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

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

Accepted Answer

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

Question 3

In a perfectly competitive market, which of the following is NOT a characteristic?

Accepted Answer

There are barriers to entry and exit.

Question 4

If the marginal cost (MC) of producing an additional unit is less than the average total cost (ATC), what happens to ATC as output increases?

Accepted Answer

ATC decreases.

Question 5

A firm in the short run will continue to produce as long as which condition holds?

Accepted Answer

$$P \u003e AVC$$

Question 6

Suppose the price elasticity of demand for a product is $$-0.5. If $$the price increases by 10%, what is the expected percentage change in quantity demanded?

Accepted Answer

Quantity demanded decreases by 5%.

Question 7

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on third parties not involved in the transaction.

Question 8

A factory emits pollution as a byproduct of production. The marginal social cost (MSC) of production is higher than the marginal private cost (MPC). What is the value of the marginal external cost (MEC)?

Accepted Answer

$$MEC = MSC - MPC$$

Question 9

In the long run, what happens to economic profits in a perfectly competitive market?

Accepted Answer

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

Question 10

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

Accepted Answer

Pigouvian tax

Question 11

A monopolist maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 12

If a market is experiencing a positive externality, what is the relationship between marginal social benefit (MSB) and marginal private benefit (MPB)?

Accepted Answer

$$MSB = MPB + MEB$$

Question 13

Suppose two countries, A and B, can produce either wheat or cars. Country A has a lower opportunity cost for wheat, while country B has a lower opportunity cost for cars. According to the theory of comparative advantage, what should each country do?

Accepted Answer

Country A should specialize in wheat and country B in cars.

Question 14

Which of the following best describes the supply curve of a firm in the short run?

Accepted Answer

It is the portion of the marginal cost curve above the average variable cost.

Question 15

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

Accepted Answer

Supply is perfectly inelastic.

Question 16

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

Accepted Answer

Both firms set prices equal to marginal cost, resulting in zero economic profit.

Question 17

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

Accepted Answer

Perfect competition in product markets

Question 18

A monopolistically competitive firm in the long run will:

Accepted Answer

Earn zero economic profit due to free entry and exit.

Question 19

Which of the following statements about market efficiency is correct?

Accepted Answer

Market efficiency is achieved when social surplus is maximized, which occurs where $$P = MSB = MSC.$$

Question 20

If a government imposes a price ceiling below the equilibrium price in a perfectly competitive market, what is the likely result?

Accepted Answer

A shortage of the good.

Microeconomics Review: Principles, Consumer and Producer Behavior, Market Structures, and Externalities

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