Deck 7: Consumers, Producers and the Efficiency of Markets

Question 1

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient when particular assumptions hold true.

Answer 1

True

Question 2

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

Answer 2

True

Question 3

A buyer's willingness to pay is that buyer's

A) minimum amount they are willing to pay for a good.
B) producer surplus.
C) consumer surplus.
D) maximum amount they are willing to pay for a good.
E) estimation of the cost of production.

Answer 3

D

Question 4

If you had been willing to pay €2.19 for the litre of milk purchased at the supermarket but were required to pay only €1.29, you have gained

A) a refund of €0.90 from the cashier.
B) a consumer surplus amounting to €0.90.
C) excess marginal benefit of €2.19.
D) producer surplus of €0.90.

Question 5

Consumer surplus tends to be small when

A) demand is price elastic.
B) supply is price elastic.
C) demand is price inelastic.
D) supply is price inelastic.

Question 6

Producer surplus is the area above the supply curve and below the price.

Question 7

Consumer surplus is the buyer's willingness to pay minus the seller's cost.

Question 8

Which of the following best explains the source of consumer surplus for a good?

A) Many consumers would be willing to pay more than the market price for the good.
B) Many consumers pay prices that are greater than the equilibrium price of the good.
C) Many consumers think the market price of the good is greater than its cost.
D) Many consumers think the price elasticity of demand for the good is unit elastic.

Question 9

Consumer surplus is the area

A) below the demand curve and above the price.
B) above the supply curve and below the price.
C) above the demand curve and below the price.
D) below the supply curve and above the price.
E) below the demand curve and above the supply curve.

Question 10

If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

Question 11

If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is

A) €0.
B) €2,000.
C) €18,000.
D) €20,000.
E) €38,000.

Question 12

If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00.

Question 13

Producer surplus is a measure of the unsold inventories of suppliers in a market.

Question 14

This table refers to five possible buyers' willingness to pay for a take-away meal. ?
$\begin{array}{|l|l|}\hline \text { Buyer } & \begin{array}{l}\text { Willingness To } \\\text { Pay }\end{array} \\\hline \text { David } & € 8.50 \\\hline \text { Laura } & € 7.00 \\\hline \text { Megan } & € 5.50 \\\hline \text { Mallory } & € 4.00 \\\hline \text { Audrey } & € 3.50 \\\hline\end{array}$
Refer to the table above. If the price of a take-away meal is €6.90, who will purchase the good?
?

A) all five individuals
B) Megan, Mallory and Audrey
C) David, Laura and Megan
D) David and Laura

Question 15

Total surplus is the seller's cost minus the buyer's willingness to pay.

Question 16

If demand increases when supply is perfectly price elastic, then

A) consumer surplus will remain the same.
B) consumer surplus will increase.
C) it is not possible to predict the change in consumer surplus.
D) consumer surplus will decrease with the increase in price.

Question 17

Consumer surplus is the

A) amount of a good consumers get without paying anything.
B) amount a consumer pays minus the amount the consumer is willing to pay.
C) amount a consumer is willing to pay minus the amount the consumer actually pays.
D) value of a good to a consumer.

Question 18

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

Question 19

Equilibrium in a competitive market maximizes total surplus.

Question 20

A consumer's willingness to pay directly measures

A) the extent to which advertising and other external forces have influenced the consumer's preferences.
B) the cost of a good to the buyer.
C) how much a buyer values a good.
D) consumer surplus.

Question 21

An increase in the price of a good along a stationary demand curve

A) improves the material welfare of the buyers.
B) decreases consumer surplus.
C) improves market efficiency.
D) increases consumer surplus.

Question 22

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then

A) the value placed on the last unit of production by buyers exceeds the cost of production.
B) the cost of production on the last unit produced exceeds the value placed on it by buyers.
C) consumer surplus is maximized.
D) total surplus is maximized.
E) producer surplus is maximized.

Question 23

A supply curve can be used to measure producer surplus because it reflects

A) the actions of sellers.
B) quantity supplied.
C) sellers' costs.
D) the amount that will be purchased by consumers in the market.

