Question 1

Suppose a factory emits pollution that harms nearby residents. The market price of the factory's product does not reflect the cost of this pollution. Which of the following best describes this situation?

Accepted Answer

There is a negative externality, and the market produces too much of the good.

Question 2

Which of the following is a necessary condition for the Coase Theorem to hold and for private bargaining to efficiently solve externality problems?

Accepted Answer

Property rights must be clearly defined and transaction costs must be low.

Question 3

A city government imposes a tax on plastic bags equal to the estimated external cost of environmental damage they cause. What is the primary purpose of this tax?

Accepted Answer

To internalize the negative externality and reduce overuse of plastic bags.

Question 4

Which of the following goods is both non-excludable and non-rivalrous, leading to the free rider problem?

Accepted Answer

National defense

Question 5

Suppose the price elasticity of demand for gasoline is $$-0.3. If $$the price of gasoline increases by $$10\%$$, what is the expected percentage change in quantity demanded?

Accepted Answer

$$-3\%$$

Question 6

If the cross-price elasticity of demand between two goods is $$+1.5$$, what does this imply about the relationship between the goods?

Accepted Answer

They are substitutes.

Question 7

A toll road is an example of which type of good?

Accepted Answer

Quasi-public (club) good

Question 8

If the demand for a product is elastic, what will happen to total revenue if the firm increases its price?

Accepted Answer

Total revenue will decrease.

Question 9

Which of the following scenarios best illustrates the 'tragedy of the commons'?

Accepted Answer

Fishermen overharvest fish from a lake, leading to depletion of the fish population.

Question 10

Suppose the income elasticity of demand for caviar is $$+2.0. $$What does this indicate?

Accepted Answer

Caviar is a normal good and a luxury.

Question 11

Which of the following would make the demand for a good more elastic?

Accepted Answer

There are many close substitutes available.

Question 12

If the supply of a good is perfectly inelastic, how does the quantity supplied respond to changes in price?

Accepted Answer

Quantity supplied does not change as price changes.

Question 13

A government wants to encourage vaccination to reduce the spread of disease. Which policy would best address the positive externality associated with vaccines?

Accepted Answer

Providing a subsidy for vaccines.

Question 14

Suppose the price of coffee increases by $$5\%$$, and as a result, the quantity demanded of cream decreases by $$2\%. $$What is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

$$-0.4$$, indicating coffee and cream are complements.

Question 15

Which of the following statements about public goods is correct?

Accepted Answer

Public goods are non-rival and non-excludable.

Question 16

If the price elasticity of supply for a product is $$1.5$$, and the price increases by $$20\%$$, what is the expected percentage change in quantity supplied?

Accepted Answer

$$30\%$$

Question 17

A steep demand curve for a product suggests which of the following?

Accepted Answer

The product has inelastic demand.

Question 18

Which of the following is most likely to have an inelastic demand?

Accepted Answer

Milk

Question 19

If a good is both excludable and rivalrous, which category does it belong to?

Accepted Answer

Private good

Question 20

Suppose a 10\% increase in income leads to a 5\% decrease in the quantity demanded for instant noodles. What type of good is instant noodles in this case?

Accepted Answer

Inferior good

Externalities, Public Goods, and Elasticity: Study Guide for Microeconomics

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