Deck 7: Perfect Competition and the Invisible Hand

Question 1

The equilibrium price and quantity of a good under perfect competition are determined by the intersection of the ________.

A) market demand and total revenue curves
B) total revenue and total cost curves
C) market demand and market supply curves
D) market supply and total revenue curves

Answer 1

market demand and market supply curves

Question 2

For a buyer,reservation value is the same as ________.

A) willingness to pay
B) willingness to accept (marginal cost)
C) total benefit
D) price

Answer 2

willingness to pay

Question 3

What does the concept of the invisible hand imply?

Answer 3

The "invisible hand" is an idea in economics suggesting that when all assumptions of a perfectly competitive market are in place,the pursuit of individual self-interest promotes the well-being of society as a whole,almost as if each individual were guided by an invisible hand to do so.Thus,under perfect competition,when individuals are working to maximize personal profits,they end up promoting social interests.

Question 4

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.If the market is perfectly competitive,the equilibrium price of a hat is ________.

A) $2
B) $6
C) $10
D) $12

Question 5

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.Suppose the equilibrium price in this market is $10.,but only 2 hats are allowed to be exchanged in this market.What is the amount of social surplus in this market under this restriction?

A) $20
B) $10
C) $26
D) $29

Question 6

The following table displays the reservation values of eight buyers and eight sellers, who each want to buy or sell a calculator.

Refer to the table above.If the market is perfectly competitive,the equilibrium quantity of calculators is ________.

A) 3 units
B) 5 units
C) 6 units
D) 8 units

Question 7

The reservation value of a buyer reflects her ________.

A) willingness to pay for a good or service
B) trade-off between buying various goods and services
C) total utility from a good or service
D) total income

Question 8

A buyer is willing to buy 10 units of a good at a maximum price of $10 per unit.The reservation value of the buyer in this case is ________.

A) $1
B) $10
C) $20
D) $100

Question 9

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.Suppose the equilibrium price in this market is $10.What is the amount of producer surplus in this market?

A) $6
B) $10
C) $15
D) $29

Question 10

A ________ is the price at which a trading partner is indifferent between making the trade and not doing so.

A) market value
B) reservation value
C) shadow value
D) discounted value

Question 11

Define "reservation values." If a buyer of a product has a reservation value of $10,the seller of the product has a reservation value of $3,and the equilibrium price of the product is determined to be $5,calculate the consumer surplus and the producer surplus.

Question 12

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.Suppose the equilibrium price in this market is $10.What is the amount of social surplus in this market?

A) $44
B) $30
C) $15
D) $39

Question 13

The marginal cost and total revenue of a firm are $5 and $275,respectively.The reservation value of the seller in this case is ________.

A) $0
B) $5
C) $55
D) $275

Question 14

The reservation value of a seller reflects her ________.

A) willingness to pay for using a resource
B) marginal cost
C) marginal revenue
D) total cost

Question 15

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.Suppose a price floor of $12 is imposed on this market.,which does not allow the price of hats drop below $12.Under this restriction,________ hats are exchanged in this market,and the social surplus will be ________.

A) 4; $41
B) 6; $38
C) 6; $29
D) 2; $40

Question 16

Consumer surplus is the ________.

A) difference between the buyer's reservation value and the price he actually pays
B) product of a buyer's reservation value and the price he actually pays
C) sum of a buyer's reservation value and the price he actually pays
D) ratio of a buyer's reservation value to the price he actually pays

Question 17

A seller is willing to sell 5 units of a good at a minimum price of $1 per unit.The reservation value of the seller in this case is ________.

A) $1
B) $5
C) $6
D) $10

Question 18

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.Suppose the equilibrium price in this market is $10.What is the amount of consumer surplus in this market?

A) $6
B) $12
C) $10
D) $15

Question 19

The following table displays the reservation values of eight buyers and eight sellers, who each want to buy or sell a calculator.

