Question 1

Suppose the government imposes a per unit tax of $$t on $$producers in a competitive market. Which of the following best describes the immediate effect on the market supply curve?

Accepted Answer

The supply curve shifts upward (or leftward) by the amount $$t.$$

Question 2

If the price of a substitute good increases, what is the expected effect on the demand curve for the original good?

Accepted Answer

The demand curve shifts to the right.

Question 3

Which of the following statements about market equilibrium is correct?

Accepted Answer

At equilibrium, marginal value equals marginal cost: $$MV = MC.$$

Question 4

A per unit tax creates deadweight loss (DWL) in a market. What is the primary reason for this?

Accepted Answer

The tax reduces the quantity traded below the efficient level, resulting in unrealized gains from trade.

Question 5

Suppose the government wants to maximize tax revenue from a per unit tax. Should it tax goods with elastic or inelastic demand, and why?

Accepted Answer

Inelastic demand, because quantity demanded does not decrease much when taxed.

Question 6

If the price elasticity of demand is low (inelastic) and the price elasticity of supply is high (elastic), who bears the larger share of a per unit tax?

Accepted Answer

Consumers bear a larger share of the tax.

Question 7

Which formula correctly expresses the share of a per unit tax paid by consumers?

Accepted Answer

$$\frac{E_s}{E_s + |E_d|}$$

Question 8

A government quota in the dairy industry restricts the quantity of milk produced. What are the likely effects on price, quantity, and welfare?

Accepted Answer

Price increases, quantity decreases, and deadweight loss occurs.

Question 9

In 1977, tofu was only available in small quantities from specialty stores. By 2003, tofu was widely available and produced using modern technology. According to supply and demand analysis, what is the most likely prediction for the equilibrium price and quantity of tofu over this period?

Accepted Answer

Equilibrium quantity increases and equilibrium price could rise or fall depending on the relative shifts in supply and demand.

Question 10

Which of the following best describes the difference between a change in quantity demanded and a change in demand?

Accepted Answer

A change in quantity demanded is a movement along the demand curve due to a price change; a change in demand is a shift of the demand curve due to non-price factors.

Question 11

If the government wants to minimize deadweight loss (DWL) from taxation, which type of good should it tax?

Accepted Answer

Goods with inelastic demand.

Question 12

A per unit subsidy is introduced in a market. Which of the following is a likely effect?

Accepted Answer

The supply curve shifts downward (or rightward), increasing equilibrium quantity.

Question 13

Which of the following is NOT a likely effect of a government-imposed quota in an agricultural market?

Accepted Answer

All farmers benefit equally and permanently from the quota.

Question 14

Suppose the government imposes a per unit tax on consumers. How does this affect the demand curve as perceived by producers?

Accepted Answer

The demand curve shifts downward by the amount of the tax.

Question 15

Why does the government typically avoid taxing groceries, even though their demand is inelastic?

Accepted Answer

Because groceries are necessities and taxing them would disproportionately affect low-income consumers.

Question 16

Which of the following best describes the 'transitional gains trap' in the context of quotas?

Accepted Answer

Initial recipients of quotas benefit, but over time, the value of the quota is capitalized into the price of the license, so future holders do not benefit.

Question 17

If a technological improvement reduces the cost of production for a good, what is the expected effect on the market equilibrium?

Accepted Answer

The supply curve shifts right, leading to a lower equilibrium price and higher equilibrium quantity.

Question 18

Which of the following is true about competitive equilibrium in a market?

Accepted Answer

It maximizes the sum of consumer surplus and producer surplus.

Question 19

If the government issues a limited number of licenses (quotas) to produce a good, what determines the market value of a quota license?

Accepted Answer

The difference between the market price and the marginal cost at the quota quantity.

Market Equilibrium and Government Intervention: Microeconomics Study Notes

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