Question 24

This table refers to five possible buyers' willingness to pay for a take-away meal. ?
$\begin{array}{|l|l|}\hline \text { Buyer } & \begin{array}{l}\text { Willingness To } \\\text { Pay }\end{array} \\\hline \text { David } & € 8.50 \\\hline \text { Laura } & € 7.00 \\\hline \text { Megan } & € 5.50 \\\hline \text { Mallory } & € 4.00 \\\hline \text { Audrey } & € 3.50 \\\hline\end{array}$
?
Refer to the table above. If the market price is €3.80,
?

A) David's consumer surplus is €4.70 and total consumer surplus for the five individuals is €9.50.
B) Megan's consumer surplus is €1.70 and total consumer surplus for the five individuals is €9.60.
C) David, Laura, and Megan will be the only buyers of a take-away meal.
D) the demand curve for the take-away meal, taking the five individuals into account, is horizontal.

Question 25

Refer to the image below. Suppose producer surplus is larger than C but smaller than A+B+C. The price of the good must be ​ ​

A) lower than P1.
B) P1.
C) between P1 and P2.
D) higher than P2.

Question 26

The seller's cost of production is

A) the proportion of total cost allocated to profit
B) the minimum amount the seller is willing to accept for a good.
C) the seller's producer surplus.
D) the maximum amount the seller is willing to accept for a good.
E) the seller's consumer surplus.

Question 27

An increase in the price of a good along a stationary supply curve

A) increases producer surplus.
B) does all of the things described in these answers.
C) decreases producer surplus.
D) improves market equity.

Question 28

This table refers to five possible buyers' willingness to pay for a take-away meal. ?

$\begin{array}{|l|l|}\hline \text { Buyer } & \begin{array}{l}\text { Willingness To } \\\text { Pay }\end{array} \\\hline \text { David } & € 8.50 \\\hline \text { Laura } & € 7.00 \\\hline \text { Megan } & € 5.50 \\\hline \text { Mallory } & € 4.00 \\\hline \text { Audrey } & € 3.50 \\\hline\end{array}$
?
Refer to the table above. If the market price is €5.50, the consumer surplus in the market will be
?

A) €3.00.
B) €4.50.
C) €15.50.
D) €21.00.

Question 29

This table refers to five possible buyers' willingness to pay for a take-away meal. ?

$\begin{array}{|l|l|}\hline \text { Buyer } & \begin{array}{l}\text { Willingness To } \\\text { Pay }\end{array} \\\hline \text { David } & € 8.50 \\\hline \text { Laura } & € 7.00 \\\hline \text { Megan } & € 5.50 \\\hline \text { Mallory } & € 4.00 \\\hline \text { Audrey } & € 3.50 \\\hline\end{array}$
?
Refer to the table above. Which of the following is not true?
?

A) At a price of €9.00, no buyer is willing to purchase take-away meal.
B) At a price of €5.50, Megan is indifferent between buying a case of take-away meal and not buying one.
C) At a price of €4.00, total consumer surplus in the market will be €9.00.
D) All of the above are correct.

Question 30

Donald produces nails at a cost of €200 per ton. If he sells the nails for €350 per ton, his producer surplus per ton is

A) €150.
B) €200.
C) €350.
D) €550.

Question 31

Refer to the image below. When the price is P2, producer surplus is ​ ​

A) A
B) A+C.
C) A+B+C.
D) D+G.

Question 32

Cost is a measure of the

A) seller's willingness to sell.
B) seller's producer surplus.
C) producer shortage.
D) seller's willingness to buy.

Question 33

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will be sold and what is the value of consumer surplus in this market?

A) Three vases will be sold and consumer surplus is €80.
B) One vase will be sold and consumer surplus is €5.
C) One vase will be sold and consumer surplus is €30.
D) Three vases will be sold and consumer surplus is €0.
E) Two vases will be sold and consumer surplus is €5.

Question 34

A competitive market outcome

A) maximizes total surplus.
B) generates equality among the members of society.
C) minimizes total surplus.
D) both maximizes total surplus and generates equality among the members of society.

