CEA Microeconomic Principles 2 — Questions and Answers
Question 1: When a firm's marginal revenue equals zero, which of the following is true about demand elasticity?
- Demand is perfectly elastic
- Demand is unit elastic (Correct answer)
- Demand is perfectly inelastic
- Demand is inelastic
Correct answer: Demand is unit elastic
When MR = 0, total revenue is maximized, which occurs at the unit-elastic point on a linear demand curve.
Question 2: A perfectly competitive firm's short-run supply curve is best described as the portion of its:
- ATC curve above the AVC curve
- MC curve above the AVC curve (Correct answer)
- MC curve above the ATC curve
- AVC curve above the MC curve
Correct answer: MC curve above the AVC curve
A competitive firm shuts down if price falls below AVC, so its supply curve is the MC curve at and above the minimum AVC.
Question 3: Which market structure is characterized by many sellers, differentiated products, and free entry and exit?
- Perfect competition
- Oligopoly
- Monopolistic competition (Correct answer)
- Monopoly
Correct answer: Monopolistic competition
Monopolistic competition features many firms selling differentiated but substitutable products with no significant barriers to entry.
Question 4: The concept of 'derived demand' refers to demand for a good that arises from:
- Consumer preferences for luxury goods
- The demand for a final product that uses it as an input (Correct answer)
- Government subsidies that create artificial demand
- Cross-price effects between substitute goods
Correct answer: The demand for a final product that uses it as an input
Derived demand is the demand for a factor of production that stems from the demand for the final good it helps produce.
Question 5: If two goods have a positive cross-price elasticity of demand, they are best classified as:
- Complements
- Inferior goods
- Substitutes (Correct answer)
- Giffen goods
Correct answer: Substitutes
A positive cross-price elasticity means when the price of one good rises, demand for the other increases — the hallmark of substitutes.
Question 6: A monopsonist in a labor market pays wages that are:
- Equal to the marginal revenue product of labor
- Above the competitive equilibrium wage
- Below the competitive equilibrium wage (Correct answer)
- Equal to the marginal factor cost of labor
Correct answer: Below the competitive equilibrium wage
A monopsonist restricts employment below the competitive level, resulting in a wage below what would prevail in a competitive labor market.
Question 7: Which of the following best describes the 'income effect' of a price decrease for a normal good?
- Consumers buy less because their real income falls
- Consumers buy more because their real purchasing power rises (Correct answer)
- Consumers substitute toward the cheaper good
- Consumers reduce consumption due to diminishing marginal utility
Correct answer: Consumers buy more because their real purchasing power rises
When the price of a normal good falls, real income rises, inducing consumers to buy more of it via the income effect.
CEA Microeconomic Principles 2
When a firm's marginal revenue equals zero, which of the following is true about demand elasticity?