Question 1

A perfectly competitive firm will maximize profit in the short run by producing the quantity where:

Accepted Answer

$$P = MC$$

Question 2

Which of the following best describes economic profit?

Accepted Answer

Total revenue minus explicit and implicit costs

Question 3

If a firm’s average variable cost (AVC) is $$10$$, average total cost (ATC) is $$15$$, and price (P) is $$12$$, what should the firm do in the short run?

Accepted Answer

Continue producing because $$AVC \u003c P \u003c ATC$$

Question 4

Which of the following is NOT an assumption of a perfectly competitive market?

Accepted Answer

Firms can influence the market price

Question 5

Suppose a firm’s marginal cost (MC) is given by $$MC = \frac{w}{MPL}$$, where $$w is $$the wage rate and $$MPL is $$the marginal product of labor. If the wage rate increases, what happens to the marginal cost?

Accepted Answer

Marginal cost increases

Question 6

In the long run, firms in a perfectly competitive market earn zero economic profit because:

Accepted Answer

Entry and exit of firms drive price to minimum average total cost

Question 7

A firm’s short-run total cost (STC) function is $$STC = FC + VC(Q). If $$fixed costs (FC) increase, what happens to the firm’s marginal cost (MC)?

Accepted Answer

Marginal cost remains unchanged

Question 8

Which of the following best explains why the average cost (AC) curve is U-shaped?

Accepted Answer

AC falls at low output due to spreading fixed costs, then rises due to diminishing marginal returns

Question 9

If a firm’s marginal product of labor (MPL) is decreasing, what happens to the marginal cost (MC) of production?

Accepted Answer

Marginal cost increases

Question 10

A firm faces the following costs: wage rate $$w = 20$$, marginal product of labor $$MPL = 5. $$What is the marginal cost (MC) of producing one more unit of output?

Accepted Answer

$$MC = \frac{20}{5} = 4$$

Question 11

Which of the following is an example of an implicit cost?

Accepted Answer

Foregone salary from running your own business instead of working elsewhere

Question 12

If a firm’s isoquant is tangent to its isocost line, what does this indicate?

Accepted Answer

The firm is minimizing cost for a given output level

Question 13

Which of the following best describes the shutdown rule in the short run?

Accepted Answer

A firm should shut down if price is less than average variable cost ($$P \u003c AVC)$$

Question 14

In the long run, which of the following is true for a perfectly competitive firm?

Accepted Answer

$$P = MC = ATC$$

Question 15

If a firm doubles all its inputs and output more than doubles, this is an example of:

Accepted Answer

Increasing returns to scale

Question 16

Which of the following is true about consumer surplus?

Accepted Answer

It is the difference between what a consumer is willing to pay and the market price

Question 17

A firm’s long-run total cost function is $$LRTC = wL + rK. If $$the wage rate ($$w) $$increases, but the rental rate of capital ($$r) $$and output remain constant, what is the firm likely to do to minimize costs?

Accepted Answer

Substitute capital for labor

Question 18

Which of the following is a characteristic of a monopoly but NOT of perfect competition?

Accepted Answer

The firm is a price maker

Question 19

If the marginal cost (MC) curve intersects the average total cost (ATC) curve at its minimum point, what does this imply?

Accepted Answer

ATC is at its lowest value

Question 20

Producer surplus is best defined as:

Accepted Answer

The difference between the market price and the minimum price a firm is willing to accept

Microeconomics: Competitive Markets, Costs, and Efficiency

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