Question 1

Suppose a perfectly competitive firm faces a market price of $10 per unit. The firm's total cost function is given by $TC = 50 + 2Q + 0.5Q^2$. What is the profit-maximizing output level for the firm in the short run?

Accepted Answer

$Q = 12$

Question 2

Which of the following best describes the law of diminishing marginal returns?

Accepted Answer

As more of a variable input is added to a fixed input, marginal product of the variable input will eventually decrease.

Question 3

A firm in a perfectly competitive market is producing at a level where $P = MC = ATC$. What does this imply about the firm's economic profit?

Accepted Answer

The firm is earning zero economic profit.

Question 4

If the price elasticity of demand for a product is $-2.5$, what will happen to total revenue if the firm increases its price?

Accepted Answer

Total revenue will decrease.

Question 5

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Products are differentiated.

Question 6

Suppose a firm’s marginal cost curve is $MC = 4 + Q$. If the market price is $P = 10$, what is the firm’s profit-maximizing output?

Accepted Answer

$Q = 6$

Question 7

A bakery finds that when it increases its output from 100 to 120 loaves per day, its total cost rises from $200 to $260. What is the marginal cost per loaf for this range?

Accepted Answer

$2.50$

Question 8

If a firm’s average variable cost is rising, which of the following must be true?

Accepted Answer

Marginal cost is above average variable cost.

Question 9

In the long run, what happens to economic profit in a perfectly competitive industry?

Accepted Answer

Firms earn zero economic profit.

Question 10

Which of the following equations correctly represents the midpoint formula for price elasticity of demand?

Accepted Answer

$\frac{\frac{Q_2 - Q_1}{(Q_2 + Q_1)/2}}{\frac{P_2 - P_1}{(P_2 + P_1)/2}}$

Question 11

A firm’s total cost is $TC = 100 + 5Q$. What is the firm’s average total cost when $Q = 20$?

Accepted Answer

$10.5$

Question 12

If a firm shuts down in the short run, which of the following must be true?

Accepted Answer

Price is less than average variable cost.

Question 13

Suppose the market for wheat is perfectly competitive and in long-run equilibrium. What will happen if there is a permanent increase in demand for wheat?

Accepted Answer

New firms will enter, supply will increase, and economic profit will return to zero.

Question 14

Which of the following best explains why the marginal cost curve eventually slopes upward?

Accepted Answer

Because of diminishing marginal returns.

Question 15

A firm’s fixed cost is $FC = 80$ and its variable cost is $VC = 4Q$. What is the total cost when $Q = 15$?

Accepted Answer

$140$

Question 16

If a competitive firm is producing where $MC > MR$, what should the firm do to maximize profit?

Accepted Answer

Decrease output.

Question 17

Which of the following is true about the relationship between marginal cost (MC) and average total cost (ATC)?

Accepted Answer

When MC equals ATC, ATC is at its minimum.

Question 18

A competitive firm’s total revenue is $TR = 20Q$ and its total cost is $TC = 5Q + 100$. What is the firm’s profit when $Q = 10$?

Accepted Answer

$50$

Question 19

If the market price falls below a firm’s average variable cost in the short run, what is the firm’s best option?

Accepted Answer

Shut down production immediately.

Question 20

Which of the following statements about long-run equilibrium in a perfectly competitive market is correct?

Accepted Answer

Firms produce at the minimum point of their average total cost curves.

Microeconomics Exam 1 Study Guide: Key Concepts and Review Topics

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