Deck 4: Markets and Government

Question 1

Suppose that a customer's willingness-to-pay for a product is $5, and the seller's willingness-to-sell is $2. If the negotiated price is $3, how much is producer surplus?

A) $1
B) $2
C) $5
D) $8

Answer 1

$1

Question 2

A $30 maximum charge on an automobile inspection is an example of a price ceiling.

Answer 2

True

Question 3

Suppose that a customer's willingness-to-pay for a product is $1,480, and the seller's willingness-to-sell is $1,210. If the negotiated price is $1,479

A) consumer surplus is nonexistent.
B) consumer surplus is greater than producer surplus.
C) producer surplus is nonexistent.
D) producer surplus is greater than consumer surplus.

Answer 3

producer surplus is greater than consumer surplus.

Question 4

If a consumer is willing to pay $20 for a pizza, but the price of the pizza is $10, then the amount of consumer surplus resulting from the customer's purchase of that pizza would be

A) $30.
B) $20.
C) $10.
D) There would be no consumer surplus.

Question 5

Suppose that a customer's willingness-to-pay for a product is $5, and the seller's willingness-to-sell is $2. If the negotiated price is $3

A) consumer surplus is negative.
B) consumer surplus is greater than producer surplus.
C) producer surplus is negative.
D) producer surplus is greater than consumer surplus.

Question 6

Market failure means that

A) the market has crashed.
B) the market has more buyers than sellers.
C) some firms that were in the industry have gone bankrupt.
D) the market has not provided a socially optimal amount of goods and services.

Question 7

How large is deadweight loss in equilibrium?

A) zero
B) the dollar value of producer surplus minus consumer surplus
C) the dollar value of consumer surplus minus producer surplus
D) the dollar value of producer surplus plus consumer surplus

Question 8

(Figure: Determining Surplus and Loss) In the graph, if the government sets a maximum price of $5, there is a

A) shortage of 20 units.
B) surplus of 20 units.
C) shortage of 40 units.
D) surplus of 40 units.

Question 9

(Figure: Determining Surplus) In the graph, the formula for consumer surplus is 0.5 × (i - j) × (k - i).

Question 10

Which statement illustrates what an effective price ceiling does to a market price?

A) Like a helium balloon bumps against a room ceiling, unable to rise to the level to which it would go if it were outside, price ceilings hold prices down below equilibrium.
B) Painting a ceiling white can make it appear higher than it actually is. Price ceilings make a price appear higher than it actually is.
C) Something attached to the ceiling is higher than it would be if it were set on the floor. Setting a price ceiling makes a price higher than it would be in a free market.
D) Just like a roof can leak in different places, price ceilings can leak; a market with price ceilings can end up with many different prices at once.

Question 11

Producer surplus is shown graphically as the area _____ the market price.

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

Question 12

If a price floor is set below the market price, it is

A) binding.
B) efficient.
C) nonbinding.
D) inefficient.

Question 13

(Figure: Understanding Price Ceilings and Floors) In the graph, if the government sets a maximum price of $25, this is an example of a(n)

A) binding price ceiling.
B) binding price floor.
C) nonbinding price ceiling.
D) efficient price floor.

Question 14

Markets tend to produce

A) the right amount of a good exhibiting external costs.
B) the right amount of a good exhibiting external benefits.
C) too little of a good exhibiting external costs.
D) too little of a good exhibiting external benefits.

Question 15

A $30 maximum price on an automobile inspection is an example of

A) a price ceiling.
B) a price floor.
C) rent control.
D) laissez-faire.

Question 16

Laissez-faire is a French term that means "let it be."

Question 17

Mr. Smith, who knows the proposed site of a major new highway from reading the newspaper, buys a ranch from Mr. Jones, who never reads the newspaper. This is an example of

A) asymmetric information.
B) adverse selection.
C) moral hazard.
D) opportunity cost.

Question 18

Steering wheel locks make it difficult for car thieves to take your car. However, these locks represent _____ to other car owners because their cars become more attractive targets since thieves are prevented from taking your car.

A) an external benefit
B) asymmetric information
C) an external cost
D) a public good

Question 19

When prices fall below equilibrium

A) producer surplus falls and consumer surplus falls.
B) producer surplus falls and consumer surplus rises.
C) producer surplus falls and it is uncertain what happens to consumer surplus.
D) consumer surplus falls and it is uncertain what happens to producer surplus.

