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, all else equal?

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 competitive market. Which of the following best explains why?

Accepted Answer

The tax reduces the quantity traded below the efficient level, 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 the government imposes a quota in the dairy industry, which of the following is NOT a predicted effect?

Accepted Answer

Increase in quantity supplied.

Question 7

Which of the following best describes 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 8

Suppose tofu becomes more popular as a health food and new technology reduces production costs. What is the predicted effect on equilibrium price and quantity in the tofu market?

Accepted Answer

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

Question 9

The tax incidence formula for the share of tax paid by consumers is given by:

Accepted Answer

$$\frac{E_s}{E_s + |E_d|}$$

Question 10

If the government wants to minimize deadweight loss (DWL) from taxation, it should tax goods with:

Accepted Answer

Inelastic demand, because quantity traded changes little and DWL is smaller.

Question 11

Which of the following is a likely reason why governments generally avoid taxing groceries heavily?

Accepted Answer

Demand for groceries is inelastic, but groceries are necessities and taxing them is politically unpopular.

Question 12

A per unit subsidy to producers will have which of the following effects in a competitive market?

Accepted Answer

The supply curve shifts downward (or rightward) by the amount of the subsidy.

Question 13

If the price elasticity of demand for a good is very low (inelastic), who bears most of the burden of a per unit tax?

Accepted Answer

Consumers bear most of the tax burden.

Question 14

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

Accepted Answer

Initial recipients of quotas benefit, but over time, the value of the quota is capitalized into the price of the license, so new entrants do not benefit.

Question 15

Suppose 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 16

Which of the following is true about competitive equilibrium in a market?

Accepted Answer

It maximizes the sum of consumer surplus and producer surplus.

Question 17

If a new technology reduces the marginal cost of production for all firms in a market, what is the expected effect on the supply curve?

Accepted Answer

The supply curve shifts to the right.

Question 18

Which of the following is NOT a factor that shifts the demand curve?

Accepted Answer

A change in the price of the good itself.

Question 19

Suppose the government issues a limited number of licenses (quotas) for egg production. What is the likely effect on the market price and quantity of eggs?

Accepted Answer

Price increases and quantity decreases.

Question 20

Which of the following best describes the effect of a per unit tax on the marginal cost (MC) of each firm?

Accepted Answer

The marginal cost increases by the amount of the tax.

Market Equilibrium and Government Intervention: Microeconomics Study Notes

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