Microeconomics Quiz Questions
Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true?
It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound.
The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a
Laffer curve
Which of the following is true regarding tradable pollution permits and Pigovian taxes?
Pigovian taxes and tradable pollution permits create an efficient market for pollution
A 10 per cent increase in the minimum wage is more likely to raise unemployment among teenage workers than among mid-career professional workers
T
A Pigovian tax sets the price of pollution while tradable pollution permits sets the quantity of pollution.
T
A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceeded the costs to the sellers.
T
A larger tax always generates a larger deadweight loss.
T
A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.
T
A price floor set above the equilibrium price is a binding constraint.
T
A tax causes a deadweight loss because it eliminates some of the potential gains from trade.
T
A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.
T
A tax creates a tax wedge between a buyer and a seller. This causes the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall.
T
An advantage of using tradable pollution permits to reduce pollution is that the regulator need not know anything about the demand for pollution rights.
T
Consumer surplus is a good measure of buyers' benefits if buyers are rational.
T
Cost to the seller includes the opportunity cost of the seller's time.
T
Equilibrium in a competitive market maximizes total surplus.
T
Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.
T
For any given demand curve for pollution, a regulator can achieve the same level of pollution with either a Pigovian tax or by allocating tradable pollution permits.
T
If a market generates a negative externality, a Pigovian tax will move the market toward a more efficient outcome.
T
If a market generates a negative externality, the social cost curve is above the supply curve (private cost curve).
T
If a market generates a positive externality, the social value curve is above the demand curve (private value curve).
T
If a tax is doubled, the deadweight loss from the tax more than doubles.
T
If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.
T
If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.
T
If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.
T
If medicine is a necessity, the burden of a tax on medicine will probably fall more heavily on the buyers of medicine.
T
If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.
T
If transactions costs exceed the potential gains from an agreement between affected parties to an externality, there will be no private solution to the externality.
T
In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.
T
Producer surplus is the area above the supply curve and below the price.
T
The height of the supply curve is the marginal seller's cost.
T
The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient.
T
The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.
T
The two main types of market failure are market power and externalities.
T
The ultimate burden of a tax falls most heavily on the side of the market that is less elastic.
T
When a group of neighbours ask a householder to tidy his front garden because they keep their own gardens tidy and attractive, they are attempting to use moral codes and social sanctions to internalize the externality associated with an untidy garden in a residential area.
T
Which of the following statements about the burden of a tax is correct?
The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation
Suppose the equilibrium price for apartments is €500 per month and the government imposes rent controls of €250. Which of the following is unlikely to occur as a result of the rent controls?
The quality of apartments will improve
Which of the following statements about a binding price ceiling is true?
The shortage created by the price ceiling is greater in the long run than in the short run
Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs?
Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music.
Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will be sold and what is the value of consumer surplus in this market?
Two vases will be sold and consumer surplus is €5
When an individual buys a car in a congested urban area, it generates
a negative externality
A binding price ceiling creates
a shortage
Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land would generate
a small deadweight loss and the burden of the tax would fall on the landlord
A negative externality generates
a social cost curve that is above the supply curve (private cost curve) for a good
A positive externality generates
a social value curve that is above the demand curve (private value curve) for a good
Which of the following would likely cause the greatest deadweight loss?
a tax on cruise line tickets
Producer surplus is the area
above the supply curve and below the price
If a market is efficient, then
all of the above
Which of the following is true with regard to a tax on labour income? Taxes on labour income tend to encourage
all of the above
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
allow the market to seek equilibrium on its own
The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of
an attempt to internalize a negative externality
When wealthy alumni provide charitable contributions to their universities to reduce the tuition payments of current students, it is an example of
an attempt to internalize a positive externality
Which of the following takes place when a tax is placed a good?
an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold
If a market generates a side effect or externality, then free market solutions
are inefficient
If a producer has market power (can influence the price of the product in the market) then free market solutions
are inefficient
Consumer surplus is the area
below the demand curve and above the price
Total surplus is the area
below the demand curve and above the supply curve
For a price ceiling to be a binding constraint on the market, the government must set it
below the equilibrium price
The surplus caused by a binding price floor will be greatest if
both supply and demand are elastic
Deadweight loss is greatest when
both supply and demand are relatively elastic
A tax on petrol is likely to
cause a greater deadweight loss in the long run when compared to the short run
When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold than otherwise, the tax has
caused a deadweight loss
Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?
costs incurred to reduce the pollution
The reduction of a tax
could increase tax revenue if the tax had been extremely high
Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike?
200
If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is
2000
Which of the following statements is true if the government places a price ceiling on petrol at €1.50 per litre and the equilibrium price is €1.00 per litre?
A significant increase in the demand for petrol could cause the price ceiling to become a binding constraint
Which of the following workers would be most likely to find it more difficult to get a job after a rise in the minimum wage rate?
