Question 1

Suppose a previously illegal drug is legalized, resulting in a rightward shift of the supply curve. If total expenditure on the drug falls after legalization, what does this imply about the price elasticity of demand for the drug?

Accepted Answer

Demand is inelastic

Question 2

After the legalization of a drug, the supply curve shifts from $$S_1 to$$ $$S_2$$, causing the equilibrium price to fall from $$P_1 to$$ $$P_2$$ and quantity to rise from $$Q_1 to$$ $$Q_2. If $$demand is inelastic, what happens to total revenue (expenditure) on the drug?

Accepted Answer

Total revenue decreases

Question 3

A $10 per unit tax is imposed on sellers. If the demand curve is steeper than the supply curve, which of the following is true?

Accepted Answer

Buyers bear most of the tax burden

Question 4

If a government imposes a tariff on an imported good, what is the immediate effect on the domestic market for that good?

Accepted Answer

Quantity of imports decreases

Question 5

A prohibitive tariff is imposed on good R, causing imports to fall to zero. What is the resulting deadweight loss?

Accepted Answer

Deadweight loss is maximized

Question 6

Anne consumes goods X and Y. If the price of X decreases and both goods are normal, what is the direction of the substitution effect for good X?

Accepted Answer

Anne consumes more of X

Question 7

In a perfectly competitive industry with a horizontal long-run supply curve, what happens in the long run if demand falls and firms initially make losses?

Accepted Answer

Firms exit, supply decreases, and economic profit returns to zero

Question 8

A profit-maximizing monopolist faces a downward-sloping demand curve and a U-shaped average total cost curve. If the monopolist earns positive economic profit, where does the price set by the monopolist lie relative to marginal cost ($$MC) $$and average total cost ($$ATC$$)?

Accepted Answer

$$P \u003e MC$$ and $$P \u003e ATC$$

Question 9

Consider the following game: Player A chooses UP or DOWN, Player B chooses LEFT or RIGHT. The payoffs are (1,4) for (UP,LEFT), (2,2) for (DOWN,LEFT), (0,0) for (UP,RIGHT), and (4,1) for (DOWN,RIGHT). What is the Nash equilibrium of this game?

Accepted Answer

A chooses DOWN, B chooses RIGHT

Question 10

In a sequential game where Arthur moves first and Terry observes Arthur's move before choosing, which concept is used to determine the optimal strategies for both players?

Accepted Answer

Subgame perfect equilibrium

Question 11

Which of the following is a reason why the Consumer Price Index (CPI) may overstate the increase in the cost of living?

Accepted Answer

It ignores substitution bias

Question 12

Suppose a government imposes a tariff that reduces imports but does not eliminate them. What happens to domestic producer surplus?

Accepted Answer

Producer surplus increases

Question 13

If the demand for a good is perfectly inelastic, what is the effect of a per-unit tax on the price paid by buyers?

Accepted Answer

Buyers pay the entire tax

Question 14

Which of the following best describes the substitution effect when the price of a normal good falls?

Accepted Answer

The consumer buys more of the good

Question 15

In the context of tariffs, what does the area representing deadweight loss indicate?

Accepted Answer

The loss in total surplus due to inefficient production and consumption

Question 16

If a monopolist is earning positive economic profit, which area on a standard monopoly diagram represents consumer surplus?

Accepted Answer

The area below the demand curve and above the monopoly price

Question 17

Which of the following is an example of quality adjustment bias in the CPI?

Accepted Answer

The CPI fails to adjust for improvements in product quality

Question 18

In a perfectly competitive market, what happens to the market price in the long run if firms are making economic losses?

Accepted Answer

Market price rises as firms exit

Question 19

If a monopolist faces a demand curve $$P = 100 - 2Q$$ and a marginal cost of $$MC = 20$$, what is the profit-maximizing quantity?

Accepted Answer

$$Q = 10$$

Question 20

In a two-player sequential game, why might the first mover have an advantage?

Accepted Answer

The first mover can commit to a strategy, influencing the second player's response

Microeconomics Study Guide: Demand, Supply, Tariffs, Competition, Monopoly, Game Theory, and CPI

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