Question 1

Suppose the market for coffee is initially in equilibrium. A new study reveals that drinking coffee significantly improves health, leading to a change in consumer preferences. What will most likely happen to the equilibrium price and quantity of coffee?

Accepted Answer

Both equilibrium price and equilibrium quantity will increase.

Question 2

Which of the following best describes the difference between a movement along the demand curve and a shift of the demand curve?

Accepted Answer

A movement along the demand curve is caused by a change in the price of the good, while a shift of the demand curve is caused by changes in non-price determinants such as income or preferences.

Question 3

If the price elasticity of demand for a product is $$-2$$, what will happen to total revenue if the price increases by 10%?

Accepted Answer

Total revenue will decrease by 20%.

Question 4

A bakery faces the following cost structure: Fixed costs are \$$100 per day, and variable costs are VC = 2q$, where q$ is the number of loaves produced. If the market price is \3 $$per loaf, what is the profit-maximizing quantity?

Accepted Answer

$$q$$ where $$MC = MR$$, so $$2q' = 3$$, thus $$q = 1.5$$ loaves (but since $$q$$ must be whole, produce 1 or 2 loaves).

Question 5

Which of the following is an example of a price ceiling, and what is a likely consequence?

Accepted Answer

A legal maximum price for apartment rents; likely to cause a shortage of apartments.

Question 6

Suppose the cross-price elasticity of demand between tea and coffee is $$0.5. $$What does this imply about the relationship between tea and coffee?

Accepted Answer

They are substitutes.

Question 7

A firm in a perfectly competitive market faces a market price of \$$10. Its average variable cost is \8$$, and its average total cost is \$12 at the profit-maximizing output. What should the firm do in the short run?

Accepted Answer

Continue to produce in the short run, even though it is making a loss.

Question 8

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

Accepted Answer

As more units of a variable input are added to fixed inputs, the additional output from each new unit of input eventually decreases.

Question 9

If the government imposes a price floor above the equilibrium price in the wheat market, what is the most likely outcome?

Accepted Answer

A surplus of wheat.

Question 10

Which of the following is NOT a characteristic of a monopoly?

Accepted Answer

The firm is a price taker.

Question 11

Suppose the income elasticity of demand for organic food is $$1.2. If $$consumer incomes rise by 10%, what will happen to the quantity demanded for organic food?

Accepted Answer

It will increase by 12%.

Question 12

Which of the following best describes producer surplus?

Accepted Answer

The difference between the price a producer receives and the minimum price they are willing to accept.

Question 13

A monopoly maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 14

If a price ceiling is set below the equilibrium price, what will happen to social surplus?

Accepted Answer

Social surplus will decrease due to deadweight loss.

Question 15

Which of the following is a barrier to entry that can lead to monopoly power?

Accepted Answer

Patents and copyrights.

Question 16

If the demand for a good is perfectly inelastic, what is the value of its price elasticity of demand?

Accepted Answer

$$0$$

Question 17

In the long run, what happens in a perfectly competitive market if firms are earning positive economic profits?

Accepted Answer

New firms enter the market, driving profits down to zero.

Question 18

Which of the following scenarios best illustrates the concept of deadweight loss?

Accepted Answer

A government sets a price ceiling on gasoline, resulting in fewer transactions than at equilibrium.

Question 19

If the market supply curve shifts to the left due to a natural disaster, what will happen to the equilibrium price and quantity?

Accepted Answer

Equilibrium price will increase and equilibrium quantity will decrease.

Question 20

Which of the following statements about consumer surplus is correct?

Accepted Answer

Consumer surplus is the area below the demand curve and above the price.

Midterm 2 Study Guide: Principles of Microeconomics (Chapters 4, 5, 6, 7, 12)

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