Role of government in microeconomics practice questions.

A specific (per-unit) indirect tax imposed on producers will shift the supply curve

• to the right (downward) by the amount of the tax
• to the left (upward) by the amount of the tax
• not at all
• so that it becomes horizontal

Answer: to the left (upward) by the amount of the tax

The tax raises production costs, shifting supply vertically upward by the per-unit tax, raising price and reducing quantity.

An ad valorem tax (a percentage tax such as VAT) is imposed on a good. Which of the following best describes the effect on the supply curve?

• It shifts vertically upward by the same absolute amount at every level of output
• It pivots upward, so the gap between old and new supply widens as price rises
• It shifts vertically downward, with the gap widening at higher prices
• It shifts horizontally to the right in a parallel fashion

Answer: It pivots upward, so the gap between old and new supply widens as price rises

Because the tax is a percentage of the price, the amount of tax per unit rises with the price, so the new supply curve diverges from the original one rather than shifting in parallel.

A government sets a legal maximum rent for apartments below the free-market equilibrium rent. Which of the following outcomes is LEAST likely to occur?

• A persistent shortage of rental apartments
• The emergence of informal (parallel) markets where tenants pay above the legal rent
• Non-price rationing such as waiting lists and queues
• An increase in the quantity of rental housing supplied

Answer: An increase in the quantity of rental housing supplied

A binding price ceiling lowers the price received by suppliers, so quantity supplied falls; shortages, queues and informal markets are the typical consequences.

A national minimum wage is set above the equilibrium wage in a competitive labour market. What is the expected effect?

• Labour demanded falls and supplied rises, causing unemployment
• Employment rises because firms are required to pay workers more
• A shortage of labour develops as firms want to hire more workers
• The labour market clears exactly at the minimum wage

Answer: Labour demanded falls and supplied rises, causing unemployment

A minimum wage is a price floor: above equilibrium it raises quantity supplied of labour and lowers quantity demanded, so excess supply of labour (unemployment) results.

A specific tax is placed on a good whose demand is much more price-inelastic than its supply. Which statement about the incidence of the tax is correct?

• Producers, because they are legally responsible for paying the tax to the government
• The burden is always shared equally between consumers and producers
• Consumers, because they cut quantity demanded only slightly when price rises
• The government, because tax revenue reduces its budget surplus

Answer: Consumers, because they cut quantity demanded only slightly when price rises

Tax incidence (who actually bears the burden) falls mainly on the more inelastic side of the market: with inelastic demand, consumers keep buying despite the higher price and so pay most of the tax. Producers' legal duty to hand the tax to the government does not decide who bears it.

A school canteen moves fruit to eye level beside the till and places sugary snacks on a low shelf at the back of the room. All prices stay the same. This intervention is best described as:

• a nudge, which changes how the choices are presented without removing any of them
• an indirect tax, which raises the price paid for the less healthy option
• command-and-control regulation, which bans the sale of the less healthy option
• direct provision, in which the state itself supplies the good to consumers

Answer: a nudge, which changes how the choices are presented without removing any of them

Nudges work through choice architecture: the snacks are still on sale at the same price, so nothing has been taxed, banned or provided by the state — only the default and the effort involved have changed.