Question 1

Suppose a factory emits pollution as a by-product of its production process. The cost of this pollution to society is not reflected in the factory's supply curve. Which of the following best describes this situation?

Accepted Answer

The factory is creating a negative externality because the marginal social cost exceeds the marginal private cost.

Question 2

According to the Coase Theorem, under what conditions can private bargaining lead to an efficient outcome in the presence of externalities?

Accepted Answer

When property rights are clearly assigned and transaction costs are low.

Question 3

A city government wants to reduce air pollution from cars. Which of the following is an example of a command-and-control policy?

Accepted Answer

Setting a maximum allowable emission level for each car.

Question 4

Which of the following goods is both non-excludable and non-rival?

Accepted Answer

National defense

Question 5

If the price elasticity of demand for a product is $$-2$$, what does this imply?

Accepted Answer

A 1% increase in price leads to a 2% decrease in quantity demanded.

Question 6

Suppose the cross-price elasticity of demand between tea and coffee is $$+0.8. $$What does this indicate about the relationship between tea and coffee?

Accepted Answer

They are substitutes.

Question 7

A government imposes a tax on a factory equal to the external cost of pollution. What is the expected effect on the market?

Accepted Answer

The supply curve shifts up (left), reducing quantity to the efficient level.

Question 8

Which of the following best describes a common resource?

Accepted Answer

Non-excludable and rival

Question 9

If the income elasticity of demand for a good is $$-0.5$$, what type of good is it?

Accepted Answer

Inferior good

Question 10

Suppose a 10% increase in the price of a product leads to a 5% decrease in quantity demanded. What is the price elasticity of demand?

Accepted Answer

$$E_D = \frac{-5\%}{10\%} = -0.5$$

Question 11

Which of the following scenarios would result in a positive externality?

Accepted Answer

A person receives a flu vaccine, reducing the spread of disease.

Question 12

If a decrease in the supply of wheat results in an increase in total revenue, what does this indicate about the price elasticity of demand for wheat?

Accepted Answer

Demand is inelastic.

Question 13

Which of the following is the correct formula for price elasticity of supply?

Accepted Answer

$$E_S = \frac{\%\Delta Q_s}{\%\Delta P}$$

Question 14

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

Accepted Answer

Quasi-public good

Question 15

If the government wants to encourage more people to get vaccinated, which policy would be most effective?

Accepted Answer

Provide a subsidy to consumers for getting vaccinated

Question 16

Which of the following statements about total revenue and elasticity is correct?

Accepted Answer

If demand is unit elastic, a change in price will not affect total revenue.

Question 17

Which of the following is NOT a determinant of the price elasticity of demand?

Accepted Answer

The cost of production

Question 18

A market failure occurs when:

Accepted Answer

The market fails to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.

Question 19

If the price elasticity of supply for oil is low in the short run, what does this imply?

Accepted Answer

It is difficult and costly to increase oil production quickly, so supply is inelastic.

Question 20

Which of the following best describes the concept of 'internalizing an external cost'?

Accepted Answer

Forcing producers to factor the cost of externalities into their production costs.

Microeconomics Study Guide: Externalities, Public Goods, and Elasticity

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