Question 1

Suppose the government imposes a per unit tax of $$t on $$producers in a competitive market. Which of the following best describes the immediate effect on the market supply curve?

Accepted Answer

The supply curve shifts upward (or leftward) by the amount $$t.$$

Question 2

If the price of a substitute good increases, what is the expected effect on the demand curve for the original good?

Accepted Answer

The demand curve shifts to the right.

Question 3

Which of the following statements about market equilibrium is correct?

Accepted Answer

At equilibrium, marginal value equals marginal cost: $$MV = MC.$$

Question 4

A per unit tax creates deadweight loss (DWL) in a market. What is the primary reason for this?

Accepted Answer

The tax reduces the quantity traded below the efficient equilibrium, resulting in unrealized gains from trade.

Question 5

Suppose the government wants to maximize tax revenue from a per unit tax. Should it tax goods with elastic or inelastic demand, and why?

Accepted Answer

Inelastic demand, because quantity demanded does not decrease much when taxed.

Question 6

If both the demand and supply curves for tofu shift to the right over time, as described in the tofu example, what is the predicted effect on equilibrium quantity and price?

Accepted Answer

Equilibrium quantity increases; equilibrium price could rise, fall, or stay the same depending on the relative shifts.

Question 7

Which of the following best explains why the government typically does NOT tax groceries heavily?

Accepted Answer

Groceries have inelastic demand, so taxing them would be regressive and burden low-income consumers.

Question 8

A quota is imposed in the dairy industry, limiting the amount of milk each farmer can produce. What is a likely effect of this policy?

Accepted Answer

Market price increases, quantity decreases, and there is a wealth transfer from consumers to producers.

Question 9

If the government wants to minimize deadweight loss (DWL) from taxation, which type of good should it tax?

Accepted Answer

Goods with inelastic demand.

Question 10

Suppose the price elasticity of supply is $$E_s = 2$$ and the absolute value of the price elasticity of demand is $$|E_d| = 1. $$According to the tax incidence formula $$\frac{E_s}{E_s + |E_d|}$$, what fraction of a per unit tax is paid by consumers?

Accepted Answer

$$\frac{2}{2+1} = \frac{2}{3}$$

Question 11

Which of the following is TRUE regarding the difference between a change in quantity demanded and a change in demand?

Accepted Answer

A change in quantity demanded is a movement along the demand curve due to a price change; a change in demand is a shift of the demand curve due to non-price factors.

Question 12

A per unit subsidy is introduced in a market. Which of the following is the most likely effect?

Accepted Answer

The supply curve shifts downward (or rightward), increasing equilibrium quantity and decreasing equilibrium price.

Question 13

Which of the following best describes the 'transitional gains trap' in the context of quotas?

Accepted Answer

Only the initial recipients of quotas benefit; over time, the value of the quota is capitalized into the price of the license.

Question 14

If the government imposes a per unit tax on consumers, what is the effect on the demand curve as perceived by producers?

Accepted Answer

The demand curve shifts downward (or leftward) by the amount of the tax.

Question 15

Which of the following is NOT a likely effect of a government-imposed quota in a competitive market?

Accepted Answer

Increase in consumer surplus.

Question 16

In a competitive market, which condition must hold for both consumers and producers at equilibrium?

Accepted Answer

$$MV(Q) = MC(Q)$$

Question 17

Which of the following would cause a leftward shift in the supply curve for a good?

Accepted Answer

An increase in input prices.

Question 18

If a per unit tax is imposed on a good with perfectly inelastic demand, who bears the entire burden of the tax?

Accepted Answer

Consumers bear the entire burden.

Question 19

Which of the following best describes the effect of a rightward shift in the demand curve, holding supply constant?

Accepted Answer

Equilibrium price and quantity both increase.

Market Equilibrium and Government Intervention: Microeconomics Study Notes

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