Question 1

Suppose the government imposes a $2 per unit tax on sellers of gasoline. Which of the following best describes the statutory and actual incidence of the tax?

Accepted Answer

Statutory incidence falls on sellers, but actual incidence depends on the relative elasticities of supply and demand.

Question 2

A negative externality exists when:

Accepted Answer

The social cost of production exceeds the private cost.

Question 3

Which of the following is a characteristic of a public good?

Accepted Answer

It is non-excludable and non-rival in consumption.

Question 4

Suppose the price elasticity of demand for a product is $$-0.5. If $$the price increases by 10%, what happens to total revenue?

Accepted Answer

Total revenue increases because demand is inelastic.

Question 5

If the cross-price elasticity of demand between two goods is $$+1.2$$, what does this imply?

Accepted Answer

The goods are substitutes.

Question 6

A factory emits pollution as a byproduct of its production. Which of the following policies would most directly correct the negative externality?

Accepted Answer

Imposing a tax equal to the external cost per unit of output.

Question 7

Which formula is used to calculate the price elasticity of demand using the midpoint method?

Accepted Answer

$$\frac{(Q_2$ - Q_1$)}{(Q_2$ + Q_1$)/2} \div \frac{(P_2$ - P_1$)}{(P_2$ + P_1$)/2}$$

Question 8

A city provides free public fireworks displays every July 4th. Which problem is most likely to arise with this public good?

Accepted Answer

Free rider problem due to non-excludability.

Question 9

If a good has a price elasticity of supply equal to $$0$$, what does this mean?

Accepted Answer

Supply is perfectly inelastic.

Question 10

Suppose a consumer has $$\20$ to spend on apples and bananas. Apples cost $$\$$2$$ each and bananas cost $$\1$ each. If the marginal utility of the last apple consumed is 10$ and the marginal utility of the last banana is 5$, is the consumer maximizing utility?

Accepted Answer

Yes, because the marginal utility per dollar is equal for both goods.

Question 11

Which of the following best explains why the demand curve slopes downward?

Accepted Answer

Because of the income and substitution effects.

Question 12

If the government wants to encourage more people to get vaccinated (a positive externality), which policy would be most effective?

Accepted Answer

Provide a subsidy for vaccines.

Question 13

Which of the following is NOT a reason why elasticity changes along a straight-line demand curve?

Accepted Answer

The slope of the demand curve changes.

Question 14

A good has an income elasticity of demand of $$-0.8. $$What type of good is this?

Accepted Answer

An inferior good.

Question 15

If marginal utility is negative, what does this imply about total utility?

Accepted Answer

Total utility is decreasing.

Question 16

Suppose a city wants to reduce pollution to the socially optimal level. Which of the following best describes the optimal level of pollution?

Accepted Answer

The level where marginal social benefit equals marginal social cost.

Question 17

If a product has perfectly inelastic demand, what will happen to quantity demanded if the price increases?

Accepted Answer

Quantity demanded will not change.

Question 18

Which of the following is an example of the rebound effect?

Accepted Answer

People drive more after buying fuel-efficient cars, partially offsetting energy savings.

Question 19

If a market is characterized by imperfect information, what is a likely consequence?

Accepted Answer

Market failure may occur due to buyers or sellers making poor decisions.

Question 20

Which of the following best describes the relationship between private and social benefits in the presence of a positive externality?

Accepted Answer

Social benefit is greater than private benefit.

Microeconomics Study Guide: Supply & Demand Extensions, Externalities, Elasticity, and Consumer Choice

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