Microeconomics Practice Exam — LearnCoachAssist

Question 1 Microeconomics

What is a mixed strategy?

Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers. A mixed strategy involves randomizing over possible actions according to specific probabilities, used when no pure strategy Nash equilibrium exists. The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa. In the short run, the firm's supply curve is the portion of the MC curve above the AVC curve.

Question 2 Microeconomics

What is the tragedy of the commons?

Accounting profit = TR − explicit costs. Economic profit = TR − explicit costs − implicit costs. Zero economic profit means the firm earns a normal return. The tragedy of the commons occurs when individuals overuse a shared resource because they do not bear the full cost, leading to depletion. Diseconomies of scale occur when long-run average total cost increases as output increases, often due to coordination problems and bureaucracy. The law of supply states that, ceteris paribus, as the price of a good increases, the quantity supplied increases, and vice versa.

Question 3 Microeconomics

What is an indifference curve?

In long-run equilibrium, firms earn zero economic profit because P = MC = minimum ATC and there is no incentive for entry or exit. An indifference curve shows all combinations of two goods that give a consumer the same level of utility. A public good is both non-excludable (cannot prevent people from using it) and non-rivalrous (one person's use does not reduce availability). Example: national defense. Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market.

Question 4 Microeconomics

What is marginal utility?

Marginal utility is the additional satisfaction a consumer receives from consuming one more unit of a good. A Nash equilibrium is a set of strategies where no player can improve their payoff by unilaterally changing their strategy. The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets. A Pigovian subsidy is a payment equal to the external benefit per unit, designed to internalize a positive externality and increase output to the socially optimal level.

Question 5 Microeconomics

What is the Coase Theorem?

Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary). it equals the slope of the indifference curve. A game where two players acting in their own self-interest reach an outcome that is worse for both than if they had cooperated. The Coase Theorem states that if property rights are well-defined and transaction costs are low, private bargaining can resolve externalities efficiently regardless of initial allocation.

Question 6 Microeconomics

What factors affect price elasticity of demand?

A utility function assigns a numerical value to consumption bundles to represent a consumer's preferences. Key factors include availability of substitutes, necessity vs. luxury, proportion of income spent, and time horizon. Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary). It shows why firms in an oligopoly have an incentive to cheat on collusive agreements — individual profit maximization leads to a Nash equilibrium inferior to joint profit maximization.

Question 7 Microeconomics

What is the total cost formula?

TC = FC + VC, where FC is fixed cost and VC is variable cost. In the long run, all costs are variable. A Giffen good is an inferior good where the income effect dominates the substitution effect, so quantity demanded increases when its price rises. Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers. The substitution effect is the change in quantity demanded due to a relative price change, holding utility constant (consumer substitutes toward the cheaper good).

Question 8 Microeconomics

What is the law of diminishing marginal utility?

Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price. if set above equilibrium, it causes a surplus. Example: minimum wage. As a consumer consumes more of a good, the marginal utility from each additional unit decreases, holding consumption of other goods constant. A market with many firms selling differentiated products, free entry and exit, and some degree of market power due to product differentiation.

Question 9 Microeconomics

What is a club good?

Productive efficiency occurs when a firm produces at the minimum of its ATC curve, using the least resources for a given output. quantity demanded does not change regardless of price. The demand curve is vertical. A club good is excludable but non-rivalrous (up to a point). Example: cable TV, toll roads with low congestion. The firm must have market power, be able to identify different groups with different elasticities, and prevent resale (arbitrage) between groups.

Question 10 Microeconomics

What is a Pigovian subsidy?

A Pigovian subsidy is a payment equal to the external benefit per unit, designed to internalize a positive externality and increase output to the socially optimal level. PED = (Q₂ − Q₁)/[(Q₂ + Q₁)/2] ÷ (P₂ − P₁)/[(P₂ + P₁)/2]. It gives the same result regardless of the direction of change. Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers. Economic profit = Total revenue − Total costs (explicit + implicit). It differs from accounting profit, which ignores implicit costs.

