Q1. For the Coase theorem to work, there must be clear assignment of property rights.

Background

Topic: Coase Theorem and Property Rights

This question tests your understanding of the conditions required for the Coase theorem to lead to efficient outcomes in the presence of externalities.

Key Terms:

• Coase Theorem: A principle stating that if property rights are well-defined and transaction costs are low, parties can negotiate to resolve externalities efficiently.

• Property Rights: Legal rights to use, control, and benefit from a resource.

Step-by-Step Guidance

1. Recall what the Coase theorem says about resolving externalities through negotiation.

2. Think about why property rights must be clear for negotiation to occur.

3. Consider what happens if property rights are ambiguous or not assigned.

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Q2. If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase.

Background

Topic: Supply and Demand Shifts

This question tests your understanding of how simultaneous shifts in demand and supply affect equilibrium price and quantity.

Key Terms:

• Equilibrium Price: The price at which quantity demanded equals quantity supplied.

• Demand Increase: Shift of the demand curve to the right.

• Supply Increase: Shift of the supply curve to the right.

Step-by-Step Guidance

1. Visualize or sketch the supply and demand curves before and after both curves shift right.

2. Recall that an increase in demand tends to raise equilibrium price, while an increase in supply tends to lower it.

3. Think about whether the net effect on price depends on the relative magnitude of the shifts.

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Q3. When there is a positive externality in a free market, too much of the good is produced and consumed.

Background

Topic: Externalities

This question tests your understanding of positive externalities and their effect on market outcomes.

Key Terms:

• Positive Externality: A benefit received by others when a good is produced or consumed, not reflected in the market price.

• Market Outcome: The equilibrium quantity and price determined by supply and demand.

Step-by-Step Guidance

1. Recall how positive externalities affect the marginal social benefit compared to marginal private benefit.

2. Think about whether the market produces more or less than the socially optimal quantity.

3. Consider examples like education or vaccinations.

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Q4. When voluntary exchange takes place, both parties gain from the exchange.

Background

Topic: Gains from Trade

This question tests your understanding of why voluntary exchange is mutually beneficial in microeconomic theory.

Key Terms:

• Voluntary Exchange: A transaction where both parties agree to trade goods or services.

• Gains from Trade: The increase in welfare or surplus for both parties.

Step-by-Step Guidance

1. Recall the concept of consumer and producer surplus.

2. Think about why both parties would agree to a trade.

3. Consider whether there are exceptions to this rule in standard microeconomic models.

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Q5. The basis for trade is absolute advantage, not comparative advantage.

Background

Topic: Comparative vs. Absolute Advantage

This question tests your understanding of the fundamental reason for trade between individuals or countries.

Key Terms:

• Absolute Advantage: The ability to produce more of a good with the same resources.

• Comparative Advantage: The ability to produce a good at a lower opportunity cost.

Step-by-Step Guidance

1. Recall the definitions of absolute and comparative advantage.

2. Think about which concept explains why trade is mutually beneficial.

3. Consider examples where countries trade even if one has an absolute advantage in both goods.

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Q6. Suppose the supply curve for digital cameras shifts to the right. This will cause a relatively large decrease in the price of digital cameras if both demand and supply are inelastic.

Background

Topic: Elasticity and Supply Shifts

This question tests your understanding of how elasticity affects the impact of supply shifts on price.

Key Terms:

• Elasticity: The responsiveness of quantity demanded or supplied to changes in price.

• Inelastic: When quantity changes little in response to price changes.

• Supply Curve Shift: An increase in supply moves the curve to the right.

Step-by-Step Guidance

1. Recall what happens to price when supply increases.

2. Think about how inelastic demand and supply affect the magnitude of price changes.

3. Consider whether a large or small price change occurs when both curves are inelastic.

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Q7. A tariff is a numerical limit on the quantity of a good that can be imported.

Background

Topic: Trade Barriers

This question tests your understanding of the difference between tariffs and quotas.

Key Terms:

• Tariff: A tax on imports.

• Quota: A numerical limit on the quantity of a good that can be imported.

Step-by-Step Guidance

1. Recall the definitions of tariff and quota.

2. Think about whether a tariff sets a quantity limit or a price increase.

3. Consider examples of each type of trade barrier.

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Q8. Suppose the extra cost of producing an extra million kilograms of French fries is $1 million. Then, McCain Foods Ltd. should make the extra French fries if they generate additional revenue of $1 million.

Background

Topic: Marginal Analysis

This question tests your understanding of profit maximization using marginal cost and marginal revenue.

Key Terms:

• Marginal Cost (MC): The cost of producing one more unit.

• Marginal Revenue (MR): The revenue from selling one more unit.

• Profit Maximization: Firms produce up to the point where MR = MC.

Step-by-Step Guidance

1. Recall the rule for profit maximization: produce where MR = MC.

2. Think about whether producing the extra unit is profitable if MR equals MC.

3. Consider what happens if MR is greater or less than MC.

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