Deck 7: Market Efficiency and Welfare

Question 1

Other things equal, a price ceiling will increase consumer surplus by allowing customers to buy more at the lower price.

Answer 1

False

Question 2

Producer surplus from a unit of output is the difference between the market price and the seller's cost of producing that unit.
​

Answer 2

True

Question 3

If the world supply of diamonds decreases, diamonds become more valuable, and therefore, the consumer surplus derived from diamonds increases.

Answer 3

False

Question 4

Consumer surplus increases whenever the price of a good decreases.

Question 5

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

Question 6

If Ming is willing to pay $75 to attend the Broadway production of The Lion King but actually pays $40, she receives a consumer surplus of $35.

Question 7

Consumer surplus is always the total area below the demand curve and above the price.

Question 8

Consumer surplus increases whenever the price of a good increases.
​

Question 9

If the world supply of diamonds increases, the market price of diamonds decreases, and the consumer surplus derived by diamond consumers increases.

Question 10

Other things equal, a price floor will reduce consumer surplus, but it will increase producer surplus if the government buys up any surplus at the price floor.
​

Question 11

Producer surplus is always the total area below the demand curve and above the supply curve.

Question 12

If a customer had to pay a $5 entry charge to get into a roller coaster theme park, and then pay $2 per ride, she would get less consumer surplus than if she was able to pay $2 per ride with no entry charge.

Question 13

If the government provides a subsidy in one industry and raises the tax revenue by taxing another industry, would, other things equal, cause welfare costs in both industries.

Question 14

The more elastic the demand curve, the smaller is the deadweight loss resulting from the imposition of a tax.

Question 15

Welfare economics is the study of how​ the allocation of resources affects economic well-being.

A)​the allocation of resources affects economic well-being.
B)​price controls work.
C)​the government helps poor people.
D)​to produce greater equality.

Question 16

If James is willing to sell an extra concert ticket for $40 and actually sells it for $100, his consumer surplus is $60.

Question 17

A subsidy in an industry would be likely to increase the consumer surplus for buyers in that industry and increase the producer surplus for sellers in that industry.

Question 18

Total welfare gains from trade to the economy can be measured by the sum of consumer and producer surplus.​

Question 19

The deadweight loss from a tax is the reduction in producer and consumer surplus minus the tax revenue transferred to the government.

Question 20

Consumer surplus equals the quantity supplied minus the quantity demandeD.​

Question 21

The difference between the amount a consumer is willing to pay and the amount they actually must pay for a good is called the:

A)​price elasticity of demand.
B)​substitution effect.
C)​consumer surplus.
D)​income elasticity of demand.

Question 22

Graphically, consumer surplus is measured by:

A)​the area below the demand curve.
B)​the area below the demand curve, but above the upward-sloping supply curve.
C)​the area below the demand curve, but above the market price.
D)​the area below the market demand curve, but above the supply curve.

Question 23

If Stephanie buys a laptop for $700 and the maximum she would have paid was $1,000, which of the following is true?

A)​Stephanie received consumer surplus of $1,000.
B)​Stephanie received producer surplus of $700.
C)​Stephanie received a consumer surplus of $700.
D)​Stephanie received a consumer surplus of $300.

Question 24

Lydia enjoys going to the theater to see Broadway musicals. The following demand schedule shows Lydia's willingness to pay for theater tickets in a year. ​

If the price of tickets to Broadway musicals equals $50, Lydia's consumer surplus will be:​

A)​$350.
B)​$300.
C)​$250.
D)​$100.

Question 25

Ceteris paribus, a decrease in the price of a good will cause the:

A)​quantity demanded of the good to decrease.
B)​quantity supplied of the good to increase.
C)​consumer surplus derived from the good to increase.
D)​supply of the good to decrease.

Question 26

The difference between the value of a good to consumers and its price is known as:

A)​demand.
B)​marginal utility.
C)​total utility.
D)​consumer surplus.

Question 27

Phil and Kelly have always wanted to take a cruise. Although willing to pay $5,000 for a Caribbean cruise for two, they were able to purchase a cruise vacation for two for $3,500. Their total consumer surplus amounted to:

A)​$750.
B)​$5,000.
C)​$1,500.
D)​$3,500.

Question 28

The area between the market price and the supply curve provides a measure of:​

A)​consumer surplus.
B)​producer surplus.
C)​consumer surplus plus producer surplus.
D)​marginal utility.

Question 29

​Exhibit 7-3
Refer to Exhibit 7-3. What is the producer surplus of the 10^th unit bought/sold?​

A)​$1.25
B)​$2.25
C)​$2.75
D)​$3.50

Question 30

Ceteris paribus, an increase in the price of a good will cause the:​

A)​quantity demanded of the good to increase.
B)​quantity supplied of the good to decrease.
C)​supply of the good to increase.
D)​consumer surplus derived from the good to decrease.