Question 11 Microeconomics

What are explicit costs vs. implicit costs?

Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary). Deadweight loss is the reduction in total surplus that results from a market distortion such as a tax, price control, or monopoly pricing. negative XED indicates complementary goods. A cartel is a group of firms that collude to restrict output and raise prices, acting like a monopoly. Example: OPEC.

Question 12 Microeconomics

What is consumer surplus?

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, represented by the area below the demand curve and above the price. A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms due to economies of scale. A game played multiple times, which can sustain cooperation through strategies like tit-for-tat because players consider future payoffs. AVC.

Question 13 Microeconomics

What is game theory?

Game theory is the study of strategic decision-making where the outcome for each participant depends on the actions of all participants. With positive externalities, the social benefit exceeds the private benefit, so the market produces less than the socially optimal quantity. A game where two players acting in their own self-interest reach an outcome that is worse for both than if they had cooperated. As more of a variable input is added to a fixed input, the marginal product of the variable input eventually decreases.

Question 14 Microeconomics

What is the free-rider problem?

Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs. The Lerner Index measures market power: L = (P − MC) / P. It ranges from 0 (perfect competition) to 1. Higher values mean more market power. Because the monopolist must lower the price on all units to sell one more unit, so MR falls faster than the demand curve. The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets.

Question 15 Microeconomics

What is marginal revenue?

It measures the responsiveness of quantity supplied to a price change: PES = % change in Qs / % change in P. Producer surplus is the difference between the market price and the minimum price producers are willing to accept, represented by the area above the supply curve and below the price. Marginal revenue (MR) is the additional revenue from selling one more unit: MR = ΔTR / ΔQ. Demand is elastic: quantity demanded changes by a larger percentage than the price change. Consumers are highly responsive to price.

Question 16 Microeconomics

What is backward induction?

it equals the slope of the indifference curve. if set below equilibrium, it causes a shortage. As a consumer consumes more of a good, the marginal utility from each additional unit decreases, holding consumption of other goods constant. Backward induction solves sequential games by starting at the final decision nodes and working backward to determine the optimal strategy at each stage.

Question 17 Microeconomics

What is a utility function?

PED = (Q₂ − Q₁)/[(Q₂ + Q₁)/2] ÷ (P₂ − P₁)/[(P₂ + P₁)/2]. It gives the same result regardless of the direction of change. A utility function assigns a numerical value to consumption bundles to represent a consumer's preferences. The law of supply states that, ceteris paribus, as the price of a good increases, the quantity supplied increases, and vice versa. The substitution effect is the change in quantity demanded due to a relative price change, holding utility constant (consumer substitutes toward the cheaper good).

Question 18 Microeconomics

What is third-degree price discrimination?

Third-degree price discrimination charges different prices to different market segments (e.g., student discounts, senior pricing) based on identifiable characteristics. Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs. Productive efficiency occurs when a firm produces at the minimum of its ATC curve, using the least resources for a given output. an increase in the price of one leads to a decrease in demand for the other (negative cross-price elasticity).

Question 19 Microeconomics

What is a Nash equilibrium?

Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs. PED measures the responsiveness of quantity demanded to a change in price: PED = % change in Qd / % change in P. In the short run, at least one input is fixed. In the long run, all inputs are variable and firms can enter or exit the market. A Nash equilibrium is a set of strategies where no player can improve their payoff by unilaterally changing their strategy.

Question 20 Microeconomics

What is the budget constraint?

The budget constraint shows all combinations of goods a consumer can afford given their income and the prices of goods: P₁Q₁ + P₂Q₂ = Income. PED measures the responsiveness of quantity demanded to a change in price: PED = % change in Qd / % change in P. Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary). Producer surplus is the difference between the market price and the minimum price producers are willing to accept, represented by the area above the supply curve and below the price.

