Microeconomic Analysis Quiz

Law of demand states that as the price of a good or service increases, the quantity demanded decreases, ceteris paribus.

The slope of a demand curve in a perfectly competitive market is negative, indicating that as the price of a good decreases, the quantity demanded increases, ceteris paribus.

Marginal cost is the additional cost incurred from producing one more unit of a good or service and is calculated as the change in total cost divided by the change in quantity.

Perfect competition leads to allocative efficiency because in the long run, firms produce at the minimum point of their average cost curve, where price equals marginal cost.

In a monopoly, there is a single seller in the market with significant control over price, leading to higher prices and lower quantities produced compared to competitive markets.

Perfectly competitive markets have many buyers and sellers, homogeneous products, perfect information, and ease of entry and exit.

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Accounting profit considers only explicit costs, such as wages and rent, while economic profit also includes implicit costs, such as the opportunity cost of the entrepreneur's time and capital.

A positive externality occurs when a third party receives a benefit from an economic transaction that they were not directly involved in, such as when a beekeeper benefits from a neighboring farmer's pollination services.

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay, represented by the area below the demand curve and above the market price line.

The production possibility frontier (PPF) represents the maximum combination of goods and services that a country can produce given its resources and technology, showing the trade-offs between different production choices.

Game theory assumes that players in a strategic interaction have conflicting interests and make decisions based on maximizing their own payoffs.

The Cobb-Douglas production function assumes constant returns to scale, meaning that if all inputs are increased by a certain percentage, output will also increase by that percentage.

A Giffen good is a rare type of good where people actually buy more of it as the price rises, violating the basic law of demand.

A normal profit is the profit necessary to keep a firm in its current market and includes only explicit costs, while an economic profit is the total revenue minus both explicit and implicit costs.