Question 1

Suppose the government imposes a $2 per unit tax on sellers of a product. Which of the following best describes the statutory and actual incidence of the tax?

Accepted Answer

Statutory incidence falls on sellers, but actual incidence is shared between buyers and sellers depending on the relative elasticities of supply and demand.

Question 2

A negative externality occurs when:

Accepted Answer

The social cost of a good exceeds the private cost.

Question 3

Which of the following is NOT a characteristic of a public good?

Accepted Answer

Provided by the government

Question 4

Suppose the price elasticity of demand for a product is $$-0.5. If $$the price increases by 10%, what happens to total revenue?

Accepted Answer

Total revenue increases because demand is inelastic.

Question 5

If the cross-price elasticity of demand between two goods is $$+0.8$$, what does this indicate?

Accepted Answer

The goods are substitutes.

Question 6

A factory emits pollution that affects nearby residents. Which curve shifts in the market for the factory's product to reflect the negative externality?

Accepted Answer

The supply curve shifts left to reflect higher social costs.

Question 7

Which formula is used to calculate the price elasticity of demand using the midpoint method?

Accepted Answer

$$ \frac{(Q_2$ - Q_1$)}{(Q_2$ + Q_1$)/2} \div \frac{(P_2$ - P_1$)}{(P_2$ + P_1$)/2} $$

Question 8

Which of the following is an example of a positive externality?

Accepted Answer

A homeowner planting flowers that beautify the neighborhood.

Question 9

If a good is perfectly inelastic, what does its demand curve look like?

Accepted Answer

A vertical line.

Question 10

Suppose a consumer is maximizing utility by allocating their budget between two goods, $$A$$ and $$B. $$Which condition must be satisfied?

Accepted Answer

$$ \frac{MU_A}{P_A} = \frac{MU_B}{P_B} $$

Question 11

If the government wants to correct for a positive externality, which policy is most appropriate?

Accepted Answer

Provide a subsidy to consumers or producers.

Question 12

Which of the following best explains the water-diamond paradox?

Accepted Answer

Diamonds are more expensive than water because their marginal utility is higher, even though water's total utility is greater.

Question 13

If the price of a normal good increases, which effect will cause consumers to buy less of it?

Accepted Answer

Both the income effect and the substitution effect.

Question 14

Which of the following is a potential problem with correcting negative externalities using taxes?

Accepted Answer

Taxes may be set too high or too low, failing to achieve the socially optimal outcome.

Question 15

A public radio station is funded by donations but is available to everyone. Which economic problem does this illustrate?

Accepted Answer

The free rider problem.

Question 16

If the price elasticity of supply is $$1.5$$, what does this indicate about the supply curve?

Accepted Answer

Supply is elastic; quantity supplied responds strongly to price changes.

Question 17

Suppose a good has an income elasticity of demand of $$-0.3. $$What type of good is this?

Accepted Answer

An inferior good.

Question 18

Which of the following best describes diminishing marginal utility?

Accepted Answer

Each additional unit consumed provides less additional utility than the previous one.

Question 19

If a market is perfectly competitive and there are no externalities, what is the relationship between private and social costs?

Accepted Answer

Private costs equal social costs.

Question 20

A city government is considering building a new park. The park is non-excludable and non-rivalrous. What type of good is this?

Accepted Answer

A public good.

Microeconomics Study Guide: Supply & Demand Extensions, Externalities, Elasticity, and Consumer Choice

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