Question 1

In a perfectly competitive market with free entry and identical firms, why do firms earn zero economic profit in the long run?

Accepted Answer

Because entry and exit of firms drive the market price to the point where total revenue equals total cost, including opportunity cost.

Question 2

Which of the following best describes 'economic rent' as used in microeconomics?

Accepted Answer

A payment to the owner of an input beyond the minimum necessary for the factor to be supplied.

Question 3

Suppose the market demand for roses is given by $$Q_D = 100 - 2P$$ and the market supply is $$Q_S = 2P. If a $$specific tax of $$t = 5$$ per stem is imposed on sellers, what is the new equilibrium price paid by consumers?

Accepted Answer

Solve for $$P in$$ $$100 - 2P = 2(P - 5)$$, so $$P = 27.5$$

Question 4

Consumer surplus is best represented by which of the following areas on a standard supply and demand graph?

Accepted Answer

The area under the demand curve and above the market price up to the quantity bought.

Question 5

If the government imposes a price ceiling below the competitive equilibrium price, what is the most likely outcome in the market?

Accepted Answer

A shortage, as consumers demand more than firms supply.

Question 6

Which of the following statements about deadweight loss (DWL) is correct?

Accepted Answer

DWL is the net reduction in welfare from a loss of surplus by one group that is not offset by a gain to another group.

Question 7

A government introduces a quota on imported cars, reducing the number of cars that can be imported. What is the likely effect on domestic producer surplus and overall welfare?

Accepted Answer

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

Question 8

If a government provides a specific subsidy to producers, which of the following is a likely outcome?

Accepted Answer

The equilibrium quantity increases, and both consumer and producer surplus rise, but there is a deadweight loss due to government expenditure.

Question 9

Which of the following best explains why competition maximizes welfare in a market?

Accepted Answer

Because at the competitive equilibrium, price equals marginal cost, ensuring allocative efficiency.

Question 10

Suppose the government imposes a sales tax on a good. Which of the following is true regarding the effect on consumer and producer surplus?

Accepted Answer

Both consumer and producer surplus decrease, and part of the loss is captured as tax revenue, but there is also a deadweight loss.

Question 11

A market has the following demand and supply: $$Q_D = 50 - P$$, $$Q_S = P. $$What is the equilibrium price and quantity?

Accepted Answer

$$P = 25$$, $$Q = 25$$

Question 12

Which of the following is an example of a barrier to entry?

Accepted Answer

A large sunk cost that new firms must pay but existing firms do not.

Question 13

If the demand curve for a good is less elastic, what is the effect of a price increase on consumer surplus compared to a more elastic demand curve?

Accepted Answer

The loss in consumer surplus is larger for the less elastic demand curve.

Question 14

Which of the following best describes 'rent seeking'?

Accepted Answer

Efforts and expenditures to gain a rent or profit from government actions, such as lobbying for tariffs or quotas.

Question 15

A government sets a price support for soybeans above the equilibrium price using a deficiency payment. What is the effect on producer surplus and deadweight loss?

Accepted Answer

Producer surplus increases, but there is a deadweight loss due to overproduction.

Question 16

If a government bans all imports of a good, what is the likely effect on domestic prices and welfare?

Accepted Answer

Domestic prices rise, and welfare decreases due to deadweight loss.

Question 17

Which of the following is true about the effect of a specific tax on a good with a more elastic demand curve?

Accepted Answer

The deadweight loss from the tax is greater for the more elastic demand curve.

Question 18

Producer surplus can be calculated as:

Accepted Answer

The area above the supply curve and below the market price up to the quantity produced.

Question 19

Which of the following policies creates a wedge between the price consumers pay and the price producers receive?

Accepted Answer

A sales tax imposed on the good.

Applying the Competitive Model: Welfare, Policy, and Market Outcomes

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