Question 1

Which of the following best describes a common resource, and why does it tend to be overused in the absence of regulation?

Accepted Answer

It is rival and non-excludable; it tends to be overused because individuals do not account for the external cost imposed on others.

Question 2

Suppose a city park is open to all and becomes crowded on weekends, reducing the enjoyment for each visitor. Which type of good is the park, and what economic problem does this illustrate?

Accepted Answer

A common resource; the tragedy of the commons.

Question 3

A firm has total fixed costs of $$100 and produces 20 units of output. What is its average fixed cost (AFC)?

$$AFC = \frac{TFC}{Q}$

Accepted Answer

$$AFC = \frac{100}{20} = 5$$

Question 4

Which of the following statements about perfect competition is correct?

Accepted Answer

Firms maximize profit where $$P = MC$$, and in the long run, economic profit is zero.

Question 5

A monopolist faces the following linear demand curve: $$P = 100 - 2Q. $$What is the marginal revenue (MR) curve?

Accepted Answer

$$MR = 100 - 4Q$$

Question 6

If a perfectly competitive firm faces a market price of $$P = 10$$, has an average total cost $$ATC = 8$$, and sells $$Q = 50$$ units, what is its economic profit?

$$Economic\ Profit = (P - ATC) 	imes Q$$

Accepted Answer

$$(10 - 8) 	imes 50 = 100$$

Question 7

Which of the following is true about the relationship between marginal product (MP) and average product (AP)?

Accepted Answer

MP intersects AP at the maximum point of AP.

Question 8

A monopolist is regulated to set price equal to marginal cost ($$P = MC). If $$marginal cost is below average total cost ($$MC \u003c ATC$$), what is the likely outcome?

Accepted Answer

The monopolist will incur losses and may require a subsidy.

Question 9

Which of the following best explains why public goods are underprovided by private markets?

Accepted Answer

Because exclusion is difficult and free riding leads to underprovision.

Question 10

Suppose a firm’s total cost is given by $$TC = 200 + 5Q + Q^2$. What is the marginal cost (MC) function?

MC$$ = \frac{dTC}{dQ}$$

Accepted Answer

$$MC = 5 + 2Q$$

Question 11

A firm’s explicit costs are $$500, its implicit costs are 200$$, and its total revenue is $$900. What is its economic profit?

$$Economic\ Profit = Total\ Revenue - (Explicit\ Cost + Implicit\ Cost)$

Accepted Answer

$$900 - (500 + 200) = 200$$

Question 12

Which of the following is a characteristic of a natural monopoly?

Accepted Answer

One firm can supply the entire market at lower cost than multiple firms due to persistent economies of scale.

Question 13

If a perfectly competitive firm’s price falls below average variable cost ($$P \u003c AVC) in $$the short run, what should the firm do?

Accepted Answer

Shut down immediately to minimize losses.

Question 14

Which of the following is an example of price discrimination by a monopolist?

Accepted Answer

Charging different prices to different consumers for the same good, not based on cost differences.

Question 15

A firm’s total product (TP) increases at a decreasing rate as more workers are hired. What law does this illustrate?

Accepted Answer

Law of diminishing marginal product.

Question 16

Suppose a monopolist’s average total cost at the profit-maximizing output is $$ATC^* = 15$$, the price charged is $$P^* = 20$$, and the quantity sold is $$Q^* = 100. $$What is the monopolist’s economic profit?

$$Economic\ Profit = (P^* - ATC^*) 	imes Q^*$$

Accepted Answer

$$(20 - 15) 	imes 100 = 500$$

Question 17

Which of the following best describes the shutdown condition for a monopolist in the short run?

Accepted Answer

The monopolist shuts down if $$P \u003c AVC.$$

Question 18

In the long run, what happens to economic profit in a perfectly competitive market, and why?

Accepted Answer

Economic profit falls to zero because free entry and exit drive profit to zero.

Question 19

Which of the following is true about the graphical relationship between marginal cost (MC), average total cost (ATC), and average variable cost (AVC)?

Accepted Answer

MC intersects both ATC and AVC at their minimum points.

Question 20

A city considers charging a fixed annual fee plus a per-use fee for water service. What pricing method is this, and why might it be used for a natural monopoly?

Accepted Answer

Two-part tariff; it helps cover fixed costs while keeping per-unit price closer to marginal cost.

Microeconomics Study Notes: Public Goods, Production & Cost, Perfect Competition, and Monopoly

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