Q: The price elasticity of demand is calculated as:

$$e_d = \frac{\%\ \text{change in Qd}}{\%\ \text{change in P}}$$

Question 1

Suppose the government imposes a $2 per unit tax on sellers in a competitive market. Which of the following statements is correct regarding the effect on equilibrium price and quantity?

Accepted Answer

The price buyers pay increases by less than $2, and the equilibrium quantity decreases.

Question 2

A price ceiling is only effective if it is set:

Accepted Answer

Below the equilibrium price.

Question 3

If the price elasticity of demand for a good is $e_d = 0.4$, what will happen to total revenue if the price increases?

Accepted Answer

Total revenue will increase.

Question 4

Suppose the government sets a price floor that is 50 cents above the equilibrium price. What is the most likely result?

Accepted Answer

A surplus will occur.

Question 5

The price elasticity of demand is calculated as:

Accepted Answer

$$e_d = \frac{\%\ 	ext{change in Qd}}{\%\ 	ext{change in P}}$$

Question 6

If the cross-price elasticity of demand between butter and margarine is positive, what does this imply?

Accepted Answer

Butter and margarine are substitutes.

Question 7

A government introduces a production quota below the equilibrium quantity. What is the most likely effect on price and quantity?

Accepted Answer

Price increases and quantity decreases.

Question 8

If the income elasticity of demand for a good is negative, the good is:

Accepted Answer

An inferior good.

Question 9

Suppose the price of oranges falls from $16 to $14 and the quantity demanded increases from 10 to 14. What is the price elasticity of demand using the midpoint formula?

Accepted Answer

$$e_d = \frac{(14-10)/((14+10)/2)}{(14-16)/((14+16)/2)} = \frac{4/12}{-2/15} = -2.5$$

Question 10

If a $2 subsidy is given to buyers, what happens to the price buyers pay and the price sellers receive?

Accepted Answer

Buyers pay less than before, and sellers receive more than before, but the difference is less than $2.

Question 11

Which of the following best describes the effect of a binding price ceiling?

Accepted Answer

It creates a shortage.

Question 12

If the government wants to increase the total revenue of a product with inelastic demand, it should:

Accepted Answer

Increase the price.

Question 13

A shortage in a market occurs when:

Accepted Answer

Quantity demanded is greater than quantity supplied.

Question 14

If the government imposes a tax on buyers, the demand curve:

Accepted Answer

Shifts downward by the amount of the tax.

Question 15

Which of the following goods is most likely to have elastic demand?

Accepted Answer

Movies ($e_d = 4.41$)

Question 16

If the cross-price elasticity of demand between two goods is negative, the goods are:

Accepted Answer

Complements.

Question 17

Suppose the government provides a $2 per unit subsidy to sellers. What is the effect on the supply curve?

Accepted Answer

The supply curve shifts downward by $2.

Question 18

If the price elasticity of demand for a good is greater than 1, a decrease in price will:

Accepted Answer

Increase total revenue.

Question 19

Which of the following scenarios best illustrates the effect of a production quota?

Accepted Answer

The government limits the quantity produced below equilibrium, raising price and reducing quantity.

Question 20

If the income elasticity of demand for good X is $1.5$, for good Y is $-0.5$, and for good Z is $0.2$, which of the following is true?

Accepted Answer

Good X is a luxury, good Y is inferior, and good Z is a normal good.

Microeconomics Study Guide: Market Equilibrium, Elasticity, and Government Intervention

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