Question 1

Suppose a factory emits pollution that affects nearby residents. The cost of pollution is not reflected in the price of the factory's product. Which of the following best describes this situation?

Accepted Answer

A negative externality, because the social cost exceeds the private cost.

Question 2

If the government imposes a tax on a factory equal to the external damage caused by its emissions, what is the intended economic effect?

Accepted Answer

To internalize the externality and align private cost with social cost.

Question 3

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

Accepted Answer

Clearly defined property rights.

Question 4

A city provides free street lighting. What type of good is street lighting, and what problem does it create?

Accepted Answer

Public good; free rider problem.

Question 5

Which of the following best describes a common resource?

Accepted Answer

Non-excludable and rivalrous, such as fisheries.

Question 6

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

Accepted Answer

It decreases by $$3\%.$$

Question 7

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

Accepted Answer

Total revenue will decrease.

Question 8

Which of the following goods is likely to have the most elastic demand?

Accepted Answer

Starbucks Coffee, because it has many substitutes.

Question 9

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

Accepted Answer

The goods are substitutes.

Question 10

A $$5\%$$ increase in income leads to a $$2\%$$ increase in the quantity demanded for milk. What is the income elasticity of demand for milk, and how is milk classified?

Accepted Answer

$$0.4$$; normal necessity.

Question 11

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

Accepted Answer

Overfishing in a lake that is open to all local residents.

Question 12

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

Accepted Answer

$$30\%$$ increase.

Question 13

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

Accepted Answer

There are many close substitutes available.

Question 14

If a good is excludable but non-rivalrous up to a point, which category does it belong to?

Accepted Answer

Quasi-public (club) good.

Question 15

A $$10\%$$ increase in the price of coffee leads to a $$5\%$$ increase in the quantity demanded of tea. What is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

$$0.5$$; tea and coffee are substitutes.

Question 16

Which of the following is true about the relationship between price elasticity of demand and total revenue?

Accepted Answer

If demand is elastic, decreasing price will increase total revenue.

Question 17

A government wants to encourage vaccination to reduce the spread of disease. Which policy is most appropriate based on economic theory?

Accepted Answer

Provide a subsidy for vaccines.

Question 18

Which of the following best explains why the supply of a good is more elastic in the long run than in the short run?

Accepted Answer

Producers have more time to adjust their production processes.

Question 19

Suppose a $$15\%$$ increase in income leads to a $$20\%$$ decrease in the quantity demanded for instant noodles. What is the income elasticity of demand, and how is instant noodles classified?

Accepted Answer

$$-1.33$$; inferior good.

Question 20

A demand curve is perfectly inelastic. Which of the following statements is true?

Accepted Answer

The demand curve is vertical, and quantity demanded does not change with price.

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

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