Specksavers
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Hi.

There are a few Micro multiple choice questions where I can't figure out why the answer is correct.

  1. A free good has which one of the following characteristics? (Answer: A)
    1. A It has no opportunity cost in supply.
    2. B It is generally supplied by the government because its consumption is considered tobe socially desirable.
    3. C It has no externalities associated with its consumption or production.
    4. D It is in perfectly inelastic supply.

Surely it does have opportunity cost in supply? If more free goods are supplied then there will be less resources to make other goods?
A government imposes an indirect tax on a product. The price of the product is likely torise by the full amount of the tax if the price elasticity of (Answer: A)
  1. A supply is perfectly elastic.
  2. B supply is perfectly inelastic.
  3. C demand is unit elastic.
  4. D demand is perfectly elastic.

    If supply is perfect elastic, then any change in price would cause demand to fall to 0. No producer would increase the price if there is going to be no demand?

    Thanks.
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rhindes71
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About the first question: if the good has no opportunity cost, that means that it doesn't use any resources whatsoever, so supplying an infinite amount of them would theoretically have no effect on the resources for other goods. As for the second question, think about the supply curve shifting, not the price. The supply curve of a perfectly elastic good (talking about price elasticity of supply here) would be horizontal, so if it were to be shifted upward, the entirety of the tax would be added to the price.
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