Q: A perfectly competitive firm faces a market price of $$10. Its average total cost at the profit-maximizing output of 100 units is 8. $$What is the firm's economic profit? $$Economic\ Profit = (P - ATC) \times Q$$

$$Economic\ Profit = (10 - 8) \times 100 = 200$$

Question 1

Which of the following best describes a common resource, and why does it tend to be overused in the absence of regulation?

Accepted Answer

It is rival and non-excludable; it tends to be overused because individuals do not account for the external cost imposed on others.

Question 2

Suppose a city park is open to all residents without charge, and its use by one person reduces the enjoyment for others due to crowding. Which type of good is the park, and what economic problem may arise?

Accepted Answer

It is a common resource; the problem is overuse, known as the tragedy of the commons.

Question 3

A firm has total fixed costs of $$100 and total variable costs of 300 $$when producing 50 units. What is the average total cost (ATC)?

$$ATC = \frac{TC}{Q}$$

Accepted Answer

$$ATC = \frac{100 + 300}{50} = 8$$

Question 4

Which of the following statements about the marginal product (MP) and average product (AP) of labor is correct?

Accepted Answer

MP intersects AP at the maximum point of AP.

Question 5

A perfectly competitive firm faces a market price of $$10. Its average total cost at the profit-maximizing output of 100 units is 8. $$What is the firm's economic profit?

$$Economic\ Profit = (P - ATC) 	imes Q$$

Accepted Answer

$$Economic\ Profit = (10 - 8) 	imes 100 = 200$$

Question 6

In the short run, a perfectly competitive firm will continue to produce as long as:

Accepted Answer

$$P \geq AVC$$

Question 7

Which of the following is true about the relationship between marginal cost (MC), average total cost (ATC), and average variable cost (AVC)?

Accepted Answer

MC intersects ATC and AVC at their minimum points.

Question 8

A monopolist faces the following linear demand curve: $$P = 100 - 2Q. $$What is the marginal revenue (MR) curve?

Accepted Answer

$$MR = 100 - 4Q$$

Question 9

Why does a monopoly create deadweight loss relative to perfect competition?

Accepted Answer

Because the monopoly price exceeds marginal cost, resulting in less output and higher price than the competitive outcome.

Question 10

A natural monopoly is most likely to occur in which of the following industries?

Accepted Answer

Electricity distribution

Question 11

If a regulator sets price equal to marginal cost ($$P = MC) $$for a natural monopoly, what is a likely outcome?

Accepted Answer

The firm may incur losses and require a subsidy.

Question 12

Which of the following is an example of price discrimination by a monopolist?

Accepted Answer

Charging different prices to different consumers for the same good, not based on cost differences.

Question 13

A firm’s total revenue is $$500, explicit costs are 300$$, and implicit costs are $$100. What is the firm’s economic profit?

$$Economic\ Profit = Total\ Revenue - (Explicit\ Cost + Implicit\ Cost)$

Accepted Answer

$$Economic\ Profit = 500 - (300 + 100) = 100$$

Question 14

Which of the following best explains why public goods are underprovided by private markets?

Accepted Answer

Because exclusion is difficult and free riding leads to underprovision.

Question 15

Suppose a perfectly competitive firm faces $$P = 20$$, $$ATC = 25$$, and $$AVC = 15 at $$its profit-maximizing output. What should the firm do in the short run?

Accepted Answer

Continue operating because price covers average variable cost, even though it incurs a loss.

Question 16

Which of the following is true about long-run equilibrium in a perfectly competitive market?

Accepted Answer

Firms earn zero economic profit because free entry and exit drive profit to zero.

Question 17

A monopolist’s average total cost at the profit-maximizing output is $$30$$, and the price charged is $$50. If $$the monopolist sells $$200$$ units, what is its economic profit?

$$Economic\ Profit = (P^* - ATC^*) 	imes Q^*$$

Accepted Answer

$$Economic\ Profit = (50 - 30) 	imes 200 = 4000$$

Question 18

Which of the following is a key difference between a perfectly competitive firm and a monopolist?

Accepted Answer

A perfectly competitive firm is a price taker, while a monopolist is a price maker.

Question 19

If a firm’s marginal product of labor is decreasing as more workers are hired, which law is being illustrated?

Accepted Answer

Law of diminishing marginal product

Question 20

Which of the following best describes a two-part tariff, and why might it be used by a natural monopoly?

Accepted Answer

A fixed fee plus a per-unit price; it helps cover fixed costs while keeping the per-unit price closer to marginal cost.

Microeconomics Study Notes: Public Goods, Production & Cost, Perfect Competition, and Monopoly

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