Question 31

Which of the following best explains the source of consumer surplus for Good A?

A)​Many consumers pay prices that are greater than the equilibrium price of Good A.
B)​Many consumers would be willing to pay more than the market price for some units of Good A.
C)​Many consumers think the market price of Good A is greater than its cost.
D)​Many consumers of Good A place a value on it that is less than the market price.

Question 32

Consumer surplus is:​

A)​the area underneath the demand curve.
B)​the total utility derived from consuming a good.
C)​the marginal utility of the last unit consumed multiplied by the number of units consumed.
D)​the difference between what consumers are willing to pay and what they are required to pay for a good.

Question 33

Total welfare gains from trade to the economy can be measured:​

A)​as the sum of consumer and producer surpluses.
B)​as the difference between producer surplus and consumer surplus.
C)​as the sum of consumer and producer surpluses minus taxes
D)​as the net gain in consumer surplus that results from an action that alters a market equilibrium.

Question 34

Gains from trade are measured by:​

A)​consumer surplus.
B)​producer surplus.
C)​the sum of consumer and producer surplus.
D)​producer surplus minus consumer surplus.

Question 35

​Exhibit 7-3
Refer to Exhibit 7-3. What is the consumer surplus of the 10^th unit bought/sold?​

A)​$1.25
B)​$2.25
C)​$2.75
D)​$3.50

Question 36

Marginal willingness to pay

A)​rises as greater quantities are consumed.
B)​falls as greater quantities are consumed.
C)​stays the same as greater quantities are consumed.
D)​none of the above

Question 37

The area between the market price and the demand curve provides a measure of:

A)​consumer surplus.
B)​producer surplus.
C)​consumer surplus plus producer surplus.
D)​marginal utility.

Question 38

The maximum price a buyer is willing to pay for a good is called:​

A)​cost.
B)​willingness to pay.
C)​equity.
D)​efficiency.

Question 39

​Exhibit 7-3
Refer to Exhibit 7-3. What is the sum of consumer surplus and producer surplus for the 10^th unit bought/sold?​

A)​$3.50
B)​$5.00
C)​$6.25
D)​$25.00

Question 40

The difference between the value of a good to sellers and its price is known as:​

A)​consumer surplus.
B)​producer surplus.
C)​demand.
D)​supply.

Question 41

Goods that are heavily taxed, such as alcohol and cigarettes, often have:

A)​relatively inelastic demand, such that the tax burden falls primarily on sellers and the deadweight loss associated with the tax is smaller than if demand were elastic.
B)​relatively elastic demand, such that the tax burden falls primarily on sellers and the deadweight loss associated with the tax is smaller than if demand were inelastic.
C)​relatively inelastic demand, such that the tax burden falls primarily on buyers and the deadweight loss associated with the tax is smaller than if demand were elastic.
D)​relatively elastic demand, such that the tax burden falls primarily on buyers and the deadweight loss associated with the tax is smaller than if demand were inelastic.

Question 42

As the market price of a good falls, consumer surplus:​

A)​falls.
B)​rises.
C)​does not change.
D)​can either fall, rise, or stay the same.

Question 43

The net loss to society from a tax on a product can be measured as:​

A)​the loss in consumer surplus.
B)​the loss in producer surplus.
C)​the loss in both consumer and producer surplus.
D)​the difference between the loss in consumer and producer surplus and the gain in tax revenue.

Question 44

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price ceiling equal to P₃, society suffers a deadweight loss equal to area:

A)​C + D + F.
B)​A + B + E.
C)​E + F.
D)​E only.

Question 45

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price ceiling equal to P₃, sellers lose producer surplus equal to area:

A)​C + D + F.
B)​B + C + E +F.
C)​E + F.
D)​C + F.

Question 46

​Exhibit 7-6
Refer to Exhibit 7-6. If the market price equals P₂, consumer surplus can be identified in the diagram as area:

A)​A + B + E.
B)​B + E.
C)​A.
D)​C + D + F.

Question 47

Other things being equal, the less elastic demand is:

A)​the lower the deadweight loss is resulting from the imposition of a given tax on a product.
B)​the greater the burden is of the tax borne by consumers.
C)​the greater the tax revenue collected by the government is.
D)​all of the above

Question 48

Which of the following statements is always true?

A)​An increase in price will lead to an increase in producer surplus along a supply curve.
B)​An increase in price will lead to an increase in consumer surplus along a demand curve.
C)​A price ceiling will lead to an increase in consumer surplus.
D)​A price floor will lead to an increase in consumer surplus.

