Question 1

Suppose a consumer's utility-maximizing bundle changes from 4 units of good X and 6 units of good Y to 6 units of good X and 4 units of good Y after the price of good X falls. Which curve best illustrates the path of these optimal choices as the price of X changes?

Accepted Answer

The price consumption curve

Question 2

If the price of a normal good decreases, which of the following best describes the combined effect on quantity demanded?

Accepted Answer

Both the income and substitution effects increase quantity demanded

Question 3

A Giffen good is characterized by which of the following?

Accepted Answer

The income effect is negative and larger than the substitution effect

Question 4

Suppose the demand for a product is given by $$Q = 100 - 2P. If $$the price increases from $$P = 20 to$$ $$P = 25$$, what is the change in total expenditure on the product?

Accepted Answer

Total expenditure decreases by $$90$$

Question 5

Which of the following best describes the bandwagon effect in the context of network externalities?

Accepted Answer

A consumer's demand for a good increases as more people buy it

Question 6

A firm’s production function is $$Q = L$$^{0.5}$$K^{0.5}. If $$both labor ($$L) $$and capital ($$K) $$are doubled, what happens to output ($$Q$)?

Accepted Answer

Output exactly doubles (constant returns to scale)

Question 7

If a firm experiences diminishing marginal returns to labor, which of the following is true about marginal cost ($$MC$$)?

Accepted Answer

$$MC$$ increases as output increases

Question 8

Suppose a firm’s marginal product of labor ($$MPL) is 10 $$and the wage rate ($$w) is$$ $$20. What is the marginal cost (MC$) of producing one more unit of output?

Accepted Answer

$$MC = 2$$

Question 9

Which of the following statements about sunk costs is correct?

Accepted Answer

Sunk costs should not affect current economic decisions

Question 10

A firm’s average total cost ($$ATC) is $$minimized when:

Accepted Answer

$$MC = ATC$$

Question 11

If the market demand for a good is the horizontal sum of two individual demand curves, $$Q_1 = 50 - P$ and Q_2$ = 30 - 2P$$, what is the market demand curve?

Accepted Answer

$$Q = 80 - 3P$$

Question 12

Which of the following best describes the marginal rate of technical substitution (MRTS) between labor ($$L) $$and capital ($$K$$)?

Accepted Answer

The rate at which a firm can substitute labor for capital while keeping output constant

Question 13

If a good is inferior, what is the slope of its Engel curve?

Accepted Answer

Downward sloping

Question 14

Which of the following is true about the law of diminishing marginal returns?

Accepted Answer

It states that adding more of a variable input to fixed inputs will eventually decrease the marginal product of the variable input

Question 15

A firm’s short-run cost function is $$C(q) = 100 + 5q + 2q^2$. What is the marginal cost (MC$) when q = 10$?

Accepted Answer

$$MC = 25$$

Question 16

If a production process uses fixed proportions of inputs, which of the following best describes the isoquants?

Accepted Answer

Isoquants are L-shaped

Question 17

Which of the following is an example of a negative network externality?

Accepted Answer

The snob effect

Question 18

If a firm’s average variable cost ($$AVC) is$$ $$10$$ and average fixed cost ($$AFC) is$$ $$5 at a $$certain output, what is the average total cost ($$ATC$$)?

Accepted Answer

$$ATC = 15$$

Question 19

Which of the following best explains why the lump sum principle holds?

Accepted Answer

A lump sum tax does not distort relative prices, so it does not create a substitution effect

Microeconomics Study Guide: Individual and Market Demand, Production, and Cost of Production

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