Q: Which formula correctly represents the arc price elasticity of demand?

$$\text{arc } \varepsilon = \left[ \frac{Q_D$$^{new}$$ - Q_D$$^{old}$$}{\frac{Q_D$$^{new}$$ + Q_D$$^{old}$$}{2}} \right] \div \left[ \frac{P$$^{new}$$ - P$$^{old}$$}{\frac{P$$^{new}$$ + P$$^{old}$$}{2}} \right]$$

Question 1

Which of the following best describes the principle of optimization in economics?

Accepted Answer

Economic agents choose the best feasible alternative that provides the highest net-benefit, where net-benefit is calculated as $$	ext{Net-Benefit} = 	ext{Benefits} - 	ext{Costs}.$$

Question 2

In a perfectly competitive market, which of the following statements is TRUE?

Accepted Answer

All buyers and sellers are price takers, and no individual can affect the market price.

Question 3

Suppose a consumer has $$\24$ to spend, milk costs $$\$$4$$ per unit, and cookies cost $$\2$ per unit. If the marginal benefit per dollar spent on the last unit of milk equals that of cookies, and the budget is exhausted, which condition is satisfied?

Accepted Answer

$$\frac{MB_{milk}}{P_{milk}} = \frac{MB_{cookie}}{P_{cookie}}$$ and $$I = P$$_{milk}$$Q_{milk} + P$$_{cookie}$$Q_{cookie}$$

Question 4

If the price of good 2 decreases, holding all else constant, what happens to the consumer's budget constraint and utility?

Accepted Answer

The budget constraint rotates upward along the vertical axis, allowing the consumer to reach a higher indifference curve.

Question 5

Which formula correctly represents the arc price elasticity of demand?

Accepted Answer

$$	ext{arc } \varepsilon = \left[ \frac{Q_D$$^{new}$$ - Q_D$$^{old}$$}{\frac{Q_D$$^{new}$$ + Q_D$$^{old}$$}{2}} ight] \div \left[ \frac{P$$^{new}$$ - P$$^{old}$$}{\frac{P$$^{new}$$ + P$$^{old}$$}{2}} ight]$$

Question 6

A firm in the short run should continue to produce as long as:

Accepted Answer

$$P \u003e AVC$$

Question 7

If marginal cost (MC) is less than average total cost (ATC), what is happening to ATC as output increases?

Accepted Answer

ATC is decreasing.

Question 8

Suppose a negative externality exists in the production of a good. Which of the following is TRUE about the market outcome?

Accepted Answer

The market produces more than the socially optimal quantity, resulting in deadweight loss.

Question 9

Which equation correctly represents the relationship between marginal social cost (MSC), marginal private cost (MPC), and marginal external cost (MEC)?

Accepted Answer

$$MSC = MPC + MEC$$

Question 10

A monopolist maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 11

In the long run, in a perfectly competitive market with identical cost structures, what is the economic profit for each firm?

Accepted Answer

Zero, because entry and exit drive profits to zero.

Question 12

Which of the following is a government solution to a negative externality?

Accepted Answer

Pigouvian tax, which increases the cost of producing the good to internalize the externality.

Question 13

If the price elasticity of supply $$|\varepsilon| = 0$$, what does this imply about the supply curve?

Accepted Answer

Supply is perfectly inelastic.

Question 14

Which of the following best describes consumer surplus?

Accepted Answer

The difference between the buyer's willingness to pay (marginal benefit) and the price of the good.

Question 15

In the context of trade, for two countries to benefit from specialization and exchange, the terms of trade must:

Accepted Answer

Lie between the opportunity costs of both countries.

Question 16

Which of the following is NOT a source of wage differences in labor markets?

Accepted Answer

Identical job requirements and identical worker skills.

Question 17

In a duopoly with homogeneous products (Bertrand competition), what is the likely market outcome?

Accepted Answer

Both firms undercut each other's prices until price equals marginal cost.

Question 18

Which of the following statements about monopolistic competition is TRUE in the long run?

Accepted Answer

Firms earn zero economic profit because free entry and exit drive profits to zero.

Question 19

Suppose a positive externality exists in the consumption of a good. Which of the following is TRUE about the market outcome?

Accepted Answer

The market produces less than the socially optimal quantity, resulting in deadweight loss.

Question 20

Which of the following equations correctly defines producer surplus (PS)?

Accepted Answer

$$PS = 	ext{Market Price} - 	ext{Willingness to Accept}$$

Comprehensive Microeconomics Review Notes (ECON 2001)

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