Q: Which formula correctly calculates consumer surplus?

$$\text{Consumer Surplus} = \text{Maximum Price Willing to Pay} - \text{Actual Price Paid}$$

Question 1

Suppose the price of coffee increases from $$2 to 2.50 $$per cup, and the quantity demanded falls from 1000 to 800 cups per day. Using the midpoint (arc) formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(800-1000)}{(800+1000)/2} \div \frac{(2.5-2)}{(2.5+2)/2} = -0.222 \div 0.222 = -1.0$$

Question 2

If the cross-price elasticity of demand between tea and coffee is $$+0.6$$, what does this indicate about the relationship between tea and coffee?

Accepted Answer

Tea and coffee are substitutes.

Question 3

Which of the following is NOT a factor that determines price elasticity of demand?

Accepted Answer

The cost of production for the good.

Question 4

A government imposes a $10 per unit tax on sellers. If demand is perfectly inelastic, who bears the entire burden of the tax?

Accepted Answer

Consumers bear the entire burden.

Question 5

Which formula correctly calculates consumer surplus?

Accepted Answer

$$	ext{Consumer Surplus} = 	ext{Maximum Price Willing to Pay} - 	ext{Actual Price Paid}$$

Question 6

If a minimum wage is set above the equilibrium wage, what is the most likely outcome in the labor market?

Accepted Answer

A surplus of labor (unemployment).

Question 7

Which of the following best describes a regressive tax?

Accepted Answer

A tax where the average tax rate decreases as income increases.

Question 8

What is the main difference between tariffs and import quotas?

Accepted Answer

Tariffs generate government revenue, while quotas do not.

Question 9

Suppose a market is experiencing overproduction. What is a likely result?

Accepted Answer

Resources are being wasted and marginal cost exceeds marginal benefit.

Question 10

Which of the following is an example of a negative externality?

Accepted Answer

Air pollution from a factory affecting nearby residents.

Question 11

If the equilibrium price of wheat is $$5 per bushel and the government sets a price floor at 7$$, what will happen?

Accepted Answer

A surplus of wheat will occur.

Question 12

Which equation represents Marginal Social Benefit (MSB) and Marginal Social Cost (MSC) in the presence of an externality?

Accepted Answer

$$	ext{MSB} = 	ext{Marginal Private Benefit} + 	ext{Marginal External Benefit}$$ and $$	ext{MSC} = 	ext{Marginal Private Cost} + 	ext{Marginal External Cost}$$

Question 13

Which of the following best describes the Coase Theorem?

Accepted Answer

If property rights are well-defined and transaction costs are low, private bargaining can solve externality problems.

Question 14

A country can produce either 100 units of wine or 200 units of cheese. Another country can produce either 50 units of wine or 150 units of cheese. Which country has the comparative advantage in cheese?

Accepted Answer

The second country (150 units of cheese).

Question 15

Which of the following is true about producer surplus?

Accepted Answer

It is the difference between the price received and the minimum price the producer is willing to accept.

Question 16

If a tax is imposed on a good and the supply is perfectly elastic, who bears the entire burden of the tax?

Accepted Answer

Consumers bear the entire burden.

Question 17

Which of the following is a characteristic of a positive externality?

Accepted Answer

The social benefit exceeds the private benefit.

Question 18

What is the effect of a progressive tax system on income distribution?

Accepted Answer

It reduces income inequality.

Question 19

If the price elasticity of demand for gasoline is $$-0.2$$, what does this imply about consumer responsiveness to price changes?

Accepted Answer

Consumers are relatively unresponsive to price changes (inelastic demand).

Question 20

Which of the following best explains why overproduction can occur in the presence of a negative externality?

Accepted Answer

Producers do not bear the full social cost, so they produce more than the socially optimal quantity.

Microeconomics Study Guide: Elasticity, Surplus, Taxation, Trade, and Externalities

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