Question 20

A price ceiling usually results in a surplus and a misallocation of resources.

Question 21

Consider the market for new homes. Ceteris paribus, which event will cause consumer surplus to increase, assuming the market sells at the equilibrium prices?

A) Burdened with student loan debt, many millennials delay marriage, children, and buying homes.
B) Tariffs on lumber from Canada increase construction costs.
C) A new tax law decreases the amount that homeowners can deduct on their mortgages.
D) Low mortgage interest rates provide an incentive for potential homeowners to buy now.

Question 22

If the price of guitar amplifiers increases, ceteris paribus, at the new price, consumer surplus for electric guitars falls.

Question 23

(Figure: Understanding Price Ceilings and Floors) In the graph, if the government sets a maximum price of $25, this is an example of a binding price ceiling.

Question 24

(Figure: Determining Surplus and Loss) In the graph, if the government sets a minimum price of $12, this is an example of a(n)

A) binding price ceiling.
B) binding price floor.
C) efficient price ceiling.
D) efficient price floor.

Question 25

Suppose that a customer's willingness-to-pay for a product is $79, and the seller's willingness-to-sell is $64. If the negotiated price is $68, consumer surplus is $4.

Question 26

If a pharmaceutical company knows that one of its products has a dangerous side effect but does not disclose that to its customers, then the market for that product is likely to fail due to

A) external costs.
B) external benefits.
C) market power.
D) asymmetric information.

Question 27

Many communities require that an inspector evaluate a house before it can be sold. This requirement

A) creates an economic burden on both the buyer and seller.
B) reduces the problem of asymmetric information.
C) creates an externality.
D) reduces market efficiency.

Question 28

Producer surplus is defined as the difference between

A) the demand curve and the market price.
B) the market price and the supply curve.
C) a price floor and the market price.
D) a price ceiling and the market price.

Question 29

The government sets a maximum price of gasoline at $2 a gallon. This is an example of a

A) price floor.
B) price ceiling.
C) public good.
D) common property resource.

Question 30

A price ceiling usually results in a _____ misallocation of resources.

A) shortage and a
B) surplus and a
C) shortage and no
D) surplus and no

Question 31

If a price ceiling is set below the market price, it is binding.

Question 32

Yulhee buys and wears a certain perfume because she likes its fragrance. Which statement describes externalities in the perfume market that come from individuals wearing perfume?

A) There may be positive externalities because others enjoy the scent, but there are no negative externalities.
B) There may be negative externalities because some may be allergic to the scent, but there are no positive externalities.
C) There may be both positive and negative externalities, since some enjoy the scent and others have an allergic reaction to it.
D) There are no externalities associated with wearing perfume.

Question 33

"Laissez-faire" is a _____ term that means _____.

A) French; "all else equal"
B) French; "let it be"
C) Spanish; "all else equal"
D) Spanish; "let it be"

Question 34

If a government imposes a $2 maximum price on a gallon of gasoline in the petroleum market, this would be an example of

A) a price ceiling.
B) a price floor.
C) rent control.
D) laissez-faire.

Question 35

(Figure: Understanding Price Ceilings and Floors) In the graph, if the government sets a maximum price of $25, there is a shortage of 600 units.

Question 36

(Figure: Determining Surplus 4) In the graph, consumer surplus is equal to

A) $25.
B) $40.
C) $80.
D) $160.

Question 37

The invisible hand is the process that describes how resources are allocated efficiently through individual decisions made in markets.

Question 38

On a graph with a demand curve, consumer surplus is the area

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

Question 39

Economists wish to eliminate external benefits because they prevent the market from operating efficiently.

Question 40

In 2016, some counties in Florida sprayed for mosquitos in an effort to combat the Zika virus. The mosquito abatement program is considered a public good because

A) the counties paid for the spraying.
B) the program was available to the public.
C) spraying for mosquitos confers external benefits to counties that did not spray.
D) mosquito abatement exhibits nonrivalry and nonexclusivity.

Question 41

(Figure: Determining Total Surplus) In the graph, total producer surplus is shown by area

A) acdf.
B) ace.
C) bce.
D) abe.

Question 42

(Figure: Determining Surplus 3) In the graph, producer surplus is $280.

Question 43

Assume dairy farmers saw high profits the previous year and expanded their herds. Consider the market for milk. Ceteris paribus, what happened to dairy farmers' willingness-to-produce milk and to the amount of producer surplus, assuming demand held steady and the market sells at the equilibrium price?

