Question 1

Suppose a factory emits pollution that harms nearby residents. According to the Coase Theorem, under what conditions can the residents and the factory reach a socially efficient outcome through private bargaining?

Accepted Answer

If transaction costs are low, property rights are clearly defined, and bargaining is possible.

Question 2

A fishing lake is overused because each fisher ignores the harm their catch imposes on others. Which of the following best describes the market failure in this scenario?

Accepted Answer

The marginal private benefit exceeds the marginal social benefit, leading to overuse.

Question 3

A city considers a Pigouvian tax to reduce methane emissions. If the marginal benefit of abatement is $$MB = 100 - 2Q$$ and the marginal cost is $$MC = 20 + Q$$, what is the socially optimal quantity of abatement $$Q^*$$?

Accepted Answer

$$Q^* = 26.67$$

Question 4

Why do Pigouvian taxes help internalize negative externalities?

Accepted Answer

They force firms to consider the external cost by making them pay for the harm caused.

Question 5

In a cap-and-trade system for pollution, which firms will reduce the most pollution?

Accepted Answer

Firms with the lowest marginal abatement costs.

Question 6

Which of the following best describes economic efficiency in a competitive market?

Accepted Answer

No mutually beneficial trades are left, and $$P = MC.$$

Question 7

A monopoly faces the demand curve $$P = 60 - Q$$ and has constant marginal cost $$MC = 20. $$What is the profit-maximizing quantity for the monopolist?

Accepted Answer

$$Q = 10$$

Question 8

Why does a monopoly avoid producing in the inelastic region of the demand curve?

Accepted Answer

Because increasing output in the inelastic region reduces total revenue.

Question 9

Suppose the government sets a price floor above the equilibrium price in the wheat market. What is the likely effect?

Accepted Answer

A surplus of wheat and deadweight loss due to inefficiency.

Question 10

A natural monopoly has high fixed costs and low marginal costs. If the regulator forces the monopoly to set $$P = MC$$, what is a likely outcome?

Accepted Answer

The monopoly may incur losses and require a subsidy to remain in business.

Question 11

Why is the mathematical approach to producer theory similar to consumer theory?

Accepted Answer

Both involve maximizing a function subject to a constraint using marginal analysis.

Question 12

In the short run, what happens to the supply curve of a perfectly competitive firm if the market price falls below average variable cost?

Accepted Answer

The firm will shut down and supply zero output.

Question 13

If the price of good X falls, and X is a normal good, what are the directions of the substitution and income effects on the quantity demanded of X?

Accepted Answer

Both effects increase quantity demanded.

Question 14

Which of the following is true about Giffen goods?

Accepted Answer

The income effect is larger than the substitution effect and works in the opposite direction.

Question 15

In monopolistic competition, what happens in the long run if firms are earning positive economic profits?

Accepted Answer

New firms enter, shifting the demand curve for each firm left until profits are zero.

Question 16

Which of the following best explains why market equilibrium may not maximize social welfare in the presence of externalities?

Accepted Answer

External costs or benefits are not reflected in market prices, leading to over- or under-production.

Question 17

A monopolist faces the demand curve $$P = 100 - 2Q$$ and marginal cost $$MC = 20. $$What price will the monopolist charge at the profit-maximizing output?

Accepted Answer

$$P = 60$$

Question 18

Which of the following is NOT a necessary condition for the Coase Theorem to hold?

Accepted Answer

A large number of affected parties with high bargaining costs.

Question 19

Suppose a minimum wage is set above the equilibrium wage. What is the most likely effect on the labor market?

Accepted Answer

A surplus of labor (unemployment) and deadweight loss.

Microeconomics Study Guide: Externalities, Efficiency, Market Structures, and Consumer/Producer Theory

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