Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on a third party not directly involved in a transaction.

Question 2

Suppose a factory emits pollution that harms nearby residents. According to the Coase Theorem, under what condition can the parties reach an efficient outcome?

Accepted Answer

Property rights are well-defined and transaction costs are low.

Question 3

A city government wants to reduce carbon emissions. Which policy is most likely to achieve a specific emissions target at the lowest cost?

Accepted Answer

Implementing a cap-and-trade system for emission allowances.

Question 4

Which of the following goods is both non-excludable and non-rival?

Accepted Answer

National defense

Question 5

If the price elasticity of demand for a product is $-2$, what will happen to total revenue if the price increases by 10%?

Accepted Answer

Total revenue will decrease.

Question 6

Given the following information, calculate the price elasticity of demand using the midpoint formula: The price of a good increases from $\$10$ to $\$12$, and the quantity demanded decreases from $100$ to $80$ units.

Accepted Answer

$\displaystyle \frac{(80-100)}{(80+100)/2} \div \frac{(12-10)}{(12+10)/2} = \frac{-20}{90} \div \frac{2}{11} = -0.222 \div 0.182 = -1.22$

Question 7

Which factor is most likely to make the demand for a good more elastic?

Accepted Answer

The good has many close substitutes.

Question 8

If the cross-price elasticity of demand between two goods is positive, what does this imply?

Accepted Answer

The goods are substitutes.

Question 9

A consumer maximizes utility by allocating their budget so that:

Accepted Answer

$\displaystyle \frac{MU_A}{P_A} = \frac{MU_B}{P_B}$ for all goods A and B.

Question 10

Suppose the price of good X falls. Which of the following best describes the substitution effect?

Accepted Answer

The consumer buys more of good X because it is relatively cheaper compared to other goods.

Question 11

Which of the following is an example of a sunk cost?

Accepted Answer

A non-refundable deposit paid for a concert ticket.

Question 12

A firm experiences diminishing marginal returns to labor when:

Accepted Answer

Adding additional workers increases output, but by smaller and smaller amounts.

Question 13

Which of the following best explains why short-run average total cost curves are U-shaped?

Accepted Answer

Specialization lowers costs at first, but diminishing marginal returns eventually increase costs.

Question 14

If a firm’s long-run average cost decreases as output increases, the firm is experiencing:

Accepted Answer

Economies of scale.

Question 15

Which of the following is an implicit cost for a business owner?

Accepted Answer

The forgone salary the owner could have earned working elsewhere.

Question 16

Suppose a firm’s total cost is given by $TC = 100 + 5Q + Q^2$. What is the marginal cost when $Q = 10$?

Accepted Answer

$\displaystyle MC = \frac{dTC}{dQ} = 5 + 2Q = 5 + 2 	imes 10 = 25$

Question 17

Which of the following best describes the minimum efficient scale?

Accepted Answer

The lowest level of output at which long-run average cost is minimized.

Question 18

A public park is often subject to the 'tragedy of the commons' because:

Accepted Answer

It is non-excludable and rival in consumption.

Question 19

If a good is excludable but non-rival, which category does it fall into?

Accepted Answer

Quasi-public good

Question 20

Suppose a consumer is influenced by price anchoring when shopping for a new phone. Which scenario best illustrates this behavioral bias?

Accepted Answer

The consumer perceives a $\$1000$ phone as a good deal after seeing a $\$1500$ phone.

Midterm 2 Study Guide: Externalities, Elasticity, Consumer Choice, and Production

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