Peregrine Exam: Microeconomics
Review Questions And Answers With
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Consumer Surplus (CS) - ANSWER✔✔ - (Maximum Buying Price)-(Price Paid)
- Difference between the max price a buyer is willing to pay for a good or service
and they price paid
Producer Surplus (PS) - ANSWER✔✔ - (Price Received)-(Minimum Selling Price)
- Difference between price received for a good or service and the minimum selling
price
Price Ceiling - ANSWER✔✔ When governments place a limit on how high a
producer may charge for his product
Price Floor - ANSWER✔✔ A legal minimum on the price at which a good can be
sold
Fixed Costs (FC) - ANSWER✔✔ Costs that do not vary with output
Variable Costs (VC) - ANSWER✔✔ Costs that vary with output
Total Cost (TC) - ANSWER✔✔ - The sum of fixed costs and variable costs
- TC = TFV + TVC
, Marginal Cost (MC) - ANSWER✔✔ The change in total cost that results from a
change in output
Average Fixed Cost Curve - ANSWER✔✔ Decrease due to spending
Average Variable Cost Curve - ANSWER✔✔ Decrease due to gains from
specialization, then increase due to diminishing marginal returns
Average Total Cost Curve - ANSWER✔✔ - U-shaped in the short run (reflects
decreasing costs due to spreading versus increasing costs due to diminishing
marginal returns)
- Flatten out in long run (fixed costs become variable in the long run)
Marginal Cost Curve - ANSWER✔✔ Moves with Average Total Cost
- Decrease due to gains from specialization
- Increase due to diminishing marginal returns
If Marginal Cost is LESS than ATC - ANSWER✔✔ ATC decreasing --> More gains
from specialization
If Marginal Cost is MORE than ATC - ANSWER✔✔ ATC increasing --> More losses
from diminishing marginal return
Steps on how much to produce, price, and determine profitability - ANSWER✔✔
1. Find the intersection of MR & MC to maximize profit
2. At Profit Maximum Output: Is price greater than, equal to, or less than ATC
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