Microeconomic Principles Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Microeconomic Principles flashcards as text
When a tax is imposed on a good with perfectly inelastic demand, the tax burden falls:
Answer: Entirely on consumers
With perfectly inelastic demand, consumers cannot reduce quantity demanded, so they bear the full burden of any per-unit tax.
The 'prisoners' dilemma' illustrates that individually rational behavior can lead to:
Answer: A collectively suboptimal outcome
Each prisoner's dominant strategy is to confess, but both confessing produces a worse collective outcome than mutual silence.
Which of the following best describes the concept of opportunity cost in microeconomics?
Answer: The value of the next-best alternative forgone when making a choice
Opportunity cost captures the true economic cost of a decision by including the value of the best alternative that must be sacrificed.
Adverse selection in insurance markets occurs when:
Answer: High-risk individuals are more likely to purchase insurance than low-risk individuals
Adverse selection results from asymmetric information where high-risk types disproportionately seek insurance, making it unsustainable at average-risk premiums.
A firm's economic profit differs from accounting profit because economic profit:
Answer: Subtracts implicit (opportunity) costs in addition to explicit costs
Economic profit deducts both explicit costs (paid to others) and implicit costs (opportunity costs of owner-supplied resources) from total revenue.
Which of the following is an example of third-degree price discrimination?
Answer: A museum charging lower admission for students than for adults
Third-degree price discrimination charges different prices to identifiable groups (e.g., students vs. adults) based on differing demand elasticities.
When a Pigouvian tax is correctly implemented on a negative externality, it causes the market to produce:
Answer: Exactly the socially optimal quantity
A Pigouvian tax equal to the marginal external cost internalizes the externality, aligning private and social incentives at the efficient output level.