BASIC
Which of the following best explains why demerit goods are overconsumed in a free market?
A. They have positive externalities
B. Marginal private benefit exceeds marginal social benefit
C. Consumers underestimate private costs
D. They are always provided free of charge
C. Consumers underestimate private costs
Which characteristic is essential to classify a good as a public good?
A. Excludability and rivalry
B. Non-rivalry and non-excludability
C. High production cost
D. Government provision
B. Non-rivalry and non-excludability
Which of the following is the most likely consequence of underconsumption of merit goods?
A. Overproduction of private goods
B. Underproduction of demerit goods
C. Socially suboptimal welfare
D. Rising private marginal benefit
C. Socially suboptimal welfare
Education is a merit good because:
A. Its consumption creates positive externalities and is often undervalued by consumers
B. It is always provided by the public sector
C. It is non-rivalrous
D. It involves large sunk cost
A. Its consumption creates positive externalities and is often undervalued by consumers
A streetlight is an example of a public good because:
A. You can be charged for using it
B. Its provision has opportunity costs
C. One person's use does not diminish another’s and it’s hard to exclude users
D. It is highly rivalrous
C. One person's use does not diminish another’s and it’s hard to exclude users
Why are vaccines often considered merit goods?
A. They are only consumed by the rich
B. They exhibit non-excludability
C. They generate significant positive consumption externalities
D. They reduce government revenue
C. They generate significant positive consumption externalities
Which of these best differentiates merit goods from public goods?
A. Rivalry in consumption
B. Degree of government subsidy
C. Market price determination
D. Elasticity of supply
A. Rivalry in consumption
Which pair of characteristics defines a private good?
A. Excludability and non-rivalry
B. Rivalry and excludability
C. Non-rivalry and non-excludability
D. Zero marginal cost
B. Rivalry and excludability
The free rider problem is most severe when:
A. The good is supplied only by the private sector
B. The good is non-rival and non-excludable
C. Prices are falling
D. The government subsidizes the good
B. The good is non-rival and non-excludable
Which of the following is a possible solution to the underconsumption of merit goods?
A. Indirect tax
B. Price ceilings
C. Government subsidies
D. Tariff removal
C. Government subsidies
What condition defines the socially optimal level of output?
A. MPB = MPC
B. MSC = MSB
C. MPC = MSC
D. MPB = MSB
B. MSC = MSB
Market failure occurs when:
A. Government fails to allocate resources
B. Price mechanism leads to socially efficient outcomes
C. Resources are not allocated efficiently by the market
D. Inflation rises above 2%
C. Resources are not allocated efficiently by the market
If information failure causes overconsumption, it is most likely that consumers have:
A. Incomplete understanding of private costs
B. Perfect knowledge
C. Access to insurance
D. High marginal private benefit
A. Incomplete understanding of private costs
Which of the following is not an example of information failure?
A. Patients unaware of drug side-effects
B. Investors lacking knowledge about financial products
C. Consumers receiving price signals
D. Students unaware of returns to education
C. Consumers receiving price signals
When MSB > MPB and the good is underproduced, the good is:
A. A private good
B. A demerit good
C. A merit good
D. A public good
C. A merit good
A firm pollutes while producing a good. This causes:
A. An increase in MPB
B. A decrease in MSB
C. MSC > MPC
D. No market failure
C. MSC > MPC
A movement along the PPC reflects:
A. Change in technology
B. Economic growth
C. Reallocation of existing resources
D. Unemployment
C. Reallocation of existing resources
A concave PPC indicates:
A. Constant opportunity cost
B. Increasing opportunity cost
C. Decreasing opportunity cost
D. No opportunity cost
B. Increasing opportunity cost
A government imposes a specific tax of $3 per unit on a good. Before tax, the equilibrium price was $10 and equilibrium quantity was 1000 units. After tax, quantity falls to 900 units and consumers now pay $11.50.
What portion of the tax is borne by producers per unit?
A. $0.50
B. $1.50
C. $2.00
D. $1.00
B. $1.50
Explanation:
Tax = $3
Consumer burden = $11.50 − $10 = $1.50
Producer burden = $3 − $1.50 = $1.50
A subsidy of $4 per unit is provided to producers of solar panels. Before subsidy, price = $50, quantity = 200 units. After subsidy, quantity increases to 240 units and the market price drops to $48.
How much of the subsidy is passed on to consumers per unit?
A. $2
B. $1
C. $3
D. $4
Answer: A
Explanation:
Price drops from $50 to $48 → Consumer gains $2
So, $2 of $4 subsidy benefits the consumer.
Remaining $2 benefits producer.
A subsidy leads to the supply curve shifting right from Q = 100 units to Q = 140 units.
If market price fell from $20 to $17, find the effective subsidy per unit received by producers.
A. $3
B. $6
C. $5
D. $7
Answer: C
Explanation:
Price consumers pay drops by $3
Subsidy = drop in consumer price ($3) + producer gain
To raise output from 100 → 140 with a $3 price drop, a $5 subsidy is a reasonable estimate using elasticity.
(Assumes $2 benefit to producer due to higher output and lower price)
A PPC shows two goods: Capital goods and Consumer goods.
If producing 10 capital goods results in 90 consumer goods, and producing 15 capital goods reduces consumer goods to 75, what is the opportunity cost of increasing capital goods from 10 to 15?
A. 3 consumer goods
B. 5 consumer goods
C. 15 consumer goods
D. 10 consumer goods
Answer: C
Explanation:
Consumer goods fall from 90 to 75 → loss of 15 units
Opportunity cost of 5 extra capital goods = 15 consumer goods
OC per unit = 15 / 5 = 3
An economy produces only wheat and cars. The PPC is linear.
At point A: 0 cars, 1000 tons of wheat
At point B: 10 cars, 800 tons of wheat
What is the opportunity cost of 1 car?
A. 20 tons of wheat
B. 100 tons
C. 50 tons
D. 200 tons
Correct OC = (1000 − 800)/10 = 20 → Answer: A
If an economy is producing at a point inside the PPC, say Point X, where it makes 300 units of good A and 400 units of good B, but could produce 500 A and 600 B, then:
What is the opportunity cost of moving from X to full efficiency?
A. Zero
B. 200 units of A
C. 200 units of B
D. Cannot be calculated
Answer: A
Explanation:
Moving inside to on PPC = using idle resources → no opportunity cost
An economy’s PPC is:
Point A: 0 guns, 1000 butter
Point B: 20 guns, 800 butter
Point C: 40 guns, 600 butter
Point D: 60 guns, 300 butter
What is the marginal opportunity cost of guns from B to C?
A. 100 units of butter per gun
B. 10 units
C. 20 units
D. 200 units of butter per 20 guns
B. 10 units