A teenage worker with few qualifications
An increase in the price of a good along a stationary demand curve
decreases consumer surplus
Within the supply and demand model, a tax collected from the buyers of a good shifts the
demand curve downward by the size of the tax per unit
The burden of a tax falls more heavily on the sellers in a market when
demand is elastic and supply is inelastic
The burden of a tax falls more heavily on the buyers in a market when
demand is inelastic and supply is elastic
Joe has ten pairs of football boots and Sue has none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots at €100 and Sue values a pair of boots at €40, then to maximize
efficiency Joe should receive the glove
For which of the following products would the burden of a tax likely fall more heavily on the sellers?
entertainment
A negative externality (that has not been internalized) causes the
equilibrium quantity to exceed the optimal quantity
A tax placed on a good that is a necessity for consumers will likely generate a tax burden that
falls more heavily on buyers
If buyers are rational and there is no market failure,
free market solutions are efficient and free market solutions maximize total surplus
If a tax on a good is doubled, the deadweight loss from the tax
increases by a factor of four
An increase in the price of a good along a stationary supply curve
increases producer surplus
Adam Smith's "invisible hand" concept suggests that a competitive market outcome
maximizes total surplus
A buyer's willingness to pay is that buyer's
maximum amount they are willing to pay for a good
A positive externality (that has not been internalized) causes the
optimal quantity to exceed the equilibrium quantity
A tax of €1.00 per litre on petrol
places a tax wedge of €1.00 between the price the buyers pay and the price the sellers receive
Tradable pollution permits
set the quantity of pollution
A price floor
sets a legal minimum on the price at which a good can be sold
A Pigovian tax on pollution
sets the price of pollution
To internalize a positive externality, an appropriate public policy response would be to
subsidize the good
Within the supply and demand model, a tax collected from the sellers of a good shifts the
supply curve upward by the size of the tax per unit
To internalize a negative externality, an appropriate public policy response would be to
tax the good
Medical care clearly enhances people's lives. Therefore, we should consume medical care until
the benefit buyers place on medical care is equal to the cost of producing it
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
the cost of production on the last unit produced exceeds the value placed on it by buyers
The seller's cost of production is
the minimum amount the seller is willing to accept for a good
Which of the following is an example of a price floor?
the minimum wage
The most efficient pollution control system would ensure that
the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount
Which side of the market is more likely to lobby government for a price floor?
the sellers
When a tax is collected from the buyers in a market,
the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers
An externality is
the uncompensated impact of one person's actions on the well-being of a bystander
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
the value placed on the last unit of production by buyers exceeds the cost of production
According to the Coase theorem, private parties can solve the problem of externalities if
there are no transaction costs
The government engages in a technology policy
to internalize the positive externality associated with technology-enhancing industries
A larger tax always generates more tax revenue.
F
A market that generates a negative externality that has not been internalized generates an equilibrium quantity that is less than the optimal quantity.
F
A positive externality is an external benefit that accrues to the buyers in a market while a negative externality is an external cost that accrues to the sellers in a market.
F
A price ceiling set below the equilibrium price causes a surplus.
F
A price floor in a market always creates a surplus in that market.
F
A tax always makes a market less efficient.
F
A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.
F
A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.
F
A tax will generate a greater deadweight loss if supply and demand are inelastic.
F
A €10 tax on football boots will always raise the price that the buyers pay for football boots by €10.
F
According to the Coase theorem, an externality always requires government intervention in order to internalize the externality.
F
Consumer surplus is the buyer's willingness to pay minus the seller's cost.
F
Deadweight loss is the reduction in consumer surplus that results from a tax.
F
Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.
F
If John values having his hair cut at €20 and Mary's cost of providing the hair cut is €10, any tax on hair cuts larger than €10 will eliminate the gains from trade and cause a €20 loss of total surplus.
F
If Roberto values smoking in a restaurant at €10 and Natalie values clean air while she eats at €15, according to the Coase theorem, Roberto will not smoke in the restaurant only if Natalie owns the right to clean air.
F
If the equilibrium price of petrol is €1.00 per litre and the government places a price ceiling on petrol of €1.50 per litre, the result will be a shortage of petrol.
F
If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00
F
Producer surplus is a measure of the unsold inventories of suppliers in a market.
F
Producing more of a product always adds to total surplus.
F
The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers.
F
The majority of economists do not like the idea of putting a price on polluting the environment.
F
The minimum wage helps all teenagers because they receive higher wages than they would otherwise.
F
To reduce pollution by some targeted amount, it is most efficient if each firm that pollutes reduces its pollution by an equal amount.
F
Total surplus is the seller's cost minus the buyer's willingness to pay.
F
When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.
F
When we use the model of supply and demand to analyse a tax collected from the buyers, we shift the demand curve upward by the size of the tax.
F
Suppose an industry emits a negative externality such as pollution and the possible methods to internalize the externality are command-and-control policies, Pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favoured to least favoured):
tradable pollution permits, Pigovian taxes, command-and-control policies
When a tax on a good starts small and is gradually increased, tax revenue
will first rise and then fall
