CEA Microeconomic Principles 3 — Questions and Answers
Question 1: In a two-part tariff pricing strategy, a firm charges:
- Different prices in two separate markets
- A fixed entry fee plus a per-unit usage price (Correct answer)
- Higher prices for the first units and lower prices for additional units
- One price to businesses and a different price to consumers
Correct answer: A fixed entry fee plus a per-unit usage price
A two-part tariff consists of a lump-sum access fee and a per-unit charge, allowing firms to capture more consumer surplus.
Question 2: The Lerner Index measures market power as:
- (P - MC) / P (Correct answer)
- (TR - TC) / TR
- (MR - MC) / P
- (P - AVC) / P
Correct answer: (P - MC) / P
The Lerner Index equals (P - MC) / P and ranges from 0 (perfect competition) to 1 (pure monopoly).
Question 3: Which of the following is an example of a negative production externality?
- A firm training workers who later benefit competitors
- A beekeeper's bees pollinating a neighboring orchard
- A factory releasing pollutants into a river (Correct answer)
- A homeowner landscaping their yard, increasing neighborhood property values
Correct answer: A factory releasing pollutants into a river
A factory polluting a river imposes uncompensated costs on third parties, making it a classic negative production externality.
Question 4: When a firm experiences diseconomies of scale, its long-run average total cost curve is:
- Falling as output increases
- Flat as output increases
- Rising as output increases (Correct answer)
- U-shaped throughout all output levels
Correct answer: Rising as output increases
Diseconomies of scale occur when increasing output causes long-run average total cost to rise, often due to coordination problems.
Question 5: A price ceiling set below the equilibrium price will result in:
- A surplus of the good
- A shortage of the good (Correct answer)
- No change in quantity supplied
- An increase in producer surplus with no deadweight loss
Correct answer: A shortage of the good
A binding price ceiling holds price below equilibrium, causing quantity demanded to exceed quantity supplied — a shortage.
Question 6: In game theory, a Nash equilibrium occurs when:
- Both players choose cooperative strategies
- Each player's strategy is optimal given the strategies of all other players (Correct answer)
- The dominant strategy results in the highest collective payoff
- One player defects while the other cooperates
Correct answer: Each player's strategy is optimal given the strategies of all other players
A Nash equilibrium is a strategy profile where no player can improve their payoff by unilaterally changing their strategy.
Question 7: Which factor would cause the demand curve for a good to shift to the right (increase in demand)?
- A decrease in consumer income for a normal good
- An increase in the price of a complementary good
- An increase in the price of a substitute good (Correct answer)
- An expectation that the price of the good will fall in the future
Correct answer: An increase in the price of a substitute good
When the price of a substitute rises, consumers shift to the original good, increasing its demand and shifting the curve rightward.
CEA Microeconomic Principles 3
In a two-part tariff pricing strategy, a firm charges: