Microeconomics Practice Exam Guidance

Q9. Consider the competitive firm whose MC, AC, AVC, AFC functions are shown in the following graph. If the market price is equal to $15, then the firm maximizes profits by producing _____?

Background

Topic: Perfect Competition & Cost Curves

This question tests your understanding of how a competitive firm determines its profit-maximizing output using cost curves and market price.

Key Terms and Formulas:

• Marginal Cost (MC): The additional cost of producing one more unit of output.

• Average Cost (AC): The total cost divided by the quantity produced.

• Average Variable Cost (AVC): The variable cost divided by the quantity produced.

• Average Fixed Cost (AFC): The fixed cost divided by the quantity produced.

• Profit Maximization Rule: In perfect competition, firms maximize profit where $MC = P$ and $MC$ is rising.

Step-by-Step Guidance

1. Examine the graph and identify the MC, AC, AVC, and AFC curves. Note the output levels where these curves intersect.

2. Locate the market price ($P = 15$) on the vertical axis and draw a horizontal line at this price level.

3. Find the output level(s) where the MC curve intersects the price line ($MC = 15$). These are potential profit-maximizing quantities.

4. Check if the price is above the AVC at these output levels. If $P \geq AVC$, the firm will produce; otherwise, it will shut down.

5. Compare the output levels to see which range matches the answer choices (e.g., more than 0 but less than 100 units, more than 100 but less than 180 units, etc.).

Try solving on your own before revealing the answer!

Final Answer: more than 0 but less than 100 units

At $P = 15$, the MC curve intersects the price line at an output level less than 100 units, and $P$ is above AVC, so the firm produces in this range.

Q11. Rock-paper-scissors game is a two-player game, in which each player simultaneously forms one of three shapes with an outstretched hand. These shapes are "rock", "paper", and "scissors". A player playing rock will beat another player playing chosen scissors, but will lose to one playing paper; a play of paper will lose to a play of scissors. If both players choose the same shape, the game is tied. Suppose the winner receives a payoff of 1 and the loser receives the payoff of -1. Both players receive zero payoff under a tie. We use letters A to R to denote payoffs. Then K=?

Background

Topic: Game Theory – Payoff Matrix

This question tests your ability to interpret a payoff matrix and assign payoffs based on the rules of a classic game theory example: rock-paper-scissors.

Key Terms and Formulas:

• Payoff Matrix: A table showing the outcomes (payoffs) for each player depending on their choices.

• Winner: Receives payoff of 1.

• Loser: Receives payoff of -1.

• Tie: Both receive payoff of 0.

Step-by-Step Guidance

1. Review the rules: Rock beats Scissors, Paper beats Rock, Scissors beats Paper.

2. Locate the cell in the matrix where Player 1 chooses Paper and Player 2 chooses Scissors (this is where K, L are the payoffs).

3. Determine who wins in this scenario: Player 2 (Scissors) beats Player 1 (Paper).

4. Assign payoffs: Winner gets 1, loser gets -1. So K (Player 1's payoff) should be -1.

Try solving on your own before revealing the answer!

Final Answer: -1

Player 1 loses when choosing Paper against Player 2's Scissors, so K = -1.