Q: A firm’s production function is $Q = 2L^{0.5}K^{0.5}$. If $L = 16$ and $K = 9$, what is the output $Q$?

$Q = 2 \times (16)^{0.5} \times (9)^{0.5} = 2 \times 4 \times 3 = 24$

Q: If a perfectly competitive firm is producing at a point where $P < AVC$, what should the firm do in the short run?

Shut down production immediately.

Q: Which of the following best describes the relationship between marginal revenue (MR) and price (P) for a monopolist?

MR is less than price for all units except the first.

Question 1

Suppose the price of a product increases from $10 to $12, and as a result, the quantity demanded decreases from 100 units to 80 units. Using the midpoint (arc elasticity) formula, what is the price elasticity of demand?

Accepted Answer

$\frac{(80-100)}{(80+100)/2} \div \frac{(12-10)}{(12+10)/2} = -1$

Question 2

Which of the following best describes the Law of Diminishing Marginal Product?

Accepted Answer

As more units of a variable input are added to fixed inputs, the additional output from each new unit will eventually decrease.

Question 3

A perfectly competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$MC = MR$

Question 4

If a monopolist faces a linear demand curve and sets marginal revenue equal to marginal cost, which of the following is true at the profit-maximizing output?

Accepted Answer

Price is greater than marginal cost: $P > MC$

Question 5

Which of the following is NOT an assumption of perfect competition?

Accepted Answer

Firms can influence the market price.

Question 6

Suppose a firm’s total cost function is $TC = 100 + 5Q + Q^2$. What is the marginal cost (MC) function?

Accepted Answer

$MC = 5 + 2Q$

Question 7

If the cross-price elasticity of demand between two goods is positive, what does this imply?

Accepted Answer

The goods are substitutes.

Question 8

A firm in the short run is producing where $MC = AVC$ and $MC$ is rising. What does this indicate?

Accepted Answer

The firm is at the minimum point of the AVC curve.

Question 9

Which of the following best describes deadweight loss from monopoly?

Accepted Answer

It is the loss of total surplus due to the monopolist producing less than the socially optimal output.

Question 10

If a firm’s average total cost (ATC) is decreasing as output increases, what can be inferred about marginal cost (MC)?

Accepted Answer

MC is less than ATC.

Question 11

Which of the following is the correct formula for the Lerner Index, a measure of market power?

Accepted Answer

$L = \frac{P - MC}{P}$

Question 12

A firm’s production function is $Q = 2L^{0.5}K^{0.5}$. If $L = 16$ and $K = 9$, what is the output $Q$?

Accepted Answer

$Q = 2 	imes (16)^{0.5} 	imes (9)^{0.5} = 2 	imes 4 	imes 3 = 24$

Question 13

Which of the following statements about Pareto efficiency is correct?

Accepted Answer

It is a situation where no one can be made better off without making someone else worse off.

Question 14

If a perfectly competitive firm is producing at a point where $P < AVC$, what should the firm do in the short run?

Accepted Answer

Shut down production immediately.

Question 15

Suppose the income elasticity of demand for a good is $-0.5$. What type of good is this?

Accepted Answer

An inferior good.

Question 16

In the long run, a perfectly competitive firm will produce at the output level where:

Accepted Answer

$P = MC = ATC$

Question 17

If a monopolist faces the demand curve $P = 100 - 2Q$ and has constant marginal cost $MC = 20$, what is the profit-maximizing quantity?

Accepted Answer

$Q = 20$

Question 18

Which of the following best describes the relationship between marginal revenue (MR) and price (P) for a monopolist?

Accepted Answer

MR is less than price for all units except the first.

Question 19

If a firm’s total revenue is maximized, what is the price elasticity of demand at that point?

Accepted Answer

Elasticity is unitary: $|\varepsilon| = 1$

Question 20

Which of the following is true about producer surplus in perfect competition compared to monopoly?

Accepted Answer

Producer surplus is generally higher under monopoly than under perfect competition.

Microeconomics Exam 2 Study Guide: Elasticity, Production & Costs, Market Structures

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