econ

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CHINA UNIVERSITY SUMMER SCHOOL ASSOCIATION

WUHAN UNIVERSITY

Intermediate Microeconomics (Econ 021) – Midterm Exams 2

STUDENT NAME: …………………………………………………………………………

SECTION A: Multiple Choice Questions (5 Marks)

Q 1. Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt

unhealthy lifestyles. Suppose that the province of Wuhan imposes a tax on junk food. For the tax

to actually deter people from eating junk food, should junk food demand be elastic or inelastic?

A. Elastic

B. Inelastic

Q 2. Let’s take a look at the supply side of junk food. If junk food supply is highly elastic—

perhaps because it’s not that hard to start selling salads with low fat dressing instead of

mayonnaise- and cheese-laden burgers—will a junk food tax have a bigger effect if supply were

inelastic or elastic? The bigger effect of supply will occur junk food is:

A. Inelastic

B. Elastic

Q 3. Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry, or the sellers of

jewelry?

A. The sellers

B. Buyers

C. None of them

Q 4. If a government is hoping that a small tax can actually discourage a lot of junk food

purchases, it should hope for:

a. Elastic supply and inelastic demand

b. Elastic supply and elastic demand

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c. Inelastic supply and elastic demand

d. Inelastic supply and inelastic demand

Q 5. One way governments have tried to collect taxes from the wealthy is through the use of

luxury taxes, which are exactly what they sound like: taxes on goods that are considered

luxuries, like jewelry or expensive cars and real estate. What is true about the demand for

luxuries?

a. It is elastic

b. It is inelastic

c. It is unit elastic

SECTION B:

QUESTION:

What type of externality (positive or negative) is present in each of the following examples? Is

the marginal social benefit of the activity greater than or equal to the marginal benefit to the

individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to

the individual? Without intervention, will there be too little or too much (relative to what would

be socially optimal) of this activity?

a. Mr. Zhang plants lots of colorful flowers in his front yard.

b. Your next-door neighbor likes to build bonfires in his backyard, and sparks often drift onto

your house.

c. Jessica, who lives next to an apple orchard, decides to keep bees to produce honey.

d. Mr. Bin buys a large SUV that consumes a lot of gasoline.