Question 35

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then

A) total surplus is maximized.
B) the value placed on the last unit of production by buyers exceeds the cost of production.
C) producer surplus is maximized.
D) the cost of production on the last unit produced exceeds the value placed on it by buyers.
E) consumer surplus is maximized.

Question 36

If Gina sells a shirt for €40, and her producer surplus from the sale is €32, her cost must have been

A) €72.
B) €32.
C) €8.
D) We would have to know the consumer surplus in order to make this determination.

Question 37

Producer surplus is the area

A) below the supply curve and above the price.
B) below the demand curve and above the supply curve.
C) below the demand curve and above the price.
D) above the demand curve and below the price.
E) above the supply curve and below the price.

Question 38

If it costs Wilfred the window cleaner €9.60 to clean the windows in a house but he is paid €15.00 for doing the job

A) Wilfred's customer receives consumer surplus of €5.40.
B) Wilfred's customer receives consumer surplus of €15.00.
C) Wilfred's receives producer surplus of €5.40.
D) Wilfred's receives producer surplus of €9.60.

Question 39

Total surplus is the area

A) above the supply curve and below the price.
B) below the demand curve and above the price.
C) below the demand curve and above the supply curve.
D) below the supply curve and above the price.
E) above the demand curve and below the price.

Question 40

Producer surplus tends to be large when

A) supply is price elastic.
B) demand is price elastic.
C) supply is price inelastic.
D) demand is price inelastic.

Question 41

Medical care clearly enhances people's lives. Therefore, we should consume medical care until

A) everyone has as much as they would like.
B) the benefit buyers place on medical care is equal to the cost of producing it.
C) buyers receive no benefit from another unit of medical care.
D) we are forced to cut back on the consumption of other goods.

Question 42

What is producer surplus, and how is it measured?

Question 43

In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

Question 44

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should

A) choose a price below the market equilibrium price.
B) allow the market to seek equilibrium on its own.
C) choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers).
D) choose a price above the market equilibrium price.

Question 45

If buyers are irrational then:

A) free market solutions are inefficient.
B) free market solutions maximize total surplus.
C) all of these answers.
D) free market solutions are equitable.

Question 46

An example of positive analysis is studying

A) how market forces produce equilibrium.
B) whether equilibrium outcomes are fair.
C) whether equilibrium outcomes are socially desirable.
D) if income distributions are fair.

Question 47

What is the relationship between the cost to sellers and the supply curve?

Question 48

Tammy loves croissants. The table shown reflects the value Tammy places on each croissants she eats:
​
Value of first croissant
€0.60
Value of second croissant
€0.50
Value of third croissant
€0.40
Value of fourth croissant
€0.30
Value of fifth croissant
€0.20
Value of sixth croissant
€0.10
​
a. Use this information to construct Tammy's demand curve for croissants.
b. If the price of croissants is €0.20, how many croissants will Tammy buy?
c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she have at a price of €0.20?
d. If the price of croissants rose to €0.40, how many croissants would she purchase now? What would happen to Tammy's consumer surplus? Show this change on your graph.

Question 49

What is consumer surplus, and how is it measured?

Question 50

Given the following two equations:
1) Total Surplus = Consumer Surplus + Producer Surplus
2) Total Surplus = Value to Buyers - Cost to Sellers
Show how equation (1) can be used to derive equation (2).

Question 51

Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve.

Question 52

Welfare economics is the study of

A) the well-being of less fortunate people.
B) welfare programs in the United States.
C) how the allocation of resources affects economic well-being.
D) the effect of income redistribution on work effort.

Question 53

Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike?

A) €500
B) €300
C) €200
D) €400
E) €100

Question 54

If a market is efficient, then

A) the market allocates buyers to the sellers who can produce the good at least cost.
B) all of these answers.
C) the quantity produced in the market maximizes the sum of consumer and producer surplus.
D) the market allocates output to the buyers that value it the most.

Question 55

What is the relationship between the demand curve and the willingness to pay?

Question 56

Other things being equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.