Question 1

Suppose a firm's long-run average cost (LRAC) curve is U-shaped. Which of the following best explains why LRAC decreases at first and then increases as output rises?

Accepted Answer

Because of economies of scale at low output levels and diseconomies of scale at high output levels.

Question 2

Given the long-run cost functions $$LRMC(q) = 20 + 2q$$ and $$LRAC(q) = \frac{169}{q} + 20 + q$$, what is the break-even price for the firm?

Accepted Answer

$$46$$

Question 3

In the short run, a firm's supply curve is the portion of its marginal cost (MC) curve that lies above which other cost curve?

Accepted Answer

Average variable cost (AVC)

Question 4

If the market price falls below the minimum of the average variable cost (AVC) curve in the short run, what should a profit-maximizing firm do?

Accepted Answer

Shut down and produce zero output

Question 5

A perfectly competitive firm faces a market price $$p = 46. $$Its marginal cost function is $$MC(q) = 20 + 2q. $$What quantity should the firm produce in the short run?

Accepted Answer

$$q = 13$$

Question 6

Which of the following statements about the long-run market supply curve in a perfectly competitive industry is correct?

Accepted Answer

It is horizontal at the break-even price because firms can freely enter and exit the market.

Question 7

Suppose a tax is imposed on consumers in a competitive market. What is the primary reason for the resulting deadweight loss?

Accepted Answer

Because the tax leads to under-transaction compared to the efficient quantity.

Question 8

A negative externality in production causes which of the following outcomes in a competitive market?

Accepted Answer

The equilibrium quantity exceeds the socially optimal quantity.

Question 9

If a government wants to correct a negative externality using a tax, what should the optimal unit tax be set equal to?

Accepted Answer

The marginal externality at the socially optimal quantity.

Question 10

Which of the following best describes the Coase Theorem?

Accepted Answer

As long as property rights are clearly specified and tradable, the allocation of rights does not affect the efficiency outcome.

Question 11

A price ceiling set below the equilibrium price will result in which of the following?

Accepted Answer

A shortage and deadweight loss due to under-transaction.

Question 12

Suppose the market demand is $$Q_d = 196 - 2p$$ and the short-run market supply is $$Q_s = 4p - 80$$ for $$p \geq 40. $$What is the short-run equilibrium price?

Accepted Answer

$$p = 46$$

Question 13

Which of the following is true about producer surplus (PS) in a perfectly competitive market?

Accepted Answer

PS is the area above the marginal cost curve and below the market price.

Question 14

If a subsidy is provided to consumers in a market with positive externalities, what is the likely effect on total surplus?

Accepted Answer

Total surplus will increase up to the socially optimal quantity, but may decrease if the subsidy is too large.

Question 15

Which of the following is NOT a property of a perfectly competitive market in the long run?

Accepted Answer

The market supply curve is vertical.

Question 16

A tariff imposed on imports will have which of the following effects?

Accepted Answer

It increases producer surplus but creates deadweight loss.

Question 17

If the marginal willingness to pay (MWTP) for the last unit of a good is less than the marginal cost (MC), what does this imply about the allocation of resources?

Accepted Answer

Too many resources are allocated to this good.

Question 18

Which of the following is a characteristic of a public good?

Accepted Answer

It is non-rival and non-excludable.

Question 19

If a firm’s short-run average cost (AC) curve is U-shaped, what explains the downward-sloping portion of the curve?

Accepted Answer

Spreading fixed costs over more units of output.

Microeconomics Study Guide: Costs, Supply, Surplus, and Externalities

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