Question 1

Suppose a consumer has an income of $$100 to spend on goods X and Y. The price of X is 10 $$and the price of Y is $20. What is the equation for the consumer's budget constraint?

Accepted Answer

$$10X + 20Y = 100$$

Question 2

If the marginal utility per dollar spent on good X is greater than that for good Y, what should the consumer do to maximize utility?

Accepted Answer

Buy more of good X and less of good Y

Question 3

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

Accepted Answer

As a consumer consumes more of a good, the additional satisfaction from each extra unit decreases.

Question 4

A consumer faces a choice between leisure and working hours. If the wage rate increases, which of the following is true regarding the substitution and income effects?

Accepted Answer

The substitution effect encourages more work, while the income effect may encourage more leisure.

Question 5

Which of the following statements about economic profit is correct?

Accepted Answer

Economic profit is total revenue minus both explicit and implicit costs.

Question 6

If a firm’s marginal product of labor (MPL) is decreasing, what does this imply about marginal cost (MC)?

Accepted Answer

Marginal cost is increasing.

Question 7

Given the following cost data for a firm: Total Fixed Cost (TFC) = $$100, Total Variable Cost (TVC) = 200$$, and output (Q) = 10 units. What is the Average Total Cost (ATC)?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{100 + 200}{10} = 30$$

Question 8

In a perfectly competitive market, why is the market price also the marginal revenue (MR) for an individual firm?

Accepted Answer

Because the firm can sell any quantity at the market price without affecting the price.

Question 9

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

Accepted Answer

The firm is earning zero economic profit (normal profit).

Question 10

If the market price falls below a firm’s average variable cost (AVC) in the short run, what should the firm do?

Accepted Answer

Shut down production immediately.

Question 11

Which of the following best describes economies of scale?

Accepted Answer

Long-run average total cost decreases as output increases.

Question 12

Suppose a firm’s long-run average cost curve (LRAC) is flat over a range of output. What does this indicate about returns to scale?

Accepted Answer

The firm is experiencing constant returns to scale.

Question 13

If existing firms in a perfectly competitive market are earning above-normal profits, what will happen in the long run?

Accepted Answer

New firms will enter, increasing market supply and lowering the market price.

Question 14

Which of the following is NOT a characteristic of perfect competition?

Accepted Answer

Firms can influence the market price.

Question 15

A firm’s marginal cost (MC) curve above the average variable cost (AVC) curve represents:

Accepted Answer

The firm’s short-run supply curve.

Question 16

If the price of good X increases, what happens to the consumer’s budget constraint?

Accepted Answer

The budget constraint pivots inward, reducing the maximum quantity of X that can be purchased.

Question 17

Which formula correctly expresses Marginal Cost (MC)?

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta Q}$$

Question 18

A firm’s objective function is to:

Accepted Answer

Maximize profit, which is total revenue minus total cost.

Question 19

If a firm is operating at the minimum point of its long-run average cost curve (LRAC), what is this point called?

Accepted Answer

Minimum Efficient Scale (MES)

Question 20

Which of the following best explains why the demand curve slopes downward?

Accepted Answer

The substitution and income effects both lead consumers to buy more as price falls.

Microeconomics Study Guide: Consumer Choice, Production, Costs, and Perfect Competition

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