A) They both increase.
B) They both decrease.
C) The willingness-to-produce rises and producer surplus falls.
D) The willingness-to-produce falls and producer surplus rises.

Question 44

Synthetic clothing releases fibers during the washing process, which then end up poisoning rivers, lakes, and oceans. Fish and other wildlife consume the microfibers, accumulating toxins in their bodies that can become concentrated as they travel up the food chain. The production of synthetic clothing is an example of market failure due to

A) asymmetric information.
B) misinformation.
C) external costs.
D) the nature of public goods.

Question 45

(Figure: Understanding Surplus and Efficiency) In the graph, what is producer surplus when the market price is $10?

A) $30
B) $40
C) $60
D) $20

Question 46

(Figure: Determining Surplus and Loss) Consider the graph. If the price is raised from $8 to $12, a surplus of

A) $80 is transferred from producers to consumers.
B) $80 is transferred from consumers to producers.
C) $140 is transferred from producers to consumers.
D) $140 is transferred from consumers to producers.

Question 47

(Figure: Determining Surplus and Loss) Consider the graph. If the price is lowered from $8 to $5, a surplus of

A) $60 is transferred from producers to consumers.
B) $60 is transferred from consumers to producers.
C) $140 is transferred from producers to consumers.
D) $140 is transferred from consumers to producers.

Question 48

(Figure: Determining Surplus) In the graph, which shape represents producer surplus?

A) triangle hik
B) line ij
C) line hi
D) triangle ijk

Question 49

(Figure: Determining Total Surplus) In the graph, total consumer surplus is shown by area

A) acdf.
B) bcde.
C) bce.
D) abe.

Question 50

Suppose the market price is $5. The buyer who buys the first unit of output has a willingness-to-pay equal to $10; the buyer who buys the second unit of output has a willingness-to-pay equal to $9; and the buyer who buys the third unit of output has a willingness-to-pay equal to $8. Total consumer surplus is

A) $27.
B) $10.
C) $5.
D) $12.

Question 51

The United States has an aging population, and as a result, the need for nursing services has increased. All other things being equal, what has happened in the market for nursing services, assuming the market sells at the equilibrium price?

A) Consumer surplus will be larger after the increase in demand.
B) Consumer surplus will be smaller after the increase in demand.
C) Consumer surplus will remain unchanged after the increase in demand.
D) There is no way to predict whether consumer surplus will change.

Question 52

The price of green grapes increases from $1.90 to $2.30 per pound. When this happens, the amount of grapes sold drops from 500 pounds to 400 pounds. Assuming that the demand and supply of grapes is held constant, what is the value of the loss of consumer surplus that occurred?

A) $200
B) $160
C) $40
D) $180

Question 53

A legal maximum price that can be charged for a product or service is known as a(n)

A) price ceiling.
B) price floor.
C) illegitimate price.
D) nonagreed price.

Question 54

(Figure: Determining Surplus and Loss) In the graph, which price would NOT allow for a binding price floor?

A) $6
B) $10
C) $14
D) $18

Question 55

Which is an example of producer surplus?

A) Shyanne thought she would have to pay at least $200 for a smartphone, but she found one she liked online for $109.99.
B) Blake was willing to pay $128 for Dustin's bike, so he was happy to only have to pay $118 for it.
C) Dustin was willing to sell his old bicycle $90, so he was overjoyed that Blake was willing to pay $118 for it.
D) Brandon was hoping to buy a watch for $150, but the cheapest one he could find was on eBay for $185.

Question 56

Suppose that the price of a good is $22 and equilibrium price is $18. Compared to market equilibrium

A) consumer surplus is decreased and deadweight loss is increased.
B) consumer surplus is increased and deadweight loss is decreased.
C) producer surplus is decreased and deadweight loss is increased.
D) producer surplus is decreased and deadweight loss is decreased.

Question 57

If the price of a good is higher than the equilibrium price

A) producers can gain at consumers' expense.
B) consumers can gain at producers' expense.
C) both producer surplus and consumer surplus increase.
D) both producer surplus and consumer surplus decrease.

Question 58

Driving your car in a large city during rush hour causes externalities because

A) gasoline is scarce, and you must pay for it.
B) it adds to road congestion and pollution.
C) gasoline is a public good.
D) your actions will benefit others, but you will be unable to charge them for the service.

Question 59

A price floor is binding if it is set above the market price.

