1 . Which of the following is a valid interpretation of the demand curve?

a.The demand curve identifies the taste and preference of the consumers.

b. The demand curve identifies the quantities purchased at various prices.

c. The demand curve identifies the consumer's income level.

d. The demand curve identifies the availability of substitute goods.

2. The welfare loss associated with an excise tax is measured by

a. the reduction in consumer surplus plus the reduction in profits due to the tax.

b. the reduction in producer surplus plus the reduction in consumer surplus minus the tax revenue.

c. the reduction in producer surplus plus the reduction in consumer surplus due to the tax.

d. the reduction in producer surplus plus the reduction in consumer surplus plus the reduction in total surplus.

3. Which scenario describes the allocation of the primary burden of an excise tax the best?

a. If demand is elastic, consumers are more burdened by the excise tax than producers.

b. If demand is inelastic but less inelastic than supply, producers are more burdened by the excise tax than consumers.

c. If demand is more elastic than supply, consumers are more burdened by the excise tax than producers.

d. If demand and supply are inelastic, the excise tax is no burden for any market participant.

4. How do you define price elasticity of demand?

a. Absolute change in demand when income changes.

b. Percentage change in price for a percentage change in demand.

c. Relative change in the consumption bundle when price increases.

d. The percentage change in demand caused by a percentage change in price.

5. In which of the following examples are we not expecting the consumer to choose a corner solution over consuming positive quantities of both goods?

a. The consumers utility function is characterized by a minimum function (e.g., min {X, Y})

b. One of the two consumable products are a bad for the consumer while the other one is a good

c. The optimization would suggest that it is optimal for the consumer to consume a negative amount of one of the goods

d .The two goods are perfect substitutes and the budget line as a different slope than the indifference curve

Short answer

1. Explain withyour own words the following concepts and provide an example for each concept that you can observe in real life.

A. The law of decreasing marginal utility

B. Nonsatiation of consumers with regard to their consumption preferences

C. Inferior Goods

D. Income & Substitution Effect

2. The sale of cannabis products is illegal in many places of the world, while it is completely legal in other places. Briefly explain the following two scenarios with help of our model on consumer and producer surplus. Supplement your answers whenever appropriate with drawings and illustrations.

A. It is well-known that there is a market for cannabis products even when selling them is illegal. How would you explain this phenomenon? (Hint: Think about analogies to the price ceiling for rental units.)

B. After a complete ban on the sale of cannabis products, one jurisdiction starts to allow their sale. Initially, they do not tax those sales at all. You observe a decrease in the market price of cannabis. Explain this phenomenon.