Question 21 Microeconomics

What is the concept of opportunity cost?

Opportunity cost is the value of the next best alternative forgone when a choice is made. It is central to economic decision-making. The firm must have market power, be able to identify different groups with different elasticities, and prevent resale (arbitrage) between groups. It measures the responsiveness of quantity supplied to a price change: PES = % change in Qs / % change in P. Key factors include availability of substitutes, necessity vs. luxury, proportion of income spent, and time horizon.

Question 22 Microeconomics

What is the marginal rate of substitution (MRS)?The MRS is the rate at which a consumer is willing to trade one good for another while maintaining the same utility level

it equals the slope of the indifference curve. TC = FC + VC, where FC is fixed cost and VC is variable cost. In the long run, all costs are variable. A monopoly is a market structure with a single seller, no close substitutes, and significant barriers to entry. YED measures the responsiveness of quantity demanded to a change in income: YED = % change in Qd / % change in income.

Question 23 Microeconomics

What is the income effect?

The consumer's optimum is where the budget constraint is tangent to the highest indifference curve, meaning MRS = P₁/P₂. Factors such as changes in income, tastes, prices of related goods, expectations, and the number of buyers shift the demand curve. The income effect is the change in quantity demanded due to a change in purchasing power caused by a price change. Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market.

Question 24 Microeconomics

What is income elasticity of demand (YED)?

With positive externalities, the social benefit exceeds the private benefit, so the market produces less than the socially optimal quantity. YED measures the responsiveness of quantity demanded to a change in income: YED = % change in Qd / % change in income. Marginal cost (MC) is the additional cost of producing one more unit: MC = ΔTC / ΔQ. Productive efficiency occurs when a firm produces at the minimum of its ATC curve, using the least resources for a given output.

Question 25 Microeconomics

What is allocative efficiency?

Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market. The market demand curve is the horizontal summation of all individual consumers' demand curves at each price level. it equals the slope of the indifference curve. Demand is inelastic: quantity demanded changes by a smaller percentage than the price change. Consumers are less responsive to price.

Question 26 Microeconomics

What is perfectly elastic demand?Perfectly elastic demand means `PED = ∞`

Productive efficiency occurs when a firm produces at the minimum of its ATC curve, using the least resources for a given output. any price increase causes quantity demanded to drop to zero. The demand curve is horizontal. Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs. Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers.

Question 27 Microeconomics

What is the substitution effect?

Third-degree price discrimination charges different prices to different market segments (e.g., student discounts, senior pricing) based on identifiable characteristics. The substitution effect is the change in quantity demanded due to a relative price change, holding utility constant (consumer substitutes toward the cheaper good). Marginal utility is the additional satisfaction a consumer receives from consuming one more unit of a good. Monopoly deadweight loss arises because the monopolist produces less than the socially efficient quantity, reducing total surplus compared to perfect competition.

Question 28 Microeconomics

What is the difference between accounting profit and economic profit?

Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price. A club good is excludable but non-rivalrous (up to a point). Example: cable TV, toll roads with low congestion. 0). Examples: instant noodles, bus travel. Accounting profit = TR − explicit costs. Economic profit = TR − explicit costs − implicit costs. Zero economic profit means the firm earns a normal return.

Question 29 Microeconomics

What is price elasticity of demand (PED)?

PED measures the responsiveness of quantity demanded to a change in price: PED = % change in Qd / % change in P. Deadweight loss is the reduction in total surplus that results from a market distortion such as a tax, price control, or monopoly pricing. A dominant strategy is one that yields the best payoff for a player regardless of what the other players do. Second-degree price discrimination charges different prices based on quantity consumed or product version. Examples: bulk discounts, tiered pricing.

Question 30 Microeconomics

What is total revenue and how does elasticity affect it?

