On this page, you can find the recording of the Exam practice for MIC [Microeconomics]. Feel free to ask questions in the comment section below, we will answer them 🙂
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I am honestly missing an explanation on why the price is not lower in Question 24. Although I get that total welfare must decrease, our actual price paid by the consumer is lower as well?
Hi Rieke,
Here is a more in depth explanation for each answer
A) The actual price paid by consumers will definitely be less than at the competitive equilibrium:
This statement is not necessarily true. The intervention that reduces the output level could be associated with a subsidy that lowers the price paid by consumers. Without specific information about the nature of the government intervention, we cannot definitively say that the price paid by consumers will be less than at the competitive equilibrium.
BConsumer surplus is definitely smaller than at the competitive equilibrium:
This statement is also likely to be true but does not have to be as you do not know the specific government intervention. If the output level is below the competitive equilibrium due to government intervention, it implies that consumers are receiving less quantity at a lower price compared to what they would have received in a competitive equilibrium. This typically results in a reduction in consumer surplus.
C)Producer surplus is definitely smaller than at the competitive equilibrium:
This statement is also likely to be true but does not have to be as you do not know the specific government intervention. In a perfectly competitive market, producers receive the competitive equilibrium price for their goods. If the output level is below the competitive equilibrium due to government intervention, it implies that producers are selling less quantity at the competitive equilibrium price, leading to a reduction in producer surplus.
Social welfare is definitely smaller than at the competitive equilibrium:
This statement is likely to be true as one of them is decreasing (and social welfare is the combination of both). Social welfare is the sum of consumer surplus and producer surplus. If both consumer and producer surpluses are reduced, as suggested by the previous statements, then overall social welfare is likely to be smaller than at the competitive equilibrium.
In summary, the most likely correct statement is:
Let me know whether that makes sense
why on question 8 option D is incorrect?
Hi Antonia,
Here is a more in depth explanation for each answer
A)
Cannot be determined, depends on the supply elasticity:
In this scenario, the demand is perfectly elastic, meaning consumers are willing to buy any quantity at a fixed price. Supply is upward sloping, but the tax burden in this case falls entirely on the sellers. Since demand is perfectly elastic, the sellers bear the full incidence of the tax, and the price they receive will be lower by the amount of the tax. Therefore, the statement that it “depends on the supply elasticity” is not accurate in this specific context.
Is lower by the amount of the tax:
B) This is the correct answer. In the case of a perfectly elastic demand, the entire burden of the tax is shifted to the sellers. The price they receive will be lower by the full amount of the tax.
Is higher by the amount of the tax:
C) This is incorrect. The price received by sellers decreases after the application of the tax; it does not increase.
Is exactly what the consumer pays minus the tax:
D) This is not accurate in this context. In a perfectly elastic demand scenario, consumers are willing to pay a fixed price, and the entire tax burden is borne by the sellers. Therefore, the price received by sellers is not the consumer price minus the tax; it’s lower by the full amount of the tax.