PRINCIPLES OF MICROECONOMICS LATEST 2026 EXAM
QUESTIONS AND SOLUTIONS RATED A+
✔✔Rent control - ✔✔short run supply is inelastic, long run very elastic bc in the short
run it just reduces rent but in the long run people will not have places to live bc landlords
are not willing to build new or maintain apartments bc of the low income but more
people will want to live in the city bc of cheap apartments
✔✔tax incidence - ✔✔the manner in which the burden of a tax is shared among
participants in a market
✔✔where is the immediate impact of the tax felt? - ✔✔on the sellers, it then affects
supply
✔✔taxes... - ✔✔discourage market activity, when a good is taxed the quantity of the
good sold is smaller than the equilibrium
✔✔who shares the burden of taxes? - ✔✔buyers AND sellers, buyers must pay more
and sellers make less
✔✔inelastic demand//elastic supply - ✔✔if there is inelastic demand and very elastic
supply that means that the sellers are very responsive to the change in price and the
supply curve is pretty flat, but the buyers are not responsive to the change in price so
the demand curve is fairly steep. the sellers bear a small burden and the buyers bear
the heaviest burden//change in price
✔✔elastic demand//inelastic supply - ✔✔then the incidence of tax falls heavier on the
producers than on the consumers
✔✔tax burden lands the heaviest on - ✔✔the side of the market that is the least elastic
✔✔welfare economics - ✔✔the study of how the allocation of resources affects
economic well-being
✔✔willingness to pay - ✔✔the maximum amount that a buyer will pay for a good
✔✔consumer surplus - ✔✔the amount a buyer is willing to pay for a good - the amount
the buyer actually pays for it
✔✔marginal buyer - ✔✔the buyer who would leave the market first if the price was any
higher
✔✔where is the consumer surplus measured - ✔✔the area below the demand curve
and above the price
, ✔✔cost - ✔✔the value of everything a seller must give up to produce a good
✔✔producer surplus - ✔✔the amount the seller is paid for a good - the sellers cost of
providing it
✔✔where is the producer surplus measured - ✔✔below the price and above the supply
curve
✔✔total surplus - ✔✔Value to buyers - cost to sellers
✔✔efficiency - ✔✔the property of a resource allocation of maximizing the total surplus
received by all members of society
✔✔equality - ✔✔the property of distributing economic prosperity uniformly among the
members of society
✔✔market outcomes - ✔✔1. free markets allocate the supply of goods to the buyers
who value them most highly measured by their WTP
2. free markets allocate the demand for goods to the sellers who can produce them at
the lowest cost
3. free markets produce the quantity of goods that maximizes the sum of consumer and
producer surplus
✔✔market power - ✔✔the ability to influence prices
✔✔externalities - ✔✔the uncompensated impact of person's actions on the well-being of
a bystander
✔✔market failure - ✔✔the inability of some unregulated markets to allocate resources
insufficiently
✔✔tax and government revenue - ✔✔T=size of the tax Q= quantity of goods sold
GR= T x Q
✔✔consumer surplus and taxes - ✔✔the area between the demand curve and the price
✔✔producer surplus and taxes - ✔✔area between the supply curve and the price
✔✔total surplus and taxes - ✔✔consumer surplus+ producer surplus+ tax revenue
✔✔deadweight loss - ✔✔the fall in total surplus that results from a market distortion
such as a tax
QUESTIONS AND SOLUTIONS RATED A+
✔✔Rent control - ✔✔short run supply is inelastic, long run very elastic bc in the short
run it just reduces rent but in the long run people will not have places to live bc landlords
are not willing to build new or maintain apartments bc of the low income but more
people will want to live in the city bc of cheap apartments
✔✔tax incidence - ✔✔the manner in which the burden of a tax is shared among
participants in a market
✔✔where is the immediate impact of the tax felt? - ✔✔on the sellers, it then affects
supply
✔✔taxes... - ✔✔discourage market activity, when a good is taxed the quantity of the
good sold is smaller than the equilibrium
✔✔who shares the burden of taxes? - ✔✔buyers AND sellers, buyers must pay more
and sellers make less
✔✔inelastic demand//elastic supply - ✔✔if there is inelastic demand and very elastic
supply that means that the sellers are very responsive to the change in price and the
supply curve is pretty flat, but the buyers are not responsive to the change in price so
the demand curve is fairly steep. the sellers bear a small burden and the buyers bear
the heaviest burden//change in price
✔✔elastic demand//inelastic supply - ✔✔then the incidence of tax falls heavier on the
producers than on the consumers
✔✔tax burden lands the heaviest on - ✔✔the side of the market that is the least elastic
✔✔welfare economics - ✔✔the study of how the allocation of resources affects
economic well-being
✔✔willingness to pay - ✔✔the maximum amount that a buyer will pay for a good
✔✔consumer surplus - ✔✔the amount a buyer is willing to pay for a good - the amount
the buyer actually pays for it
✔✔marginal buyer - ✔✔the buyer who would leave the market first if the price was any
higher
✔✔where is the consumer surplus measured - ✔✔the area below the demand curve
and above the price
, ✔✔cost - ✔✔the value of everything a seller must give up to produce a good
✔✔producer surplus - ✔✔the amount the seller is paid for a good - the sellers cost of
providing it
✔✔where is the producer surplus measured - ✔✔below the price and above the supply
curve
✔✔total surplus - ✔✔Value to buyers - cost to sellers
✔✔efficiency - ✔✔the property of a resource allocation of maximizing the total surplus
received by all members of society
✔✔equality - ✔✔the property of distributing economic prosperity uniformly among the
members of society
✔✔market outcomes - ✔✔1. free markets allocate the supply of goods to the buyers
who value them most highly measured by their WTP
2. free markets allocate the demand for goods to the sellers who can produce them at
the lowest cost
3. free markets produce the quantity of goods that maximizes the sum of consumer and
producer surplus
✔✔market power - ✔✔the ability to influence prices
✔✔externalities - ✔✔the uncompensated impact of person's actions on the well-being of
a bystander
✔✔market failure - ✔✔the inability of some unregulated markets to allocate resources
insufficiently
✔✔tax and government revenue - ✔✔T=size of the tax Q= quantity of goods sold
GR= T x Q
✔✔consumer surplus and taxes - ✔✔the area between the demand curve and the price
✔✔producer surplus and taxes - ✔✔area between the supply curve and the price
✔✔total surplus and taxes - ✔✔consumer surplus+ producer surplus+ tax revenue
✔✔deadweight loss - ✔✔the fall in total surplus that results from a market distortion
such as a tax
