A) A consumer purchasing a laptop.
B) A factory polluting a river while producing goods.
C) A firm reducing its production costs.
D) A company earning profits from new technology.
An externality occurs when a third party is affected by a transaction. Pollution from a factory impacts people who are not directly involved in production or consumption, making it a negative externality.
A) The usefulness of a good.
B) The satisfaction derived from consuming a good or service.
C) The quality of a product.
D) The value of a good in monetary terms.
Utility represents the level of satisfaction or pleasure a consumer gets from consuming goods or services. It is subjective and varies between individuals.
A) Perfectly elastic supply.
B) Perfectly inelastic supply.
C) Unit elastic supply.
D) Decreasing marginal cost.
A vertical supply curve shows that the quantity supplied does not change with price, indicating perfectly inelastic supply. This is often seen in cases like fixed land or rare goods.
A) Profit maximization by firms.
B) Government regulation.
C) The presence of externalities or public goods.
D) Consumer preferences.
Market failure occurs when resources are not allocated efficiently due to factors like externalities (e.g., pollution) or public goods, which lead to inefficiencies in the market outcome.
A) Homogeneous products.
B) Freedom of entry and exit.
C) Firms have price-setting power.
D) Large number of buyers and sellers.
In perfect competition, firms are price takers. They cannot set prices because the market determines the price, and individual firms are too small to influence it.
A) At its minimum point.
B) At its maximum point.
C) At the origin.
D) At the equilibrium price.
The marginal cost curve intersects the average total cost curve at its minimum because when MC is less than ATC, ATC decreases, and when MC is greater than ATC, ATC increases.
A) Raw materials.
B) Wages for hourly workers.
C) Rent on a factory.
D) Shipping costs.
Fixed costs do not vary with the level of output in the short run. Rent on a factory is a fixed cost because it must be paid regardless of production levels.
A) National defense.
B) A lighthouse.
C) A cup of coffee.
D) A public park.
A private good is rival (one person’s consumption reduces availability for others) and excludable (consumers can be prevented from using it). A cup of coffee fits these characteristics.
A) Is not maximizing total utility.
B) Should buy more of the cheaper good.
C) Is maximizing total utility.
D) Should buy more of the expensive good.
A consumer maximizes utility when the marginal utility per dollar spent on all goods is equal, ensuring the best allocation of resources for the highest total satisfaction.
A) Increases as output increases.
B) Remains constant as output increases.
C) Decreases as output increases.
D) Is independent of output.
In a natural monopoly, economies of scale are so significant that average total cost decreases over a large range of output, making a single firm more efficient than multiple firms.
A) It is vertical.
B) It is horizontal.
C) It has a slope of infinity.
D) It has a slope of 1.
A perfectly elastic demand curve is horizontal, indicating that consumers will only buy at one price. Any increase in price reduces demand to zero, while any decrease leads to infinite demand.
A) Total revenue increases.
B) Total revenue decreases.
C) Total revenue remains unchanged.
D) Total revenue is maximized.
When demand is inelastic, consumers are less sensitive to price changes. As price increases, the percentage decrease in quantity demanded is smaller, leading to higher total revenue.
A) The quantity supplied only.
B) The quantity demanded only.
C) The interaction of supply and demand.
D) Government intervention in the market.
The equilibrium price is where the quantity demanded equals the quantity supplied, reflecting the market-clearing price set by the forces of supply and demand.
A) A luxury good.
B) A normal good.
C) An inferior good.
D) A substitute good.
For inferior goods, demand decreases as income increases, resulting in a negative income elasticity of demand.
A) Opportunity cost.
B) The marginal rate of substitution (MRS).
C) The income effect.
D) The substitution effect.
The slope of an indifference curve represents the MRS, which shows the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility.