Microeconomics — Free Economics SL Practice Questions

In the market for rice in Thailand, the government imposes a price floor above the equilibrium price to support farmers' incomes.

The government of Viet Nam has imposed a maximum price (price ceiling) on rice, a staple food, set below the free-market equilibrium price, to ensure affordability for low-income households.

The market for fresh strawberries in a small town experiences a significant increase in the number of health-conscious consumers. The market was initially in equilibrium.

Norway imposes a higher purchase tax on petrol cars. At the same time, consumer incomes in Norway rise. EVs are a normal good; petrol cars are a substitute for EVs.

A city government provides free flu vaccinations to all residents. The social benefit of widespread vaccination is greater than the private benefit received by individuals who get vaccinated.

The government of a small island nation is considering a policy to address the negative externality created by a coal-fired power plant. The plant emits sulphur dioxide, causing respiratory illnesses in nearby communities. The marginal external cost (MEC) of electricity generation is estimated at USD 50 per MWh. The current market equilibrium output is $200\,\text{MWh}$ per day, while the socially optimal output is $140\,\text{MWh}$ per day.

A farmer in Kenya grows maize for the local market. In 2023, the price of maize increased from KES 50 per kilogram to KES 70 per kilogram. The farmer responded by increasing the quantity supplied from $1000\,\text{kg}$ per month to $1300\,\text{kg}$ per month.

The global market for lithium, a key input in electric vehicle (EV) batteries, has experienced significant changes. In 2023, the price of lithium carbonate fell by over 70 percent from its 2022 peak, while the number of lithium mines in operation globally increased by 15 percent. Tesla, a major EV producer, announced plans to build its own lithium refinery in Texas to secure supply.

A national weather forecasting service provides storm warnings to all residents via radio and mobile alerts. Once produced, no resident can be prevented from receiving the warnings, and one resident receiving a warning does not reduce its availability to others.

A public radio station broadcasts music and news. The broadcast is non-excludable — no listener can be prevented from tuning in — and non-rivalrous — one listener's enjoyment does not reduce signal quality for others. The station relies entirely on voluntary listener donations to cover its operating costs.

A market for fresh strawberries in equilibrium at a price of USD 3 per punnet and a quantity of 500 punnets per day. A new study is published showing that strawberries contain a nutrient that significantly reduces the risk of heart disease.

In the market for fresh coffee beans in Colombia, the demand supply schedules are given by the following linear equations, where $Q$ is measured in thousands of tonnes per month and $P$ is the price in thousands of Colombian pesos per tonne: $$Q_d = 240 - 3P \qquad Q_s = 2P - 40$$

A government subsidises maize flour, a staple food for low-income households. The subsidy reduces the market price of maize flour by $25\%$. A typical low-income consumer in Nairobi currently spends $40\%$ of monthly income on maize flour. Maize flour is placed on the x-axis; all other goods are placed on the y-axis.

The below shows a budget line and indifference curves for a consumer named Mei.

The market for a popular brand of smartphones in equilibrium at a price of USD 800 and a quantity of 500,000 units per month. A new tax shifts the supply curve, raising the market price to USD 880 and causing the quantity demanded to fall to 450,000 units per month.

In a small Caribbean island nation, the government is considering imposing a tax on sugar-sweetened beverages to reduce consumption. Research indicates that the price elasticity of demand (PED) for these beverages is $-0.4$ in the short run and $-1.2$ in the long run. A proposed tax would raise the price of these beverages by $20$ percent.

A local bakery produces fresh bread daily. The manager is considering increasing the supply of bread in response to a rise in demand. The bakery has limited oven space and cannot purchase additional ovens for at least six months. Flour, a key input, is readily available from local suppliers at any time.

The global market for lithium, a key input for electric vehicle (EV) batteries, has experienced a sustained increase in demand over the past five years. In the short run, lithium supply is relatively inelastic. In the long run, supply becomes more elastic as new mining projects come online.

A government introduced a specific tax of $\text{VND}\,5{,}000$ per litre on sugary drinks. Prior to the tax, the market equilibrium price was $\text{VND}\,20{,}000$ per litre and equilibrium quantity was $10$ million litres per month. After the tax, consumers paid $\text{VND}\,24{,}000$ per litre, quantity traded fell to $7$ million litres per month, and the government collected $\text{VND}\,35$ billion per month in tax revenue.

The government of India increased the minimum support price (MSP) for wheat from INR 1,800 per quintal (the market equilibrium price) to INR 2,015 per quintal. At INR 2,015, the quantity supplied by farmers is 120 million quintals and the quantity demanded by consumers is 80 million quintals. The government purchases all unsold surplus at the MSP.