Refer to the table above.If the market is perfectly competitive,the equilibrium price of calculators is ________.

A) $2
B) $6
C) $12
D) $20

Question 20

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

Refer to the scenario above.If the market is perfectly competitive,the equilibrium quantity of hats is ________.

A) 6
B) 5
C) 10
D) 4

Question 21

When buyers and sellers optimize in a perfectly competitive market,________.

A) social surplus is maximized
B) social surplus is minimized
C) only consumer surplus is maximized
D) only consumer surplus is minimized

Question 22

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.If the market for notebooks is perfectly competitive,the equilibrium price is ________.

A) $2
B) $3
C) $4
D) $5

Question 23

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.What is Seller 3's producer surplus?

A) $1
B) $2
C) $3
D) $4

Question 24

If a buyer's reservation value for a good is $15 and the price at which he purchases the good is $8,his consumer surplus is ________.

A) $7
B) $1.8
C) −$7
D) $120

Question 25

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.If only the two highest-value buyers and the two lowest-cost sellers engage in trade,what is the social surplus?

A) $6
B) $10
C) $12
D) $20

Question 26

If a seller's marginal cost is $25 and the price at which the good is sold is $15,the producer surplus is ________.

A) −$10
B) $10
C) $15
D) $25

Question 27

If the producer surplus in a market for a good is $36 and the consumer surplus in the market for the same good is $9,the social surplus in the market is ________.

A) $4
B) $27
C) $45
D) $324

Question 28

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.If the market is perfectly competitive,what is Buyer 3's consumer surplus?

A) $0
B) −$1
C) $1
D) $2

Question 29

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.If the market for notebooks is perfectly competitive,the equilibrium quantity is ________.

A) 2 units
B) 3 units
C) 4 units
D) 5 units

Question 30

For social surplus to be maximized,the ________ buyers are actually making a purchase and the ________ sellers are selling the products.

A) lowest-value; highest-cost
B) highest-value; lowest-cost
C) highest-value; highest-cost
D) lowest-value; lowest-value

Question 31

Jack is a prospective buyer of a commodity that Jill is offering to sell.Social surplus in this scenario can be maximized when ________.

A) only Jack is optimizing
B) only Jill is optimizing
C) both Jack and Jill are optimizing
D) neither Jack nor Jill is optimizing

Question 32

If a buyer enjoys a consumer surplus of $25 when he purchases a good for $50,his willingness to pay for the good is ________.

A) $2
B) $25
C) $50
D) $75

Question 33

The total surplus in a market is represented by the area between the ________.

A) demand curve and the market price line
B) supply curve and the market price line
C) demand and supply curves and the price axis
D) demand curve and the horizontal axis

Question 34

If a seller enjoys a producer surplus of $30 when she sells a good for $79,her reservation value for the good is ________.

A) $30
B) $49
C) $79
D) $109

Question 35

Social surplus is the consumer surplus ________.

A) multiplied by the producer surplus
B) minus the producer surplus
C) divided by the producer surplus
D) plus the producer surplus

Question 36

Suppose a market has only one seller and only one buyer of a good in the market.The buyer is willing to pay $50 for the good and the seller is willing to accept $15.The market price of the good is determined to be $30.If they trade,the social surplus will be ________.

A) $15
B) $35
C) $45
D) $65

Question 37

If a seller's reservation value for a good is $10 and the price at which the good is sold is $15,his producer surplus is ________.

A) $25
B) $150
C) $1.5
D) $5

Question 38

Producer surplus is the ________.

A) sum of a seller's reservation value and the price he finally receives
B) difference between a seller's reservation value and the price he finally receives
C) product of a seller's reservation value and the price he finally receives
D) ratio of a seller's reservation value to the price he finally receives

Question 39

Suppose a market has only one seller and only one buyer of a good.The buyer has a reservation value of $25 and the seller has a reservation value of $15.The market price of the good is determined to be $20.If they trade,the social surplus will be ________.

