Question 1

A government imposes a tax on sugary drinks, causing their price to increase by 15%. If the quantity demanded decreases by 30%, what is the price elasticity of demand, and how would you classify the demand for sugary drinks?

Accepted Answer

Demand is elastic because the percentage change in quantity demanded is greater than the percentage change in price.

Question 2

Suppose the price of housing increases by 20% over a decade. In the long run, how might this affect the price elasticity of demand for housing?

Accepted Answer

Demand may become more elastic as consumers find alternative living arrangements.

Question 3

A movie theater reduces ticket prices from $$12 to 10$$, and the number of tickets sold increases from 300 to 400. What happens to total revenue, and what does this indicate about the price elasticity of demand?

Accepted Answer

Total revenue increases, indicating elastic demand.

Question 4

If the price of a product decreases from $$10 to 5 $$and the quantity demanded increases from 50 units to 100 units, what is the price elasticity of demand using the midpoint method?

Accepted Answer

$$2.0$$

Question 5

Using the midpoint method, calculate the income elasticity of demand if the quantity demanded increases from 500 to 600 units when consumer income increases from $$1,000 to 1$$,200.

Accepted Answer

$$2.0$$

Question 6

What does a positive cross-price elasticity of demand indicate about the relationship between two goods?

Accepted Answer

The goods are substitutes.

Question 7

A tech company increases the price of its software from $$100 to 120$$, and the number of licenses supplied rises from 2,000 to 2,600. Calculate the price elasticity of supply using the midpoint method and classify the supply.

Accepted Answer

$$1.44$$, elastic

Question 8

What is the market implication of a perfectly inelastic supply curve when demand increases?

Accepted Answer

Price will increase significantly, but quantity supplied will remain unchanged.

Question 9

Using the midpoint method, calculate the price elasticity of demand if the price changes from $$10 to 12 $$and the quantity demanded changes from 100 units to 80 units.

Accepted Answer

$$1.22$$

Question 10

When the price of a good decreases, what are the components of the additional consumer surplus?

Accepted Answer

Additional surplus to existing consumers and new surplus to new consumers.

Question 11

In a small market with sellers willing to sell at $$5, 7$$, and $$9, if the market price is 10$$, what is the total producer surplus?

Accepted Answer

$$9$$

Question 12

If a government sets a price ceiling below the equilibrium price, what is the likely effect on deadweight loss?

Accepted Answer

Deadweight loss will increase due to underproduction.

Question 13

A market has demand $$Q_d = 1000 - 10P$$ and supply $$Q_s = 5P + 100. $$Calculate the consumer surplus at equilibrium.

Accepted Answer

$$8,000$$

Question 14

What happens to the quantity supplied and quantity demanded when an effective price ceiling is imposed below the equilibrium price?

Accepted Answer

Quantity supplied decreases and quantity demanded increases, leading to a shortage.

Question 15

Solve for the equilibrium price using the equations $$Q_d = 6000 - 60P$$ and $$Q_s = 40P - 800.$$

Accepted Answer

$$75$$

Question 16

If the demand curve is represented by $$P = 100 - 2Q$$ and the price is set at $$40$$, what is the consumer surplus?

Accepted Answer

$$800$$

Question 17

How is the tax incidence distributed if the demand is more elastic than supply?

Accepted Answer

Producers bear a larger share of the tax burden.

Question 18

What is deadweight loss?

Accepted Answer

The loss of economic surplus due to trades not occurring at the equilibrium quantity.

Question 19

If the price of a good decreases from $$20 to$$ $$18$$ and the quantity supplied decreases from $$200$$ units to $$180$$ units, what is the price elasticity of supply using the midpoint method?

Accepted Answer

$$0.9$$

Question 20

How is the benefit of a subsidy typically divided between consumers and producers?

Accepted Answer

The benefit is divided based on the price elasticities of demand and supply.

Question 21

Why does increasing tax rates not always lead to increased tax revenue according to the Laffer Curve?

Accepted Answer

Higher tax rates can decrease the quantity exchanged, reducing overall tax revenue.

Question 22

How does a $$4$$ tax on suppliers affect the equilibrium price and quantity if the demand equation is $$Q_d = 40 - 4P$$ and the supply equation is $$Q_s = 2P - 8$$?

Accepted Answer

Equilibrium price increases, quantity decreases.

Question 23

How is deadweight loss represented on a supply and demand graph in the presence of externalities?

Accepted Answer

Deadweight loss is represented by the area between the efficient equilibrium and the market equilibrium.

Question 24

How do corrective taxes differ from pollution permits in managing externalities?

Accepted Answer

Corrective taxes set a price for pollution, while permits set a quantity limit.

Question 25

Why might common resources be overused in a free market economy?

Accepted Answer

Because they are non-excludable and rival, leading to the tragedy of the commons.

Question 26

How can property rights help resolve the tragedy of the commons?

Accepted Answer

By internalizing the externality and providing incentives for sustainable use.

Question 27

What is the key difference in constructing demand curves for private and public goods?

Accepted Answer

Private goods are added horizontally, public goods are added vertically.

Macroeconomics Midterm Study Guide: Elasticity, Surplus, Taxes, and Public Goods

Study Guide - Practice Questions

Study Guide - Flashcards