The government of Country X, a high-income economy, introduced a binding maximum price (price ceiling) on rental housing in its capital city in 2023. The policy aimed to improve housing affordability for low-income households. The market for rental housing before the policy had an equilibrium monthly rent of USD 1800 and 100,000 units rented. The government set the maximum price at USD 1200 per month. At this price, quantity demanded is 140,000 units and quantity supplied is 70,000 units. The price elasticity of demand (PED) for rental housing is estimated at $0.4$ in the short run and $0.8$ in the long run. The price elasticity of supply (PES) is estimated at $0.6$ in the short run and $1.2$ in the long run.

The market for fresh coffee beans in Colombia is initially in equilibrium at a price of $8{,}000$ Colombian pesos per kilogram and a quantity of $500{,}000$ kilograms per month. In early 2023, a severe frost destroyed a significant portion of the Arabica coffee harvest in Brazil, a major global competitor. Simultaneously, a widely publicised medical study concluded that drinking three cups of coffee per day significantly reduces the risk of type 2 diabetes.

The market for ride-hailing services (e.g., Uber, Ola) in Mumbai, India, is highly competitive. In January 2024, the Mumbai municipal government introduced an environmental tax of INR 50 per trip on all ride-hailing services, aiming to reduce traffic congestion and air pollution. Simultaneously, incomes in Mumbai have been rising steadily due to growth in the technology and financial services sectors.

The government of Country X introduced a subsidy for electric vehicle (EV) manufacturers in 2023, reducing production costs by $15\%$. Over the same period, consumer income rose by $8\%$ and the price of petrol — a complement to petrol-powered cars — increased by $12\%$. The EV market was initially in equilibrium at a price of USD 30,000 per vehicle and a quantity of 100,000 vehicles per year.

The government of Vietnam has introduced a subsidy of $500{,}000$ Vietnamese dong per hectare, paid directly to rice farmers who adopt organic farming methods. The policy aims to reduce the use of chemical fertilizers, which cause water pollution in the Mekong Delta. Currently $40\%$ of rice farmers use organic methods; the government targets $70\%$ within three years.

A city government estimates that each rooftop garden on a new residential building costs GBP 15,000 to install but generates GBP 25,000 in community benefits through improved air quality, reduced urban heat island effect, and increased biodiversity. Currently, only 10 percent of new residential buildings voluntarily include rooftop gardens. The government is considering two policy responses: a regulation mandating rooftop gardens on all new buildings, or a subsidy of GBP 10,000 per rooftop garden paid to builders.

The Mekong River Basin Southeast Asia supports the livelihoods of over 60 million people through fisheries, agriculture, and transport. Dams built for hydroelectric power in the upper basin (Laos and China) provide clean energy but disrupt sediment flow, reduce fish stocks by an estimated $40\%$ in downstream Cambodia and Vietnam, and increase saltwater intrusion into rice paddies, damaging agricultural output.

In 2023, the global price of coffee beans fell by $15\%$ due to a bumper harvest in Brazil. In response, the government of Vietnam introduced a subsidy of $2000$ Vietnamese dong per kilogram for coffee farmers. Vietnam's coffee production subsequently increased by $8\%$.

In 2024, the price of lithium — a key input for electric vehicle (EV) battery production — increased by $40\%$ due to mining disruptions in Chile. At the same time, battery manufacturer CATL announced a new production technology that reduces battery production time by $25\%$. Industry analysts recorded that global supply of EV batteries increased by $5\%$ overall.

The global market for flu vaccines is characterised by a fixed production lead time of six months. In 2023, the World Health Organization (WHO) announced a particularly severe predicted flu strain for the Northern Hemisphere winter. Simultaneously, the government of Japan announced a subsidy of JPY 1500 per dose to domestic vaccine manufacturers for each dose produced above their 2022 output levels. In the European Union, new regulations required all vaccine production facilities to install advanced cold-chain storage systems, increasing fixed costs by an estimated 20 percent.

The small island nation of Maldives depends heavily on coastal sea walls to protect residents from rising sea levels. Sea walls are non-excludable: once built, no resident can be prevented from benefiting. They are also non-rivalrous: one person's protection does not reduce the protection available to others. A local economist observes that no private company has built sea walls, despite surveys showing high willingness to pay among residents. The government is now considering three responses: direct provision funded by taxation, subsidising a private contractor, or doing nothing and allowing voluntary contributions.

Country X is a developing nation in sub-Saharan Africa with a high incidence of malaria. A private pharmaceutical company has developed a mosquito net treated with a long-lasting, area-wide insecticide. The net has two key characteristics: - Once deployed in a village, it is impossible to prevent any resident from benefiting from the reduced local mosquito population. - One household's use of the net does not diminish the insecticide benefit available to neighbouring households. The government of Country X is considering two policies: - Policy A: Provide nets free to all households, funded by foreign aid. - Policy B: Subsidise $50\%$ of the retail price and allow private firms to sell the nets.