A) $10
B) $20
C) $40
D) $60

Question 40

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.If the six highest-value buyers and the six lowest-cost sellers engage in trade,what is the social surplus?

A) $6
B) $8
C) $10
D) $12

Question 41

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.In the completed graph,what is the equilibrium price for Walter Payton rookie cards in this market? Explain your choice.

A) $120
B) $130
C) Either $140 or $150
D) $160

Question 42

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

Refer to the figure above.What is the consumer surplus in the market?

A) $50
B) $75
C) $100
D) $225

Question 43

The following table displays the reservation values of 10 sellers and 10 buyers in a market for cameras where each individual wants to buy or sell one camera.

a)What is the equilibrium price and quantity of cameras?
b)What is the social surplus when four highest-value buyers trade with four lowest-cost sellers?
c)What is the social surplus when eight highest-value buyers trade with eight lowest-cost sellers?
d)What is the highest possible social surplus in the market? At what quantity does it occur?

Question 44

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.Assuming a market price of $140 per card,consumer surplus in this market is ________.

A) $100
B) $125
C) $150
D) $250

Question 45

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.The market equilibrium quantity is ________.

A) 4
B) 5
C) 6
D) 7

Question 46

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

Refer to the figure above.What is the maximum possible social surplus?

A) $100
B) $150
C) $225
D) $375

Question 47

The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

Refer to the tables above.How many units does each buyer buy,and how many units does each seller sell at the equilibrium?

A) Buyer 1: 2 units, Buyer 2: 2 units, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units
B) Buyer 1: 2 units, Buyer 2: 1 unit, Buyer 3: 2 units; Seller 1: 3 units, Seller 2: 2 units
C) Buyer 1: 1 unit, Buyer 2: 2 units, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units
D) Buyer 1: 2 units, Buyer 2: 1 unit, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units

Question 48

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.When the price is ________ and the quantity is ________,social surplus is maximized.

A) $8; 5 units
B) $6; 4 units
C) $4; 4 units
D) $2; 8 units

Question 49

The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

Refer to the tables above.Suppose that the price is $34 per unit.What is the sum of the three buyers' surplus? What is the sum of the two sellers' surplus? What is the social surplus?

A) Sum of buyers' surplus = $77; Sum of sellers' surplus = $115; Social surplus = $187
B) Sum of buyers' surplus = $92; Sum of sellers' surplus = $95; Social surplus = $187
C) Sum of buyers' surplus = $66; Sum of sellers' surplus = $105; Social surplus = $171
D) Sum of buyers' surplus = $108; Sum of sellers' surplus = $78; Social surplus = $186

Question 50

The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

Refer to the tables above.What is the range of equilibrium prices? What is the equilibrium quantity?

A) $25 and $30; 4 units
B) $25 and $45; 5 units
C) $30 and $35; 5 units
D) $35 and $45; 6 units

Question 51

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

Refer to the figure above.What is the producer surplus in the market?

A) $50
B) $75
C) $150
D) $200

Question 52

The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook.

Refer to the table above.Maximum social surplus is ________.

A) $10
B) $12
C) $14
D) $16

Question 53

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.Assuming a market price of $140 per card,producer surplus in this market is ________.

A) $100
B) $125
C) $150
D) $250

Question 54

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.Social surplus in this market is ________.

A) $200
B) $225
C) $250
D) $500

Question 55

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

Refer to the figure above.What is the equilibrium price and quantity of the light bulbs?

A) Equilibrium price = $25, equilibrium quantity = 0 units
B) Equilibrium price = $25, equilibrium quantity = 15 units
C) Equilibrium price = $15, equilibrium quantity = 15 units
D) Equilibrium price = $5, equilibrium quantity = 15 units

Question 56

The following figure shows the demand and supply of a good.Calculate the social surplus using this figure.What is the maximum possible social surplus in this market?

