CEA Economic Theory & Principles 2

Question 1

Which concept explains why a firm will continue producing as long as marginal revenue exceeds marginal cost?

Accepted Answer

Profit maximization principle

Answer

Firms maximize profit by producing up to the point where MR = MC, stopping if MR would fall below MC.

Question 2

In a perfectly competitive market, long-run equilibrium results in firms earning:

Accepted Answer

Normal (zero economic) profits

Answer

Free entry and exit drive economic profits to zero in the long run under perfect competition.

Question 3

The concept of 'consumer sovereignty' in market economies refers to:

Accepted Answer

Consumers' power to direct resource allocation through purchasing decisions

Answer

Consumer sovereignty means that consumer preferences, expressed through market demand, guide what goods are produced.

Question 4

If the cross-price elasticity of demand between two goods is negative, the goods are:

Accepted Answer

Complements

Answer

Negative cross-price elasticity indicates complements — a rise in one good's price reduces demand for the other.

Question 5

The 'invisible hand' metaphor introduced by Adam Smith describes:

Accepted Answer

How self-interested behavior leads to socially beneficial outcomes in free markets

Answer

Smith argued that individuals pursuing self-interest in competitive markets unintentionally promote the public good.

(CEA) Certified Economic Analyst Practice Test