TR = P × Q. If demand is elastic, a price decrease increases TR. If demand is inelastic, a price decrease decreases TR. An indifference curve shows all combinations of two goods that give a consumer the same level of utility. A positive externality occurs when a third party benefits from a transaction they are not part of. Example: education, vaccinations. It measures how the quantity demanded of one good responds to a price change in another: XED = % change in Qd of good A / % change in P of good B.

Question 31 Microeconomics

What is the short run vs. the long run in production?

As a consumer consumes more of a good, the marginal utility from each additional unit decreases, holding consumption of other goods constant. It measures how the quantity demanded of one good responds to a price change in another: XED = % change in Qd of good A / % change in P of good B. In the short run, at least one input is fixed. In the long run, all inputs are variable and firms can enter or exit the market. A common resource is rivalrous but non-excludable, leading to overuse. Example: fish in the ocean.

Question 32 Microeconomics

Why is marginal revenue less than price for a monopolist?

In the short run, at least one input is fixed. In the long run, all inputs are variable and firms can enter or exit the market. The Lerner Index measures market power: L = (P − MC) / P. It ranges from 0 (perfect competition) to 1. Higher values mean more market power. Because the monopolist must lower the price on all units to sell one more unit, so MR falls faster than the demand curve. A monopoly is a market structure with a single seller, no close substitutes, and significant barriers to entry.

Question 33 Microeconomics

What is the long-run outcome in monopolistic competition?

Firms earn zero economic profit in the long run, but produce at a quantity less than minimum ATC, resulting in excess capacity. Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs. Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price. Opportunity cost is the value of the next best alternative forgone when a choice is made. It is central to economic decision-making.

Question 34 Microeconomics

What is the consumer's optimal choice?

The substitution effect is the change in quantity demanded due to a relative price change, holding utility constant (consumer substitutes toward the cheaper good). The consumer's optimum is where the budget constraint is tangent to the highest indifference curve, meaning MRS = P₁/P₂. Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market. The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets.

Question 35 Microeconomics

What is the profit-maximizing rule for a firm?

A monopolist maximizes profit at MR = MC and then charges the price on the demand curve corresponding to that quantity. A utility function assigns a numerical value to consumption bundles to represent a consumer's preferences. A firm maximizes profit where marginal revenue (MR) equals marginal cost (MC), i.e., MR = MC. The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets.

Question 36 Microeconomics

What is a price ceiling?A price ceiling is a government-imposed maximum price that can be charged for a good

each firm considers rivals' reactions. non-credible threats are ignored in equilibrium analysis. 0 (demand rises with income); inferior goods have YED < 0 (demand falls with income). Luxury goods have YED > 1. if set below equilibrium, it causes a shortage.

Question 37 Microeconomics

What does it mean if PED < 1?

non-credible threats are ignored in equilibrium analysis. an increase in the price of one leads to a decrease in demand for the other (negative cross-price elasticity). Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary). Demand is inelastic: quantity demanded changes by a smaller percentage than the price change. Consumers are less responsive to price.

Question 38 Microeconomics

What is first-degree price discrimination?

Third-degree price discrimination charges different prices to different market segments (e.g., student discounts, senior pricing) based on identifiable characteristics. First-degree (perfect) price discrimination charges each consumer their maximum willingness to pay, capturing all consumer surplus as profit. Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price. Deadweight loss is the reduction in total surplus that results from a market distortion such as a tax, price control, or monopoly pricing.

Question 39 Microeconomics

What is the law of demand?

The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa. Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market. analyzed using a game tree and solved by backward induction. A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms due to economies of scale.

Question 40 Microeconomics

What is a price floor?A price floor is a government-imposed minimum price

A game played multiple times, which can sustain cooperation through strategies like tit-for-tat because players consider future payoffs. non-credible threats are ignored in equilibrium analysis. The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa. if set above equilibrium, it causes a surplus. Example: minimum wage.

Question 41 Microeconomics

What is a Giffen good?

0). Most goods are normal goods. Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers. A cartel is a group of firms that collude to restrict output and raise prices, acting like a monopoly. Example: OPEC. A Giffen good is an inferior good where the income effect dominates the substitution effect, so quantity demanded increases when its price rises.