Question 57

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.


Refer to the scenario above.In the graph above,plot the market demand schedule from the willingness to pay of buyers,and graph the market supply schedule from the willingness to accept of sellers.(Hint: Use the stairstep method similar to Exhibits 7.2 and 7.3 in the textbook; over and down for drawing market demand,and up and over for drawing market supply.)

Question 58

The social surplus in a market is $50.If another economic agent enters the market such that the marginal cost he incurs is $10 and the marginal benefit he receives from the trade is $5,then which of the following statements is true?

A) The social surplus will remain the same.
B) The social surplus will increase by $5.
C) The social surplus will decrease by $5.
D) The social surplus will increase by $10.

Question 59

The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

Refer to the tables above.Suppose that the price is $31 per unit.What is the sum of the three buyers' surplus? What is the sum of the two sellers' surplus? What is the social surplus?

A) Sum of buyers' surplus = $92; Sum of sellers' surplus = $94; Social surplus = $186
B) Sum of buyers' surplus = $92; Sum of sellers' surplus = $95; Social surplus = $187
C) Sum of buyers' surplus = $86; Sum of sellers' surplus = $95; Social surplus = $181
D) Sum of buyers' surplus = $108; Sum of sellers' surplus = $78; Social surplus = $186

Question 60

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

Refer to the figure above.What is the social surplus if the market is in equilibrium?

A) $50
B) $75
C) $100
D) $150

Question 61

The following graph shows the marginal cost curves of two profit-maximizing firms in a perfectly competitive market.

Refer to the graph above.At the competitive equilibrium price in this market,Firm 1 produces ________ compared to Firm 2,and will get ________ in producer surplus.

A) more; more
B) more; less
C) less; more
D) less; less

Question 62

Take a deck of playing cards and remove the aces,jacks,queens,and kings.Imagine that any remaining card in the deck is a single individual,either a seller or a consumer,and all are gathered at a single perfectly competitive market.Red cards are sellers,and black cards are consumers.The number on a card indicates the individual's reservation price.Each seller owns a single unit of an indivisible good.Each consumer can buy at most one unit of the good from a seller.The invisible hand predicts that the market outcome will be ________.

A) equilibrium price = 6, and units sold = 5
B) equilibrium price = 6, and units sold = 10
C) equilibrium price = 3, and units sold = 5
D) equilibrium price = 5, and units sold = 6

Question 63

If firms in a competitive industry independently operate to maximize profits,the ________ are eventually equalized across the firms.

A) total costs
B) marginal costs
C) profits
D) revenues

Question 64

The following figure shows the marginal cost curves of two profit-maximizing firms-Firm A and Firm B-in a perfectly competitive market.

Refer to the figure above.Which of the following statements is true?

A) Firm A produces at a lower marginal cost.
B) For a particular market price, Firm A will enjoy a greater producer surplus.
C) Firm B will have a higher reservation value than Firm A.
D) The profit-maximizing level of output of Firm B will be greater than that of Firm A at all prices.

Question 65

The following figure shows the marginal cost curves of two profit-maximizing firms-Firm A and Firm B-in a perfectly competitive market.

Refer to the figure above.Which of the following statements is true?

A) Firm B produces at a higher marginal cost than Firm A.
B) At a given market price, Firm A will enjoy a greater producer surplus.
C) Firm A will have a higher reservation value for the good than Firm B.
D) Firm B will produce a lower quantity than Firm A at all prices.

Question 66

$100 is to be divided among two individuals-Mary and Jenna.Which of the following allocations is Pareto efficient?

A) Mary receives $45, and Jenna receives $45.
B) Mary receives $20, and Jenna receives $75.
C) Mary receives $1, and Jenna receives $99.
D) Mary receives $90, and Jenna receives $9.

Question 67

Efficiency in competitive markets is characterized by ________.

