Question 1

Suppose a city government imposes a binding price ceiling on apartment rents. Which of the following is the most likely immediate outcome in the rental market?

Accepted Answer

A shortage of apartments, as quantity demanded exceeds quantity supplied.

Question 2

A firm faces the following demand schedule: When the price is \$$10, quantity demanded is 100 units; when the price is \8$$, quantity demanded is 140 units. What is the price elasticity of demand (PED) using the midpoint formula?

Accepted Answer

$$ PED = \frac{(140-100)}{(140+100)/2} \div \frac{(8-10)}{(8+10)/2} = \frac{40}{120} \div \frac{-2}{9} = 0.333 \div -0.222 = -1.5 $$

Question 3

Which of the following best describes the concept of opportunity cost?

Accepted Answer

The value of the next best alternative forgone when a choice is made.

Question 4

If the government imposes a tax on sellers in a market where demand is more inelastic than supply, who bears the greater burden of the tax?

Accepted Answer

Buyers, because the more inelastic side bears a larger burden.

Question 5

A negative externality exists in the production of steel. Which policy would most efficiently correct the market outcome?

Accepted Answer

A Pigouvian tax equal to the external cost imposed by steel production.

Question 6

Which of the following statements is an example of positive economics?

Accepted Answer

"An increase in the minimum wage will lead to higher unemployment among teenagers."

Question 7

Suppose the market for coffee is in equilibrium. If the price of tea (a substitute for coffee) increases, what will happen to the equilibrium price and quantity of coffee?

Accepted Answer

Equilibrium price will increase and equilibrium quantity will increase.

Question 8

A country’s production possibilities curve (PPC) shifts outward. Which of the following could explain this change?

Accepted Answer

An improvement in technology.

Question 9

If the marginal benefit (MB) of producing an additional unit of a good is less than the marginal cost (MC), what should a rational producer do?

Accepted Answer

Decrease production, since the cost of the last unit exceeds its benefit.

Question 10

Which of the following best describes consumer surplus?

Accepted Answer

The difference between what consumers are willing to pay and what they actually pay.

Question 11

Suppose the government sets a binding price floor in the wheat market. What is the most likely result?

Accepted Answer

A surplus of wheat, as quantity supplied exceeds quantity demanded.

Question 12

If the cross-price elasticity of demand between two goods is positive, what does this imply about the relationship between the goods?

Accepted Answer

They are substitutes.

Question 13

A market is allocatively efficient when:

Accepted Answer

$$ MB = MC  ($$Marginal Benefit equals Marginal Cost)

Question 14

Which of the following would cause a movement along the demand curve for gasoline, rather than a shift of the curve?

Accepted Answer

A decrease in the price of gasoline.

Question 15

If a good has an income elasticity of demand greater than 1, it is considered:

Accepted Answer

A normal good and a luxury.

Question 16

Suppose a tax is imposed on a market. Which of the following is true regarding deadweight loss (DWL)?

Accepted Answer

DWL is the reduction in total surplus caused by the tax.

Question 17

Which of the following is most likely to increase the price elasticity of demand for a product?

Accepted Answer

The product has many close substitutes.

Question 18

If the marginal social cost (MSC) of producing a good exceeds the marginal private cost (MPC), what does this indicate?

Accepted Answer

There is a negative externality.

Question 19

A new technology reduces the cost of producing smartphones. What is the likely effect on the equilibrium price and quantity in the smartphone market?

Accepted Answer

Equilibrium price decreases and equilibrium quantity increases.

Question 20

Which of the following best explains why the production possibilities curve (PPC) is typically bowed outward?

Accepted Answer

Opportunity cost increases as more of one good is produced due to resource specialization.

Microeconomics Exam 1 Review: Core Concepts and Applications

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