Microeconomic Principles Flashcards

The deadweight loss from a monopoly arises because the monopolist:

Answer: Produces less than the socially optimal output level

A monopolist restricts output below the competitive level to charge a higher price, creating deadweight loss from foregone mutually beneficial trades.

According to the theory of consumer choice, a consumer maximizes utility when:

Answer: The marginal utility of the last dollar spent is equal across all goods

Utility maximization requires that MU/P be equal for all goods purchased, so no reallocation of spending can increase total utility.

In the long run under perfect competition, economic profit tends toward zero because:

Answer: New firms enter the market when profits exist, driving down price

Free entry allows new firms to enter profitable markets, increasing supply and reducing price until economic profit equals zero.

Which of the following is a characteristic of a public good?

Answer: Non-rival in consumption and non-excludable

Public goods are simultaneously non-rival (one person's use doesn't reduce availability to others) and non-excludable (no one can be prevented from using them).

A firm is producing at a point where marginal cost exceeds marginal revenue. To maximize profit, the firm should:

Answer: Decrease output to increase marginal revenue

When MC > MR, reducing output lowers costs more than it reduces revenue, increasing profit until MC = MR.

The substitution effect of a price change always leads consumers to:

Answer: Buy less of a good whose relative price has risen

The substitution effect causes consumers to replace relatively more expensive goods with relatively cheaper alternatives, regardless of income effects.

Which pricing strategy allows a monopolist to charge each consumer their maximum willingness to pay?

Answer: First-degree (perfect) price discrimination

First-degree price discrimination involves charging each consumer their reservation price, capturing the entire consumer surplus as producer surplus.