A) all buyers pay more than their reservation value
B) all sellers receive less than their reservation value
C) every buyer whose willingness to pay is greater than or equal to marginal cost is served in the market
D) every seller makes positive economic profits in the short run

Question 68

The following graph represents the market for a certain good.

Refer to the graph above.What is the price when the market outcome is Pareto efficient?

A) 7
B) 5
C) 3
D) 1

Question 69

The following graph represents the market for a certain good.

Refer to the graph above.Which two outcomes create the same social surplus?

A) (Price = 5 and Quantity = 5) and (Price = 5 and Quantity = 6)
B) (Price = 4 and Quantity = 4) and (Price = 4 and Quantity = 7)
C) (Price = 4 and Quantity = 5) and (Price = 5 and Quantity = 4)
D) (Price = 5 and Quantity = 4) and (Price = 5 and Quantity = 6)

Question 70

Define a Pareto efficient outcome.Does it ensure equity? Explain with an example.

Question 71

The concept of the invisible hand suggests that ________.

A) individuals working for self-interest will eventually maximize the well-being of society
B) equilibrium in a competitive market is determined independent of demand and supply
C) government intervention is necessary to rectify market imperfections
D) the price mechanism allocates resources only to the people with high income in the country

Question 72

The following graph shows the marginal cost curves of two profit-maximizing firms in a perfectly competitive market.

Refer to the graph above.If the equilibrium price in this market is $5,Firm 1's producer surplus is equal ________,and Firm 2's producer surplus is equal ________.

A) $24; $16
B) $24; $40
C) $12; $24
D) $14; $8

Question 73

An outcome is Pareto efficient if ________.

A) an individual can be made better off without making someone else worse off
B) the benefits of the outcome are equally distributed among all participants
C) no individual can be made better off without making someone else worse off
D) the costs of the outcome are equally shared by all participants

Question 74

The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

Refer to the tables above.Suppose that Buyer 1 buys the first unit of Seller 1,Buyer 2 buys the first unit of Seller 2,and Buyer 3 buys the second and the third units of Seller 2.What is the social surplus?

A) $187
B) $186
C) $171
D) $168

Question 75

When an outcome is Pareto efficient,________.

A) social surplus is maximized
B) producer surplus is less than consumer surplus
C) social surplus is minimized
D) producer surplus is more than consumer surplus

Question 76

Which of the following statements is true of competitive market equilibrium?

A) The determination of equilibrium price and quantity is independent of the demand for goods.
B) Social surplus is minimized at the competitive equilibrium.
C) At the competitive equilibrium, there are no unexploited gains from trade.
D) A competitive equilibrium is determined only by a few large sellers in the market.

Question 77

$20 is to be divided among two individuals-Gary and Jamie.Which of the following allocations is NOT Pareto efficient?

A) Gary receives $1, and Jamie receives $19.
B) Gary receives $19, and Jamie receives $1.
C) Gary receives $8, and Jamie receives $9.
D) Gary receives $15, and Jamie receives $5.

Question 78

Which of the following is true of a competitive market equilibrium?

A) It minimizes social surplus.
B) All the gains from trade are not realized.
C) It is Pareto efficient.
D) All firms earn positive economic profits.

Question 79

Which of the following statements is true of a perfectly competitive market?

A) At equilibrium, it is possible to make someone better off without making someone else worse off.
B) The equilibrium price in a competitive market efficiently allocates scarce resources to participants.
C) The equilibrium price is determined by a few large firms in the market.
D) The sum of consumer surplus and producer surplus is not maximized at the equilibrium.

Question 80

The following graph represents the market for a certain good.

Refer to the graph above.Which of the following is true?

A) Social surplus could be increased if the producer could manage to sell more than five units at the price of 5.
B) Selling a sixth unit at a price of 5 increases social surplus by 1.
C) As long as the price of the good is 5, social surplus is maximized independently of the quantity sold.
D) As long as the quantity sold is 5, social surplus is maximized independently of the price of the good.