A Quick Microeconomics Knowledge Test

2.

If production of an item results in negative external costs, then:

Market forces will always correct the problem
The market price is below the socially preferred price that reflects the external costs
The market price is above the socially preferred price that reflects the external costs
The market quantity is too low from society's point of view

Correct Answer

A. The market price is below the socially preferred price that reflects the external costs

Explanation

When the production of an item results in negative external costs, it means that there are additional costs imposed on society that are not accounted for in the market price. In this case, the correct answer suggests that the market price is below the socially preferred price that reflects these external costs. This means that the market price does not fully incorporate the negative effects on society, resulting in an inefficient allocation of resources. To achieve a socially preferred outcome, the market price should be higher to account for these external costs.

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3.

Government can correct for negative externalities by:

Decreasing the costs to those responsible for the externality
Decreasing taxes
Increasing taxes or regulation
Allowing the market system to correct the problem

Correct Answer

A. Increasing taxes or regulation

Explanation

Increasing taxes or regulation is a way for the government to correct for negative externalities. By imposing higher taxes or implementing stricter regulations on activities that generate negative externalities, the government aims to discourage these activities and reduce their impact on society. This approach internalizes the costs of the externality, making those responsible for it bear the burden. It also provides an incentive for individuals and businesses to find alternative, less harmful ways of operating, thus helping to address the negative effects caused by externalities.

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4.

Suppose that when the price of a soft drink rises 10%, the quantity demanded of the soft drink falls 5%. Based on this information, what is the approximate absolute price elasticity of demand for a soft drinks?

0.05
0.5
0.2
2.0

Correct Answer

A. 0.5

Explanation

The approximate absolute price elasticity of demand for a soft drink is 0.5. This means that for every 1% increase in price, the quantity demanded will decrease by 0.5%. The negative sign indicates that there is an inverse relationship between price and quantity demanded, meaning that as price increases, quantity demanded decreases. The magnitude of 0.5 suggests that the demand for soft drinks is relatively inelastic, meaning that changes in price have a smaller impact on quantity demanded.

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5.

The price elasticity of demand measures:

How much the market price changes in response to a change in demand
The producers' sensitivity to a price change
The consumers' sensitivity to a price change
How much the demand changes in response to a change in income

Correct Answer

A. The consumers' sensitivity to a price change

Explanation

The price elasticity of demand measures the sensitivity of consumers to a change in price. It quantifies how much the quantity demanded of a good or service changes in response to a change in its price. A high price elasticity of demand indicates that consumers are highly sensitive to price changes, meaning that a small increase in price would lead to a significant decrease in demand, and vice versa. On the other hand, a low price elasticity of demand suggests that consumers are not very responsive to price changes, indicating that a change in price would have a minimal impact on the quantity demanded.

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6.

In economics, utility is defined as:

The usefulness of a good or service
The objective measure of the desirability of a good or service
The want-satisfying power of a good or service
The utilitarian value of a good or service

Correct Answer

A. The want-satisfying power of a good or service

Explanation

Utility in economics refers to the want-satisfying power of a good or service. It measures the satisfaction or benefit that individuals derive from consuming a particular good or service. Utility is subjective and varies from person to person, as it depends on individual preferences and desires. The concept of utility is important in understanding consumer behavior and decision-making, as individuals aim to maximize their utility by choosing goods and services that provide them with the greatest satisfaction or fulfill their wants and needs.

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7.

Marginal utility is defined as:

The increase in utility divided by the total number of units consumed
The change in total utility divided by the change in number of units consumed
The total utility divided by the total number of units consumed
The number of units consumed divided by the total utility

Correct Answer

A. The change in total utility divided by the change in number of units consumed

Explanation

Marginal utility is a concept in economics that measures the additional utility or satisfaction gained from consuming an additional unit of a good or service. It is calculated by dividing the change in total utility by the change in the number of units consumed. This means that it measures the increase in satisfaction per additional unit consumed. By dividing the change in total utility by the change in the number of units consumed, we can determine how much additional satisfaction is gained from each additional unit consumed.

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8.

Consumers are most satisfied when:

All of their income has been saved
The total level of utility is as high as possible
They save more than they spend
Goods are bought "on sale."

Correct Answer

A. The total level of utility is as high as possible

Explanation

Consumers are most satisfied when the total level of utility is as high as possible. Utility refers to the satisfaction or happiness that individuals derive from consuming goods or services. Therefore, when the total level of utility is maximized, it means that consumers are getting the most satisfaction possible from their consumption choices. This implies that they are making optimal decisions, selecting goods and services that provide them with the highest level of satisfaction and meeting their needs and preferences effectively.

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A Quick Microeconomics Knowledge Test

A situation in which a benefit or a cost associated with an economic activity spills over to third parties is called:

Quiz Preview

If production of an item results in negative external costs, then:

Government can correct for negative externalities by:

Suppose that when the price of a soft drink rises 10%, the quantity demanded of the soft drink falls 5%. Based on this information, what is the approximate absolute price elasticity of demand for a soft drinks?

The price elasticity of demand measures:

In economics, utility is defined as:

Marginal utility is defined as:

Consumers are most satisfied when: