CEA Microeconomic Principles 5

Question 1

When a tax is imposed on a good with perfectly inelastic demand, the tax burden falls:

Accepted Answer

Entirely on consumers

Answer

With perfectly inelastic demand, consumers cannot reduce quantity demanded, so they bear the full burden of any per-unit tax.

Question 2

The 'prisoners' dilemma' illustrates that individually rational behavior can lead to:

Accepted Answer

A collectively suboptimal outcome

Answer

Each prisoner's dominant strategy is to confess, but both confessing produces a worse collective outcome than mutual silence.

Question 3

Which of the following best describes the concept of opportunity cost in microeconomics?

Accepted Answer

The value of the next-best alternative forgone when making a choice

Answer

Opportunity cost captures the true economic cost of a decision by including the value of the best alternative that must be sacrificed.

Question 4

Adverse selection in insurance markets occurs when:

Accepted Answer

High-risk individuals are more likely to purchase insurance than low-risk individuals

Answer

Adverse selection results from asymmetric information where high-risk types disproportionately seek insurance, making it unsustainable at average-risk premiums.

Question 5

A firm's economic profit differs from accounting profit because economic profit:

Accepted Answer

Subtracts implicit (opportunity) costs in addition to explicit costs

Answer

Economic profit deducts both explicit costs (paid to others) and implicit costs (opportunity costs of owner-supplied resources) from total revenue.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Microeconomic Principles 5