Micro Unit 6 MCQ Practice

A per-unit tax on pollution produced by a firm will affect the firm's output and pollution levels in which of the following ways?

• Output: Increase, Pollution: Increase

• Output: Increase, Pollution: Decrease

• Output: Decrease, Pollution: Increase

• Output: Decrease, Pollution: Decrease

• Output: No change, Pollution: No change

Answer explanation

A per-unit tax on pollution increases the cost of production, leading firms to reduce output. Consequently, lower output results in decreased pollution levels, making 'Output: Decrease, Pollution: Decrease' the correct choice.

If an industry ignores the external costs it generates in its production, which of the following will be true at the competitive market equilibrium output?

• Price will be greater than the marginal social cost.

• Price will be less than the marginal social cost.

• Price will be equal to the marginal social cost.

• Marginal private cost will be equal to marginal social cost.

• Marginal private cost will be greater than the marginal social cost.

Answer explanation

When an industry ignores external costs, the price reflects only marginal private costs, which are lower than the marginal social cost. Thus, at competitive market equilibrium, price will be less than the marginal social cost.

Which of the following is the best example of a negative externality?

• An increase in the price of oil due to the imposition of environmental regulations

• An increase in the price of oil due to action taken by the Organization of Petroleum Exporting Countries (OPEC)

• A decline in oil stock prices as a result of bad management

• Oil leakages from drilling platforms in the Gulf of Mexico

• Declining restrictions on the importation of foreign-made cars

Answer explanation

Oil leakages from drilling platforms in the Gulf of Mexico represent a negative externality as they cause environmental damage affecting third parties, unlike the other options which do not impose external costs on others.

To correct for positive externalities, the government should

• do nothing, since no harm is done by positive externalities

• levy a tax on the output of the good or service

• pay a subsidy equal to the marginal external benefit

• impose a price ceiling on the good to discourage its production

• impose a price floor on the good at which the marginal private benefit equals the marginal social cost

Answer explanation

To address positive externalities, the government should pay a subsidy equal to the marginal external benefit. This encourages production and consumption, aligning private benefits with social benefits.

A pure public good is a good that is

• provided efficiently by markets

• rivalrous and excludable in consumption

• nonrivalrous and excludable in consumption

• rivalrous and nonexcludable in consumption

• nonrivalrous and nonexcludable in consumption

Answer explanation

A pure public good is characterized by being nonrivalrous, meaning one person's use does not reduce availability for others, and nonexcludable, meaning it's difficult to prevent anyone from using it. Thus, the correct choice is nonrivalrous and nonexcludable in consumption.

An increase in the marginal social benefit of consuming a public good should result in

• a decrease in public production of the good

• an increase in the optimal quantity of the good

• a decrease in the optimal quantity of the good

• a decrease in the social costs associated with producing the good

• a decrease in the social costs associated with consuming the good

Answer explanation

An increase in the marginal social benefit of consuming a public good indicates that society values the good more. This leads to an increase in the optimal quantity of the good produced to meet the higher demand.

If the monopolist produces the allocatively efficient level of output rather than the profit-maximizing level of output, consumer surplus will

• decrease by the area P5JKP4

• decrease by the area P5JMP2

• increase by the area P5JGP1

• increase by the area P5JKP4

• increase by the area P5JMP2

Answer explanation

When a monopolist produces at the allocatively efficient level, output increases, leading to a larger consumer surplus. The correct choice, P5JKP4, represents the area of this increase in consumer surplus.

The primary purpose of antitrust laws is to

• protect consumers from fraudulent business practices

• protect small businesses from unfair foreign competition

• prevent firms from monopolizing trade and to promote competition

• reduce lawsuits and limit the liabilities of businesses

• grant the government the right to take over private property

Answer explanation

The primary purpose of antitrust laws is to prevent firms from monopolizing trade and to promote competition, ensuring a fair market for consumers and businesses alike.

Most economists argue that a monopoly is inefficient because it

• has no incentive to minimize its costs

• produces too little output and sets a price above marginal cost

• earns too much profit by charging consumers any price it wants

• produces too much output and thus wastes scarce resources

• usually produces unsafe products if not regulated by government

Answer explanation

Most economists argue that a monopoly is inefficient because it produces too little output and sets a price above marginal cost, leading to a loss of consumer surplus and overall economic inefficiency.

The short-run supply curve for a firm in a perfectly competitive industry is

• its entire marginal cost curve

• its average variable cost curve above its marginal cost curve

• its average total cost curve above its marginal cost curve

• its marginal cost curve above the minimum point of its average total cost curve

• its marginal cost curve above the minimum point of its average variable cost curve

Answer explanation

In a perfectly competitive industry, a firm's short-run supply curve is its marginal cost curve above the minimum point of its average variable cost curve, as it only produces when it can cover variable costs.