Question 1

Suppose a perfectly competitive market experiences a positive demand shock. In the short run, what is most likely to occur?

Accepted Answer

Price will rise above $$ATC_{min}$$, firms will earn positive economic profits, and new firms will be incentivized to enter in the long run.

Question 2

Which of the following best explains why the long-run supply curve in a perfectly competitive industry is horizontal at $$P = ATC_{min}$$?

Accepted Answer

Because entry and exit of firms drive economic profit to zero, so price equals minimum average total cost.

Question 3

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

Accepted Answer

$$MR = 100 - 4Q$$

Question 4

Suppose a government imposes a per-unit tax on a good. The incidence of the tax falls more heavily on:

Accepted Answer

The side of the market with the more inelastic curve.

Question 5

Which of the following is NOT a reason why the Invisible Hand may fail to maximize total surplus?

Accepted Answer

Perfect information

Question 6

A country has a comparative advantage in producing a good if:

Accepted Answer

It can produce the good at a lower opportunity cost than other countries.

Question 7

If a price ceiling is set below the equilibrium price, what is the most likely outcome?

Accepted Answer

A shortage will occur, as quantity demanded exceeds quantity supplied.

Question 8

Suppose the marginal private cost (MPC) of producing a good is $$MPC = 10 + Q$$, and the marginal external cost is constant at 5. What is the marginal social cost (MSC)?

Accepted Answer

$$MSC = 10 + Q + 5$$

Question 9

Which of the following best describes a Nash Equilibrium in a simultaneous-move game?

Accepted Answer

Each player chooses a strategy that is a best response to the strategies chosen by the other players.

Question 10

A public good is characterized by:

Accepted Answer

Non-rivalry and non-excludability

Question 11

If a monopolist can perfectly price discriminate (first-degree price discrimination), what is the effect on consumer surplus and deadweight loss?

Accepted Answer

Consumer surplus is zero and deadweight loss is eliminated.

Question 12

Suppose a country is a small open economy and the world price of wheat is below its autarky price. If the country opens to trade, what will happen?

Accepted Answer

The country will import wheat, and domestic consumers will gain.

Question 13

Which of the following is a necessary condition for the Coase Theorem to hold in solving externalities?

Accepted Answer

Property rights are clearly defined and transaction costs are low.

Question 14

A price floor set above the equilibrium price will:

Accepted Answer

Cause a surplus, as quantity supplied exceeds quantity demanded.

Question 15

If the production possibilities curve (PPC) is bowed outward, what does this indicate about opportunity costs?

Accepted Answer

Opportunity costs are increasing.

Question 16

Which of the following is true about deadweight loss from a tariff in a small open economy?

Accepted Answer

It arises because some consumers who value the good above the world price do not buy it, and some inefficient domestic producers produce more.

Question 17

Suppose a firm in a perfectly competitive market faces a market price of $$P = 20$$, and its cost function is $$TC = 100 + 4Q + Q^2$. What is the profit-maximizing output?

Accepted Answer

Set $$MC = MR$$: $$MC = \frac{dTC}{dQ} = 4 + 2Q. $$Set $$20 = 4 + 2Q \Rightarrow Q = 8.$$

Question 18

Which of the following is an example of a common resource?

Accepted Answer

Fish in the ocean

Question 19

In a sequential game, backward induction is used to:

Accepted Answer

Solve for the subgame perfect Nash equilibrium by reasoning from the end of the game to the beginning.

Question 20

If a subsidy is provided to buyers of a good, what is the likely effect on total surplus and deadweight loss?

Accepted Answer

Total surplus decreases due to overproduction, creating deadweight loss.

Principles of Microeconomics: Final Exam Study Guide

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