Microeconomics Flashcards

Which of the following correctly describes a Giffen good?

Answer: An inferior good whose demand curve slopes upward

Giffen goods are inferior goods where the negative income effect of a price increase outweighs the substitution effect, causing quantity demanded to rise with price.

Economic profit equals zero in the long run for a perfectly competitive firm because:

Answer: Free entry and exit drive price to minimum average total cost

Positive profits attract new entrants who increase supply and drive price down to the minimum ATC, eliminating economic profit.

The marginal rate of technical substitution (MRTS) measures:

Answer: The rate at which capital can replace labor while holding output constant

MRTS = −ΔK/ΔL along an isoquant, representing how much capital is needed to replace one unit of labor without changing output.

Consumer surplus is maximized under which market structure?

Answer: Perfect competition

Perfect competition sets P = MC at minimum ATC, producing the highest output and lowest price, thereby maximizing consumer surplus.

An increase in the wage rate will shift a firm's isocost line by:

Answer: Rotating it inward along the labor axis, keeping the capital intercept fixed

A higher wage raises the cost of labor, reducing the maximum labor affordable for a given budget while leaving the capital intercept unchanged.

Which condition defines the profit-maximizing input choice for a competitive firm?

Answer: Value of marginal product equals the input price

A firm maximizes profit by hiring inputs until VMP = w, where VMP = P × MP; this equates the revenue generated by the last unit of input to its cost.

In a Stackelberg duopoly, the leader firm benefits from:

Answer: Committing to an output level first, forcing the follower to react

The Stackelberg leader gains a first-mover advantage by credibly committing to output, which constrains the follower's best response and increases leader profits.