm to minimize the cost of producing a given level of output in the long run?

Accepted Answer

$$\frac{MPL}{MPK} = \frac{w}{r}$$

Question 2

A firm faces the following total cost function in the short run: $$TC = 100 + 5Q + Q^2$, where Q$ is output. What is the marginal cost (MC) when Q = 10$?

Accepted Answer

$$MC = 25$$

Question 3

Which of the following best describes the relationship between the long-run average cost (LRAC) curve and the short-run average cost (SRAC) curves?

Accepted Answer

The LRAC curve is the lower envelope of all possible SRAC curves.

Question 4

If a firm experiences economies of scale, which of the following is true as output increases?

Accepted Answer

Long-run average cost decreases.

Question 5

A firm produces two products, A and B. The cost of producing 100 units of A and 100 units of B together is $$C(100,100) = 1500. $$The cost of producing 100 units of A alone is $$C(100,0) = 900$$, and the cost of producing 100 units of B alone is $$C(0,100) = 800. $$What is the degree of economies of scope?

Accepted Answer

$$\frac{900 + 800 - 1500}{1500} = 0.13$$

Question 6

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

Accepted Answer

Firms are price makers.

Question 7

A competitive firm faces a market price of $$P = 20. $$Its marginal cost is $$MC = 20 at$$ $$Q = 50. $$The average variable cost at $$Q = 50 is$$ $$AVC = 18. $$What should the firm do in the short run?

Accepted Answer

Produce 50 units.

Question 8

Suppose the government imposes a price ceiling below the equilibrium price in a competitive market. Which of the following is a likely outcome?

Accepted Answer

A shortage will occur.

Question 9

If the supply of a good is perfectly inelastic and a per-unit tax is imposed, who bears the entire burden of the tax?

Accepted Answer

Producers bear the entire burden.

Question 10

A competitive firm’s short-run supply curve is best described as:

Accepted Answer

The portion of its marginal cost curve above average variable cost.

Question 11

Suppose a government introduces a production quota that is less than the competitive equilibrium quantity. What is the most likely effect on total surplus?

Accepted Answer

Total surplus decreases due to deadweight loss.

Question 12

If a firm’s long-run average cost curve is downward sloping, which of the following statements is true?

Accepted Answer

The firm is experiencing economies of scale.

Question 13

Which of the following best explains the difference between economies of scale and increasing returns to scale?

Accepted Answer

Economies of scale refer to cost advantages as output increases, while increasing returns to scale refer to output increasing by a greater proportion than inputs.

Question 14

A country imposes an import tariff on a good. Which of the following is a likely effect?

Accepted Answer

Domestic producer surplus increases, but total welfare decreases due to deadweight loss.

Question 15

If the cost-output elasticity $$E_C is $$less than 1, what does this imply?

Accepted Answer

The firm is experiencing economies of scale.

Question 16

Suppose a competitive firm’s total revenue is $$TR = 100Q$$ and its total cost is $$TC = 20Q + 200. $$What is the profit-maximizing output in the short run?

Accepted Answer

Any positive $$Q$$ since $$P = MC at $$all $$Q.$$

Question 17

A government subsidy is given to producers in a competitive market. Which of the following is a likely effect?

Accepted Answer

The market price decreases and quantity increases.

Question 18

If a price floor is set above the equilibrium price, what is the most likely outcome?

Accepted Answer

A surplus will occur.

Question 19

Which of the following best describes the user cost of capital?

Accepted Answer

The opportunity cost of using capital, including depreciation and forgone interest.

Question 20

Suppose the government imposes a per-unit tax on a good with highly elastic demand and inelastic supply. Who bears most of the tax burden?

Accepted Answer

Producers bear most of the tax burden.

Microeconomics Study Notes: Cost of Production, Profit Maximization, and Competitive Markets

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