$$E_d = \frac{P}{Q} \times \frac{1}{Slope}$$, so $$Q = 20$$, $$Slope = -2$$, $$E_d = \frac{60}{20} \times \frac{1}{-2} = -1.5$$

$$DWL = \frac{1}{2} \times base \times height$$

Question 1

Which of the following best describes the law of demand?

Accepted Answer

As the price of a good decreases, the quantity demanded increases.

Question 2

If the demand for a product is given by $$P = 100 - 2Q$$, what is the price elasticity of demand at $$P = 60$$?

Accepted Answer

$$E_d = \frac{P}{Q} 	imes \frac{1}{Slope}$$, so $$Q = 20$$, $$Slope = -2$$, $$E_d = \frac{60}{20} 	imes \frac{1}{-2} = -1.5$$

Question 3

A government imposes a unit tax on a good with highly elastic demand. Which of the following is most likely to occur?

Accepted Answer

Producers will bear most of the tax burden.

Question 4

Which formula correctly calculates deadweight loss (DWL) from a tax?

Accepted Answer

$$DWL = \frac{1}{2} 	imes base 	imes height$$

Question 5

If the price of a substitute good increases, what happens to the demand for the original good?

Accepted Answer

The demand for the original good increases.

Question 6

Suppose the government wants to maximize tax revenue from a product. Which demand characteristic should the product have?

Accepted Answer

Inelastic demand

Question 7

Which of the following is NOT a determinant of supply?

Accepted Answer

Number of buyers

Question 8

A market is in equilibrium at price $$P^*$$ and quantity $$Q^*. If a $$price ceiling is set below $$P^*$$, what will occur?

Accepted Answer

A shortage will occur.

Question 9

Which of the following best describes consumer surplus?

Accepted Answer

The difference between the maximum price a buyer is willing to pay and the price actually paid.

Question 10

If the demand for a good is inelastic, what is the effect of a unit tax on the deadweight loss and government revenue?

Accepted Answer

Deadweight loss is small and government revenue is large.

Question 11

Which of the following statements about tax incidence is correct?

Accepted Answer

Economic incidence depends on the elasticity of supply and demand.

Question 12

If the supply curve shifts to the right due to improved technology, what happens to equilibrium price and quantity?

Accepted Answer

Price decreases, quantity increases.

Question 13

A product has a price elasticity of demand $$|E_d| = 0.5. $$What does this imply?

Accepted Answer

Demand is inelastic.

Question 14

Which of the following will NOT cause a shift in the demand curve for coffee?

Accepted Answer

A change in the price of coffee

Question 15

If a tax is imposed on producers and the supply is perfectly inelastic, who bears the entire tax burden?

Accepted Answer

Producers

Question 16

Which of the following best explains why deadweight loss from a tax is greater when demand is elastic?

Accepted Answer

Elastic demand means consumers are more responsive to price changes, so quantity falls more.

Question 17

If the government imposes a tax and the demand curve is perfectly inelastic, what is the effect on quantity traded?

Accepted Answer

Quantity traded does not change.

Question 18

Which of the following is true at market equilibrium?

Accepted Answer

$$Q_d = Q_s$$

Question 19

Suppose a tax causes the price paid by consumers to rise by $$2$$ and the price received by producers to fall by $$3. $$What is the size of the tax?

Accepted Answer

$$5$$

Demand, Supply, Elasticity, Surplus, and Tax Incidence: Core Microeconomic Foundations for Macroeconomics

Study Guide - Practice Questions