Question 1

Suppose the government imposes a price ceiling on apartment rents that is below the market equilibrium price. Which of the following is the most likely outcome in the rental market?

Accepted Answer

A shortage of apartments, as the quantity demanded exceeds the quantity supplied.

Question 2

A competitive firm is producing at a level where $$P = MC = ATC. $$What does this indicate about the firm's economic profit in the long run?

Accepted Answer

The firm is earning zero economic profit.

Question 3

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

Accepted Answer

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

Question 4

A monopolist faces the following demand curve: $$P = 100 - 2Q. $$Its marginal cost is constant at $$MC = 20. $$What is the profit-maximizing quantity for the monopolist?

Accepted Answer

$$Q = 20$$

Question 5

If a firm in perfect competition is producing where $$P \u003c AVC$$, what should the firm do in the short run?

Accepted Answer

Shut down immediately.

Question 6

Which of the following is a source of deadweight loss in a market?

Accepted Answer

A price floor set above equilibrium price.

Question 7

Suppose a natural monopoly is regulated to set price equal to average cost ($$P = AC). $$What is the likely result?

Accepted Answer

The monopoly will earn zero economic profit.

Question 8

In the short run, which of the following costs must a firm always pay, even if it shuts down production?

Accepted Answer

Fixed costs

Question 9

A perfectly competitive firm faces a market price of $$P = 50. $$Its marginal cost is given by $$MC = 10 + 2Q. $$What is the profit-maximizing output?

Accepted Answer

$$Q = 20$$

Question 10

Which of the following statements about long-run equilibrium in perfect competition is correct?

Accepted Answer

Firms produce where $$P = MC = ATC$$ and earn zero economic profit.

Question 11

If a government sets a minimum wage above the equilibrium wage, what is the most likely effect in the labor market?

Accepted Answer

A surplus of labor, as more workers want jobs than firms are willing to hire.

Question 12

Which of the following is true about monopoly compared to perfect competition?

Accepted Answer

Monopoly produces less output at a higher price.

Question 13

A firm’s total cost function is $$TC = 100 + 5Q + Q^2$. What is the marginal cost function?

Accepted Answer

$$MC = 5 + 2Q$$

Question 14

Which of the following best explains why competitive markets are considered efficient?

Accepted Answer

They maximize total surplus (consumer plus producer surplus).

Question 15

If a monopolist sets output where $$MR = MC$$, and $$P \u003e MC at $$that output, what does this imply about allocative efficiency?

Accepted Answer

There is deadweight loss due to underproduction.

Question 16

Suppose a firm’s average total cost (ATC) is decreasing as output increases. What does this imply about marginal cost (MC)?

Accepted Answer

MC is below ATC.

Question 17

A city government is considering regulating a natural monopoly by setting price equal to marginal cost ($$P = MC). $$What is a likely problem with this policy?

Accepted Answer

The monopoly may incur losses because $$P \u003c ATC.$$

Question 18

Which of the following best describes the difference between short run and long run in production?

Accepted Answer

In the short run, at least one input is fixed; in the long run, all inputs are variable.

Question 19

A firm’s marginal cost curve intersects its average total cost curve at $$Q = 10$$ and $$ATC = 30. If $$the market price is $$P = 25$$, what should the firm do in the short run?

Accepted Answer

Shut down if $$P \u003c AVC$$; otherwise, produce and incur a loss.

Question 20

Which of the following is NOT a characteristic of perfect competition?

Accepted Answer

There are barriers to entry.

Microeconomics Study Notes: Market Efficiency, Government Actions, Costs, Perfect Competition, and Monopoly

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