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Questions and Answers

What happens to total revenue when the price of a good with inelastic demand is increased?

  • Total revenue increases. (correct)
  • Total revenue decreases significantly.
  • Total revenue remains unchanged.
  • Total revenue becomes negative.

    • If the price elasticity of demand (PED) for a product is exactly 1, what pricing strategy should a firm adopt?

  • Decrease the price.
  • Increase the price.
  • Maintain the current price. (correct)
  • Reduce production costs.

    • Which type of goods would typically have a negative income elasticity of demand (YED)?

  • Normal goods
  • Luxury goods
  • Complementary goods
  • Inferior goods (correct)

    • What does a positive cross-price elasticity of demand (XED) indicate about two goods?

    <p>They are perfect substitutes.</p> Signup and view all the answers

    When calculating the price elasticity of supply (PES), which of the following factors does NOT influence it?

    <p>Consumer income levels.</p> Signup and view all the answers

    At what point does the marginal cost (MC) curve intersect the average cost (AC) curve?

    <p>At the minimum average cost</p> Signup and view all the answers

    What does the law of diminishing marginal utility state?

    <p>Additional units of a good provide less additional satisfaction.</p> Signup and view all the answers

    If the long run average cost (LRAC) curve is downward sloping, what does it indicate about production?

    <p>Increasing returns to scale are present.</p> Signup and view all the answers

    What would be the effect on total revenue if a firm decreases the price of a good with elastic demand?

    <p>Total revenue increases.</p> Signup and view all the answers

    Which of the following statements is true regarding sunk costs?

    <p>They are irrelevant to current decision-making.</p> Signup and view all the answers

    What is the result of a rightward shift in the supply curve while the demand remains unchanged?

    <p>Lower equilibrium price and higher quantity</p> Signup and view all the answers

    Which of the following best describes consumer surplus?

    <p>The difference between what consumers are willing to pay and what they actually pay</p> Signup and view all the answers

    What happens to the market equilibrium when both demand and supply decrease simultaneously?

    <p>The price is ambiguous while quantity decreases</p> Signup and view all the answers

    Which statement correctly describes a price ceiling?

    <p>It prevents the price from rising above a certain level</p> Signup and view all the answers

    What effect does an increase in price elasticity of demand have on consumer responsiveness?

    <p>Consumers become more responsive to price changes</p> Signup and view all the answers

    What outcome is likely when there is a binding price floor in a market?

    <p>A surplus arises in the market</p> Signup and view all the answers

    What role does deadweight loss play in market inefficiencies?

    <p>It quantifies the loss of economic efficiency when supply and demand are not in balance</p> Signup and view all the answers

    How does movement along the demand curve differ from a shift in the demand curve?

    <p>Movement along is caused by price changes, while shifts are due to other factors</p> Signup and view all the answers

    In perfect competition, firms are typically described as price:

    <p>Takers, since they sell homogenous products</p> Signup and view all the answers

    Which of the following concepts does NOT contribute to a monopolistic market structure?

    <p>Many close substitutes available for the product</p> Signup and view all the answers

    What characterizes the price and quantity decisions of a monopolist compared to a perfectly competitive firm?

    <p>Monopolists charge a higher price and produce a smaller quantity.</p> Signup and view all the answers

    What role does price discrimination play for a monopolist?

    <p>It enables different prices for different consumer groups for the same good.</p> Signup and view all the answers

    In oligopoly theory, what is the significance of the Nash equilibrium?

    <p>It denotes a situation where no player has an incentive to deviate from their chosen strategy.</p> Signup and view all the answers

    What condition describes the profit-maximizing level of output for a monopolist?

    <p>MR = MC</p> Signup and view all the answers

    Under perfect competition, what happens to firms in the short run if the price falls below the minimum of average variable cost (AVC)?

    <p>They shut down temporarily.</p> Signup and view all the answers

    What is a characteristic feature of tacit collusion in oligopoly?

    <p>It can be maintained via informal understandings.</p> Signup and view all the answers

    How can firms in an oligopoly escape the prisoner's dilemma?

    <p>By differentiating their products sufficiently or initiating cooperative behavior.</p> Signup and view all the answers

    In a perfectly competitive market, what determines the market price?

    <p>The aggregate demand and aggregate supply in the market.</p> Signup and view all the answers

    For firms in the long run under perfect competition, what is the condition for breaking even?

    <p>P = MR = AC</p> Signup and view all the answers

    What strategy is employed in sequential games to determine optimal actions?

    <p>Backward induction to analyze the best responses.</p> Signup and view all the answers

    Which statement is true regarding the demand curve facing a monopolist?

    <p>It is downward sloping.</p> Signup and view all the answers

    How does the demand curve typically behave for a monopolist?

    <p>It slopes downward, demonstrating that more must be sold at lower prices.</p> Signup and view all the answers

    What distinguishes the HHI as a measure of market concentration in oligopoly?

    <p>It calculates the sum of the squares of market shares of all firms.</p> Signup and view all the answers

    What is true about marginal revenue for a perfectly competitive firm?

    <p>MR is equal to price.</p> Signup and view all the answers

    What is the primary difference between cooperative and non-cooperative behavior in oligopolies?

    <p>Cooperative behavior allows firms to collude, while non-cooperative leads to individual strategies.</p> Signup and view all the answers

    When will a firm in a competitive market be most likely to shut down in the long run?

    <p>P &lt; AC</p> Signup and view all the answers

    If a monopolist increases the price of their product, what impact will it have on the quantity sold?

    <p>Quantity sold will decrease.</p> Signup and view all the answers

    What is a potential outcome when firms in an oligopoly engage in tacit collusion?

    <p>Stable prices and reduced competition among rivals.</p> Signup and view all the answers

    What is the relationship between average total cost (ATC) and price (P) for a firm in long-run equilibrium in perfect competition?

    <p>Price will equal ATC.</p> Signup and view all the answers

    What signals to new firms to enter a perfectly competitive market?

    <p>High prices that exceed average cost.</p> Signup and view all the answers

    Study Notes

    Microeconomics Review

    • The review covers topics including supply, demand, market, elasticities, costs, consumer theory, profit maximization, perfect competition, monopoly, and oligopoly/game theory.
    • Detailed analysis of the supply, demand, and market model will be covered in this review along with elasticities, consumer and producer surplus, price floors/ceilings.
    • Short-run and long-run firm and industry analysis is included.
    • Complete examination of cost concepts, such as marginal cost (MC), average cost (AC), fixed cost (FC), and average variable cost (AVC).
    • Discussion about diminishing returns , increasing MC, and increasing returns to scale.
    • Consumer theory, including total utility, marginal utility, the law of diminishing marginal utility, indifference curves, budget constraints, and optimal choices.
    • Profit maximization, including the relationship between total revenue, total cost, and profit; the role of marginal revenue (MR) and marginal cost (MC), and the differences in profit maximizing output for firms in perfect competition and monopoly.
    • Firm behavior models for perfect competition, including firms as price takers, market equilibrium, short and long run shutdown points.
    • Monopoly, including barriers to entry, demand and marginal revenue curves, optimal output and price determination
    • Oligopoly and game theory, including imperfect competition, non-cooperative behavior/prisoner dilemma/Nash equilibrium, cooperative behavior, tacit collusion/price leadership/cartels, escaping prisoner's dilemma, and strategic behavior by firms in oligopoly.
    • Relevant diagrams and graphs to illustrate concepts.
    • Additional resources for further study are noted.

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