Question 1

Suppose the government imposes a $2 per unit tax on sellers of a product. Which of the following best describes the statutory and actual incidence of the tax?

Accepted Answer

Statutory incidence falls on sellers, but actual incidence is shared between buyers and sellers depending on the relative elasticities of supply and demand.

Question 2

A negative externality occurs when:

Accepted Answer

The social cost of a good exceeds the private cost.

Question 3

Which of the following is a characteristic of a public good?

Accepted Answer

It is non-excludable and non-rival in consumption.

Question 4

Suppose a factory emits pollution that harms nearby residents. Which curve shifts in the market for the factory's product to reflect the negative externality, and why?

Accepted Answer

The supply curve shifts left because the social cost is higher than the private cost.

Question 5

If the price elasticity of demand for a product is $$-0.5$$, what does this imply about the demand for the product?

Accepted Answer

Demand is inelastic; consumers are not very responsive to price changes.

Question 6

A government wants to correct for a positive externality in the market for flu vaccines. Which policy is most appropriate?

Accepted Answer

Provide a subsidy to consumers or producers of flu vaccines.

Question 7

Which formula is used to calculate the price elasticity of demand using the midpoint method?

Accepted Answer

$$ \frac{(Q_2$ - Q_1$)}{(Q_2$ + Q_1$)/2} \div \frac{(P_2$ - P_1$)}{(P_2$ + P_1$)/2} $$

Question 8

If a good has a cross-price elasticity of demand of $$+1.2$$ with respect to another good, what does this indicate?

Accepted Answer

The two goods are substitutes.

Question 9

Suppose the demand for a product is perfectly inelastic. What will happen to total revenue if the price increases?

Accepted Answer

Total revenue will remain unchanged.

Question 10

A consumer is deciding how to allocate their budget between two goods, A and B. If the marginal utility per dollar spent on A is higher than on B, what should the consumer do to maximize utility?

Accepted Answer

Buy more of A and less of B.

Question 11

Which of the following best explains the water-diamond paradox?

Accepted Answer

Diamonds are more expensive than water because their marginal utility is higher, even though water's total utility is greater.

Question 12

If the government provides a public good, such as national defense, what is a potential problem that may arise?

Accepted Answer

Free rider problem, where individuals benefit without paying.

Question 13

Suppose a firm faces a price elasticity of supply of $$0.8. If $$the price increases by 10%, what is the approximate percentage change in quantity supplied?

Accepted Answer

$$ 0.8 	imes 10\% = 8\% $$ increase in quantity supplied

Question 14

Which of the following is NOT a reason why elasticity changes along a straight-line demand curve?

Accepted Answer

The percentage change in price and quantity changes as you move along the curve.

Question 15

If a good has an income elasticity of demand of $$-0.3$$, what type of good is it?

Accepted Answer

Inferior good

Question 16

Which of the following best describes the rebound effect in environmental economics?

Accepted Answer

When increased efficiency leads to higher overall consumption, offsetting some of the environmental gains.

Question 17

If a market is failing due to imperfect information, which policy could help correct the failure?

Accepted Answer

Mandating disclosure of product information.

Question 18

Suppose a consumer's total utility from consuming 3 units of a good is 30, and from consuming 4 units is 36. What is the marginal utility of the 4th unit?

Accepted Answer

$$ 36 - 30 = 6 $$

Question 19

Why does the demand curve slope downward?

Accepted Answer

Because of diminishing marginal utility and the substitution effect.

Question 20

A city government wants to achieve the optimal level of pollution. Which approach is most likely to achieve this?

Accepted Answer

Balancing the marginal cost of pollution reduction with the marginal benefit.

Microeconomics Study Guide: Supply & Demand Extensions, Externalities, Elasticity, and Consumer Choice

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