Question 60

A price ceiling is a legally mandated _____ which goods or services cannot be sold.

A) maximum price above
B) minimum price above
C) maximum price below
D) minimum price below

Question 61

Total surplus is calculated as

A) consumer surplus plus market efficiency.
B) producer surplus plus deadweight loss.
C) consumer surplus plus deadweight loss.
D) producer surplus plus consumer surplus.

Question 62

(Figure: Determining Surplus and Loss) In the graph, a minimum price of $8 would allow for a binding price floor.

Question 63

When LeBron James rejoined the Cleveland Cavaliers in 2014, Fox Sports Ohio was able to raise its rates for advertising on its cable TV channel. This situation is an example of

A) an external benefit.
B) asymmetric information.
C) an external cost.
D) a public good.

Question 64

Which is FALSE? When the price of oil is below equilibrium

A) consumers, as a group, are better off.
B) producers, as a group, are worse off.
C) total surplus falls.
D) there is a deadweight loss.

Question 65

Suppose that a customer's willingness-to-pay for a product is $120, and the seller's willingness-to-sell is $110. If the negotiated price is $119

A) consumer surplus is negative.
B) consumer surplus is greater than producer surplus.
C) producer surplus is negative.
D) producer surplus is greater than consumer surplus.

Question 66

Suppose that a customer's willingness-to-pay for a product is $5, and the seller's willingness-to-sell is $2. If the negotiated price is $4, producer surplus is greater than consumer surplus.

Question 67

Total producer surplus for an entire market equals the area under the demand curve and above the equilibrium price.

Question 68

Farm price supports

A) reduce food prices.
B) can lead to food shortages.
C) can lead to an excess supply of supported farm products.
D) can decrease the food supply.

Question 69

When the supply of a product rises, ceteris paribus, what happens to firms' willingness-to-sell and to the amount of producer surplus?

A) They both decrease.
B) They both increase.
C) The willingness to produce rises and producer surplus falls.
D) The willingness to produce falls and producer surplus rises.

Question 70

Agricultural price supports have

A) caused lower prices for consumers.
B) created surpluses.
C) created shortages.
D) left agricultural markets unaffected.

Question 71

Why are prices above equilibrium considered to be inefficient?

A) They cause a deadweight loss in total surplus.
B) They cause producers to lose even though the losses are offset by consumer gains.
C) They cause consumers to lose even though their losses are exactly offset by producer gains.
D) Anything that raises prices for consumers means that the market has lost efficiency.

Question 72

(Figure: Determining Surplus 4) In the graph, producer surplus is equal to

A) $8.
B) $5.
C) $10.
D) $25.

Question 73

The difference between the market price and the supply curve is called

A) consumer surplus.
B) deadweight loss.
C) markup.
D) producer surplus.

Question 74

Suppose an effective price floor is imposed in a market and leads to the development of an illegal black market for the product. How would the price in the black market compare to the price of the product in the legal market, which has an effective price floor?

A) The black market price will be higher.
B) The black market price will be lower.
C) The black market price will be the same but the quantity sold will be higher.
D) The black market price will be the same but the quantity sold will be lower.

Question 75

If demand for a product rises, what happens to consumer surplus, assuming supply does not change and the market sells at the equilibrium price?

A) Consumer surplus will be larger after the increase in demand.
B) Consumer surplus will be smaller after the increase in demand.
C) Consumer surplus will remain unchanged after the increase in demand.
D) There is no way to predict whether consumer surplus will change.

Question 76

(Figure: Understanding Price Ceilings and Floors) In the graph, which price would allow for a binding price floor?

A) $25
B) $40
C) $50
D) $75

Question 77

(Figure: Determining Surplus and Loss) In the graph, consumer surplus is _____ in equilibrium and _____ at a price of $5.

A) $40; $160
B) $40; $330
C) $160; $40
D) $160; $180

Question 78

The government often provides funding for the arts when markets do not do so sufficiently. This funding is to overcome which market failure?

A) asymmetric information
B) negative externalities (external costs)
C) positive externalities (external benefits)
D) lack of competition

Question 79

(Figure: Understanding Price Ceilings and Floors) In the graph, a maximum price of $90 would allow for a binding price ceiling.

Question 80

Markets are efficient when

A) consumer surplus is maximized.
B) total surplus is maximized.
C) they deviate from equilibrium.
D) consumer surplus is equal to producer surplus.