Question 1

Suppose a firm uses labor (L) and capital (K) to produce output. The wage rate is $$w$$ and the rental rate of capital is $$r. If $$the marginal product of labor is $$MPL$$ and the marginal product of capital is $$MPK$$, which condition must hold for the firm to minimize the cost of producing a given level of output in the long run?

Accepted Answer

$$\frac{MPL}{MPK} = \frac{w}{r}$$

Question 2

A firm faces the following total cost function in the short run: $$TC = 100 + 5Q + Q^2$, where Q$ is output. What is the marginal cost (MC) function?

Accepted Answer

$$MC = 5 + 2Q$$

Question 3

Which of the following best describes economies of scale?

Accepted Answer

Long-run average cost decreases as output increases.

Question 4

A firm produces two products, A and B. The cost of producing 100 units of A and 100 units of B together is $$C(100,100) = 1500. $$The cost of producing 100 units of A alone is $$C(100,0) = 900$$, and the cost of producing 100 units of B alone is $$C(0,100) = 800. $$What is the degree of economies of scope?

Accepted Answer

$$\frac{C(100,0) + C(0,100) - C(100,100)}{C(100,100)} = \frac{900 + 800 - 1500}{1500} = 0.13$$

Question 5

In a perfectly competitive market, which of the following is true about the demand curve facing an individual firm?

Accepted Answer

It is perfectly elastic at the market price.

Question 6

Suppose the market price is $$P = 20$$, and a competitive firm’s average variable cost at its profit-maximizing output is $$AVC = 18$$, while average total cost is $$ATC = 25. $$What should the firm do in the short run?

Accepted Answer

Continue producing, even though it is making a loss.

Question 7

If a government imposes a price ceiling below the equilibrium price in a competitive market, which of the following is most likely to occur?

Accepted Answer

A shortage, because quantity demanded exceeds quantity supplied.

Question 8

Which of the following best explains the concept of deadweight loss resulting from a tax imposed on a competitive market?

Accepted Answer

It is the reduction in total surplus that results because the tax discourages mutually beneficial trades.

Question 9

Suppose the supply of a good is perfectly inelastic and the government imposes a per-unit tax. Who bears the entire burden of the tax?

Accepted Answer

Producers bear the entire burden.

Question 10

A firm’s long-run average cost curve is U-shaped. Which of the following best explains the downward-sloping portion of this curve?

Accepted Answer

Economies of scale, where increasing output lowers average cost.

Question 11

If a competitive firm’s marginal cost is below the market price, what should the firm do to maximize profit?

Accepted Answer

Increase output until marginal cost equals price.

Question 12

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Firms can influence the market price.

Question 13

Suppose the government introduces a production quota that is below the competitive equilibrium quantity. What is the most likely effect on total surplus?

Accepted Answer

Total surplus decreases due to deadweight loss.

Question 14

If the cost-output elasticity $$E_C is $$less than 1, what does this imply about the firm’s cost structure?

Accepted Answer

The firm experiences economies of scale.

Question 15

A country imposes an import tariff on a good. Which of the following is a likely effect?

Accepted Answer

Domestic producers gain, consumers lose, and there is deadweight loss.

Question 16

If a firm’s expansion path is a straight line through the origin in the $$L$$-$$K$$ space, what does this imply about the production technology?

Accepted Answer

The firm uses labor and capital in fixed proportions as output increases.

Question 17

Which of the following statements about the long-run supply curve for a constant-cost industry is correct?

Accepted Answer

It is perfectly elastic at the minimum long-run average cost.

Question 18

Suppose a government provides a per-unit subsidy to producers in a competitive market. What is the likely effect on equilibrium price and quantity?

Accepted Answer

Equilibrium price decreases and equilibrium quantity increases.

Question 19

If a firm experiences diseconomies of scope, which of the following is true?

Accepted Answer

The cost of producing two outputs together is greater than producing them separately.

Microeconomics Study Notes: Cost of Production, Profit Maximization, and Competitive Markets

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