Question 42 Microeconomics

What is economic profit?

YED measures the responsiveness of quantity demanded to a change in income: YED = % change in Qd / % change in income. The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets. A monopoly is a market structure with a single seller, no close substitutes, and significant barriers to entry. Economic profit = Total revenue − Total costs (explicit + implicit). It differs from accounting profit, which ignores implicit costs.

Question 43 Microeconomics

What does it mean if PED > 1?

Demand is elastic: quantity demanded changes by a larger percentage than the price change. Consumers are highly responsive to price. Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price. YED measures the responsiveness of quantity demanded to a change in income: YED = % change in Qd / % change in income. analyzed using a game tree and solved by backward induction.

Question 44 Microeconomics

What is an inferior good?An inferior good is a good for which demand decreases as consumer income rises (YED <

0). Examples: instant noodles, bus travel. The Coase Theorem states that if property rights are well-defined and transaction costs are low, private bargaining can resolve externalities efficiently regardless of initial allocation. A Nash equilibrium is a set of strategies where no player can improve their payoff by unilaterally changing their strategy. negative XED indicates complementary goods.

Question 45 Microeconomics

What is the marginal product of labor?

Producer surplus is the difference between the market price and the minimum price producers are willing to accept, represented by the area above the supply curve and below the price. The marginal product of labor (MPL) is the additional output produced by one more unit of labor: MPL = ΔQ / ΔL. An indifference curve shows all combinations of two goods that give a consumer the same level of utility. It shows why firms in an oligopoly have an incentive to cheat on collusive agreements — individual profit maximization leads to a Nash equilibrium inferior to joint profit maximization.

Question 46 Microeconomics

What is a negative externality?

each firm considers rivals' reactions. A negative externality occurs when a third party bears costs from a transaction they are not part of. Example: pollution from a factory. The HHI measures market concentration by summing the squares of each firm's market share: HHI = Σ(sᵢ)². Higher HHI indicates less competition. Key factors include availability of substitutes, necessity vs. luxury, proportion of income spent, and time horizon.

Question 47 Microeconomics

What causes a shift in the demand curve?

A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms due to economies of scale. With positive externalities, the social benefit exceeds the private benefit, so the market produces less than the socially optimal quantity. Factors such as changes in income, tastes, prices of related goods, expectations, and the number of buyers shift the demand curve. Monopoly deadweight loss arises because the monopolist produces less than the socially efficient quantity, reducing total surplus compared to perfect competition.

Question 48 Microeconomics

How do you classify goods using income elasticity?Normal goods have YED >

Factors such as changes in input prices, technology, expectations, number of sellers, and government policies shift the supply curve. 0 (demand rises with income); inferior goods have YED < 0 (demand falls with income). Luxury goods have YED > 1. The income effect is the change in quantity demanded due to a change in purchasing power caused by a price change. Game theory is the study of strategic decision-making where the outcome for each participant depends on the actions of all participants.

Question 49 Microeconomics

What is the supply curve of a perfectly competitive firm?

In the short run, the firm's supply curve is the portion of the MC curve above the AVC curve. Factors such as changes in input prices, technology, expectations, number of sellers, and government policies shift the supply curve. A common resource is rivalrous but non-excludable, leading to overuse. Example: fish in the ocean. A public good is both non-excludable (cannot prevent people from using it) and non-rivalrous (one person's use does not reduce availability). Example: national defense.

Question 50 Microeconomics

What is the Lerner Index?

The Lerner Index measures market power: L = (P − MC) / P. It ranges from 0 (perfect competition) to 1. Higher values mean more market power. Backward induction solves sequential games by starting at the final decision nodes and working backward to determine the optimal strategy at each stage. Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market. The consumer's optimum is where the budget constraint is tangent to the highest indifference curve, meaning MRS = P₁/P₂.