Question 1

Suppose the government imposes a per unit tax of $$t on $$producers in a competitive market. Which of the following best describes the immediate effect on the market supply curve?

Accepted Answer

The supply curve shifts upward (or leftward) by the amount $$t.$$

Question 2

If the price of a substitute good increases, what is the expected effect on the demand curve for the original good?

Accepted Answer

The demand curve shifts to the right.

Question 3

Which of the following statements about market equilibrium is correct?

Accepted Answer

At equilibrium, marginal value equals marginal cost: $$MV = MC.$$

Question 4

A per unit tax on a good creates deadweight loss (DWL) because:

Accepted Answer

It reduces the quantity traded below the efficient level, resulting in unrealized gains from trade.

Question 5

If the government wants to minimize deadweight loss (DWL) from taxation, it should tax goods with:

Accepted Answer

Inelastic demand

Question 6

Suppose the supply of tofu increases due to technological improvements, while demand also increases due to changing consumer preferences. According to the model, what is the most likely effect on equilibrium price and quantity?

Accepted Answer

Equilibrium quantity increases; equilibrium price could rise, fall, or stay the same depending on the relative shifts.

Question 7

Which of the following best describes the difference between a change in quantity demanded and a change in demand?

Accepted Answer

A change in quantity demanded is a movement along the demand curve due to a price change; a change in demand is a shift of the demand curve due to non-price factors.

Question 8

The tax incidence on consumers is given by the formula $$\frac{E_s}{E_s + |E_d|}$$, where $$E_s is $$the price elasticity of supply and $$E_d is $$the price elasticity of demand. If demand is perfectly inelastic, what fraction of the tax is paid by consumers?

Accepted Answer

All of the tax is paid by consumers.

Question 9

A government quota in the dairy industry is most likely to result in which of the following outcomes?

Accepted Answer

A decrease in quantity, an increase in price, and a wealth transfer from consumers to producers.

Question 10

If the government wants to maximize tax revenue, should it tax goods with inelastic or elastic demand, and why?

Accepted Answer

Inelastic demand, because quantity demanded does not decrease much when taxed.

Question 11

Which of the following is NOT a likely reason why the government avoids taxing groceries heavily?

Accepted Answer

Demand for groceries is highly elastic, so tax revenue would be low.

Question 12

Suppose a per unit subsidy is given to producers. What is the most likely effect on the market?

Accepted Answer

The supply curve shifts downward (or rightward), increasing equilibrium quantity and decreasing equilibrium price.

Question 13

Which of the following best explains why not all farmers benefit from a quota system in the long run?

Accepted Answer

The value of the quota is capitalized into the price of the license, so only initial holders benefit (transitional gains trap).

Question 14

If a per unit tax is imposed on consumers, how does this affect the demand curve as perceived by producers?

Accepted Answer

The demand curve shifts downward by the amount of the tax.

Question 15

Which of the following is true about the efficiency of competitive market equilibrium?

Accepted Answer

Competitive equilibrium maximizes the sum of consumer and producer surplus.

Question 16

Suppose the government introduces a quota that restricts the quantity of eggs produced. What happens to the price and consumer surplus in the market for eggs?

Accepted Answer

Price increases and consumer surplus decreases.

Question 17

If the price of an input used in tofu production rises, what is the expected effect on the market supply curve for tofu?

Accepted Answer

The supply curve shifts to the left.

Question 18

Which of the following best describes the effect of a per unit tax on a good with perfectly elastic supply?

Accepted Answer

Producers bear none of the tax burden; consumers bear all of it.

Question 19

Which of the following is a correct application of marginal analysis for a profit-maximizing producer?

Accepted Answer

Produce the quantity where $$P = MC(Q).$$

Question 20

If both demand and supply decrease simultaneously, what can we say about the new equilibrium?

Accepted Answer

Equilibrium quantity will decrease, but the effect on equilibrium price is ambiguous.

Market Equilibrium and Government Intervention: Microeconomics Study Notes

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