A small island nation, Maldivia, has a coastline threatened by rising sea levels. A private company proposes building a network of sea walls to protect the entire island. The company states that it cannot prevent any resident from benefiting from the sea walls once built, and one person's protection does not reduce the protection available to others. The government is considering whether to fund the project through compulsory taxation or to leave it to the private market.

In 2023, the market for avocados in Mexico experienced significant changes. Severe droughts reduced the avocado harvest by $30\%$ compared to the previous year. At the same time, consumer preferences shifted strongly towards healthier diets, increasing the demand for avocados.

The market for rented apartments in Mumbai, India, is currently in equilibrium at a monthly rent of $\text{Rs}\,15{,}000$ with $10{,}000$ apartments rented. The city government is considering two housing affordability policies: - Policy A: a rent ceiling set at $\text{Rs}\,10{,}000$ per month - Policy B: a subsidy paid directly to low-income tenants, shifting market demand to the right

The government of Country X, a low-income nation heavily dependent on rice as a staple food, has implemented a price ceiling on rice at USD 30 per 50 kg bag. The current market equilibrium price is USD 45 per bag and the equilibrium quantity is 10 million bags per month. The price elasticity of demand (PED) for rice is $-0.2$ and the price elasticity of supply (PES) is $0.5$. The government argues that this policy will improve food security for low-income households.

Linh is a consumer in Hanoi, Vietnam, with a weekly budget of $1{,}200{,}000$ VND to spend on two normal goods: rice and pho. A kilogram of rice costs $15{,}000$ VND and a bowl of pho costs $60{,}000$ VND. Linh seeks to maximise her total utility subject to her budget constraint. The Vietnamese government then introduces a subsidy on rice, reducing its price to $10{,}000$ VND per kilogram. The price of pho and Linh's income remain unchanged.

Carlos runs a small coffee shop in Bogotá, Colombia. He sells two products: regular coffee at $4{,}000$ Colombian Pesos (COP) per cup and specialty lattes at $8{,}000$ COP per cup. Carlos faces a fixed daily production capacity: he can serve at most $150$ cups in total per day. His marginal cost is $1{,}500$ COP per cup of regular coffee and $4{,}000$ COP per cup of latte. As a profit-maximising producer, Carlos chooses the combination of cups of regular coffee ($Q_r$) and specialty lattes ($Q_s$) that maximises daily profit subject to his capacity constraint. A new tax on sugar subsequently raises the marginal cost of producing lattes to $6{,}500$ COP per cup. Carlos responds by reallocating resources to produce more regular coffee and fewer lattes.

In 2023, the government of Kenya introduced a $16\%$ value-added tax (VAT) on mobile money transfers, including M-Pesa transactions. Following the tax, the volume of mobile money transfers fell by $12\%$ in the first quarter. Over the same period, consumer spending on basic food staples (maize flour) rose by $8\%$, while spending on luxury imported goods (European cars) remained unchanged. Rational behaviour: consumers maximise total utility subject to a budget constraint. Utility maximisation occurs where $\dfrac{MU_x}{P_x} = \dfrac{MU_y}{P_y}$ across all goods. A Giffen good is an inferior good for which the income effect outweighs the substitution effect, producing an upward-sloping demand curve.

In 2023, the government of Kenya introduced a $20\%$ tax on sugary carbonated drinks, aiming to reduce consumption and address rising healthcare costs related to diabetes. The price elasticity of demand (PED) for these drinks in Kenya is estimated to be $-0.6$. The market is dominated by two large producers, and consumers have limited access to close substitutes such as diet drinks or fresh juice, particularly in rural areas.

In Brazil, the price elasticity of demand (PED) for coffee is estimated to be $-0.2$, while the PED for airline travel is estimated to be $-1.8$. The Brazilian government is considering imposing a $20\%$ tax on both goods to raise revenue for public health programmes.

The government of a small island nation, Coralia, is considering a policy to support local fishermen. The market for fresh fish in Coralia is highly volatile. When tourist arrivals spike during festivals, the price of fish can double within a week, but fishermen cannot significantly increase their catch immediately because their boats are limited and fishing grounds are fixed in the short run. Over a year, however, new fishermen can enter the industry and boats can be upgraded. A local economist estimates that a $40\%$ increase in price leads to a $4\%$ increase in quantity supplied in the first month, but a $32\%$ increase in quantity supplied after one year.

The global market for rare earth elements (REEs) is dominated by China, which accounts for approximately $60\%$ of global mining and over $85\%$ of global processing. REEs are essential inputs for manufacturing high-tech products such as electric vehicle (EV) batteries, wind turbines, and smartphones. In 2023, the Chinese government introduced new environmental regulations that significantly increased the cost of mining and processing REEs. Industry analysts estimate that in the short run (first 12 months), global quantity supplied of processed REEs fell by $8\%$ despite a $40\%$ rise in the market price. In the long run (beyond 5 years), new mining projects in Australia, the United States, and Brazil are expected to increase global supply capacity by $35\%$.