Q: If a firm’s average total cost (ATC) is $$10$$ and average variable cost (AVC) is $$7 at$$ $$Q = 30$$, what is the firm’s total fixed cost (FC)?

$$FC = (ATC - AVC) \times Q = (10 - 7) \times 30 = 90$$

Q: A perfectly competitive firm faces a market price of $$P = 15. At$$ $$Q = 40$$, its ATC is $$12$$ and MC is $$15. $$What is the firm’s economic profit at this output?

$$\text{Profit} = (P - ATC) \times Q = (15 - 12) \times 40 = 120$$

Question 1

Suppose a consumer has an income of $$I = 120$$, and faces prices $$P_1 = 10$ for good 1 and P_2$ = 20$$ for good 2. What is the equation of the consumer's budget constraint?

Accepted Answer

$$120 = 10x_1 + 20x_2$$

Question 2

If the price of good 1 falls while the price of good 2 and income remain unchanged, what happens to the consumer's budget constraint?

Accepted Answer

It pivots outward, increasing the intercept on the $$x_1$$ axis.

Question 3

A consumer is maximizing utility by purchasing quantities of goods 1 and 2 such that $$MB_1$$/$$P_1$$ = $$MB_2$$/$$P_2. If$$ $$MB_1$$/$$P_1$$ \u003e $$MB_2$$/$$P_2$$, what should the consumer do?

Accepted Answer

Buy more of good 1 and less of good 2.

Question 4

Suppose the price of a good increases from $$P = 5 to$$ $$P = 7$$, and the quantity demanded falls from $$Q = 100 to$$ $$Q = 80. $$What is the arc price elasticity of demand using the midpoint formula?

Accepted Answer

$$\displaystyle \varepsilon = \frac{-20/90}{2/6} = -0.67$$

Question 5

If the cross-price elasticity of demand between two goods is $$\varepsilon_{ij} = 1.2$$, what is the relationship between the goods?

Accepted Answer

They are substitutes.

Question 6

A consumer's demand for ramen noodles falls by 10% when their income rises by 20%. What is the income elasticity of demand, and what type of good is ramen?

Accepted Answer

$$\varepsilon_I = \frac{-10\%}{20\%} = -0.5$$, so ramen is an inferior good.

Question 7

Which of the following statements about indifference curves is correct?

Accepted Answer

Indifference curves cannot cross because that would violate the assumption that more is better.

Question 8

A firm’s total cost increases from $$TC = 200 to$$ $$TC = 260 as $$output rises from $$Q = 20 to$$ $$Q = 25. $$What is the marginal cost of the 21st to 25th units?

Accepted Answer

$$MC = \frac{260 - 200}{25 - 20} = 12$$

Question 9

If a firm’s average total cost (ATC) is $$10$$ and average variable cost (AVC) is $$7 at$$ $$Q = 30$$, what is the firm’s total fixed cost (FC)?

Accepted Answer

$$FC = (ATC - AVC) 	imes Q = (10 - 7) 	imes 30 = 90$$

Question 10

Which of the following best describes economies of scale?

Accepted Answer

Long-run average total cost falls as output increases.

Question 11

A perfectly competitive firm faces a market price of $$P = 15. At$$ $$Q = 40$$, its ATC is $$12$$ and MC is $$15. $$What is the firm’s economic profit at this output?

Accepted Answer

$$	ext{Profit} = (P - ATC) 	imes Q = (15 - 12) 	imes 40 = 120$$

Question 12

In the long run, if firms in a perfectly competitive market are earning positive economic profits, what will happen?

Accepted Answer

New firms will enter, increasing supply and driving price down until profit is zero.

Question 13

At what point does a perfectly competitive firm shut down in the short run?

Accepted Answer

When price falls below minimum average variable cost.

Question 14

Suppose the market equilibrium price for a good is $$P = 20$$ and the equilibrium quantity is $$Q = 100. $$The demand curve intercepts the price axis at $$P = 40. $$What is the total consumer surplus?

Accepted Answer

$$CS = \frac{1}{2} 	imes 100 	imes (40 - 20) = 1000$$

Question 15

A government quota reduces the quantity traded in a market from the efficient level of $$Q = 80 to$$ $$Q = 50. At$$ $$Q = 50$$, the demand price is $$P = 30$$ and the supply price is $$P = 18. $$What is the deadweight loss (DWL) from the quota?

Accepted Answer

$$DWL = \frac{1}{2} 	imes (80 - 50) 	imes (30 - 18) = 180$$

Question 16

Which of the following is NOT a reason why perfectly competitive markets may fail to be Pareto efficient?

Accepted Answer

All buyers and sellers have perfect information.

Question 17

If the price elasticity of supply is $$\varepsilon_s = 0.5$$, how will a 10% increase in price affect the quantity supplied?

Accepted Answer

Quantity supplied will increase by 5%.

Question 18

A firm’s supply curve in the short run is best described as:

Accepted Answer

The portion of its marginal cost curve above minimum average variable cost.

Question 19

Which of the following best describes the equity-efficiency trade-off in economics?

Accepted Answer

Policies that increase equity often reduce efficiency by creating deadweight loss.

Microeconomics Study Guide: Consumer and Producer Behavior, Market Efficiency (Ch. 5–7)

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