Question 49

A tax on a product causes a deadweight loss because:

A)​some consumer surplus is transferred from buyers to producers.
B)​some producer surplus is transferred from producers to consumers.
C)​some consumer and producer surplus is transferred to the government.
D)​it distorts the incentives of producers and consumers so that the efficient level of output is not produced.

Question 50

As a result of a per-unit tax on output in a market:

A)​the quantity traded increases.
B)​the quantity traded does not change.
C)​the quantity traded decreases.
D)​a surplus is created at the new equilibrium price.

Question 51

As a result of the imposition of a tax on a product:​

A)​some consumer surplus is transferred from buyers to producers.
B)​some producer surplus is transferred from sellers to consumers.
C)​some consumer and producer surplus is transferred from buyers and sellers to the government.
D)​there is no change in either consumer or producer surplus.

Question 52

​Exhibit 7-6
Refer to Exhibit 7-6. If the market price equals P₂, producer surplus can be identified in the diagram as area:​

A)​A + B + E.
B)​B + E.
C)​D.
D)​C + D+ F.

Question 53

A deadweight loss occurs as a result of a per-unit tax because:

A)​the government spends tax dollars less efficiently than do private citizens.
B)​there is a decline in output for units for which the marginal benefit exceeds the marginal cost.
C)​taxes cause an overproduction of output relative to the socially efficient level or production.
D)​a surplus is created.

Question 54

Consumer surplus measures:

A)​the total benefits received from consuming a given quantity of a good.
B)​the marginal benefit received from consuming the last unit of a good.
C)​the net benefits received by consumers after deducting the cost of purchasing a good.
D)​the dollar amount spent on units of a particular good.

Question 55

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price floor equal to P₁, society suffers a deadweight loss equal to area:

A)​C + D + F.
B)​A + B + E.
C)​E + F.
D)​E only.

Question 56

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price floor equal to P₁, sellers lose producer surplus equal to area ____, but gain producer surplus equal to area ____.

A)​E + F; B
B)​F; C
C)​F; B
D)​E; C

Question 57

A price ceiling imposed below equilibrium price causes a deadweight loss for society because:​

A)​buyers benefit at the expense of sellers.
B)​as a result of the ceiling, units of output are not produced despite the fact that the value to consumers exceeds the production cost.
C)​sellers benefit at the expense of buyers.
D)​the poor gain at the expense of the rich.

Question 58

Other things being equal, the more elastic demand is:

A)​the lower the deadweight loss is resulting from the imposition of a particular tax on a product.
B)​the greater the deadweight loss is resulting from the imposition of a particular tax on a product.
C)​the greater the fraction is of the burden of the tax borne by consumers.
D)​the greater the tax revenue collected by the government is.

Question 59

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price floor equal to P₁, buyers lose consumer surplus equal to area:​

A)​C + D + F.
B)​B + C + E + F.
C)​E + F.
D)​B + E.

Question 60

​Exhibit 7-6
Refer to Exhibit 7-6. If the market is in equilibrium and then the government imposes a price ceiling equal to P₃, buyers lose consumer surplus equal to area ____, but gain consumer surplus equal to area ____.

A)​F; C
B)​E; C
C)​E + F; C
D)​D; C + F

Question 61

A tax would not impose a welfare cost only if:​

A)​the quantity exchanged did not change as a result.
B)​supply was perfectly elastic.
C)​supply was unit elastic.
D)​the demand curve was perfectly elastic.

Question 62

Which of the following is true?​

A)​A lower price will increase your consumer surplus by the amount you were buying originally, times the reduction in the price.
B)​A lower price will leave unchanged your consumer surplus for each of the units you were already consuming, but will increase consumer surplus from increased purchases at the lower price.
C)​A lower price will decrease your producer surplus for each of the units you were producing, but will not change producer surplus by changing the quantity sold.
D)​None of the above is true.

Question 63

If the government wanted a tax to reduce the quantity exchanged a large amount but not raise much in tax revenue, it would want to tax an industry with

A)​elastic supply and demand curves.
B)​inelastic supply and demand curves.
C)​inelastic supply and elastic demand.
D)​elastic supply and inelastic demand.

Question 64

The more elastic the supply curve, the ____ will be the effect of a tax on the quantity exchanged and the ____ will be the welfare cost.​

A)​greater; greater.
B)​greater; smaller.
C)​smaller; greater.
D)​smaller; smaller.

Question 65

After a tax is imposed,​

A)​consumers pay a higher price.
B)​consumers lose consumer surplus.
C)​producers lose producer surplus.
D)​all of the above are true.

Question 66

​Exhibit 7-7
Refer to Exhibit 7-7. When the price falls from P₂ to P₁, consumer surplus

A)​increases by area D + E
B)​increases by area B + C
C)​decreases by area B + C
D)​decreases by area C

Question 67

​Exhibit 7-7
Refer to Exhibit 7-7. When the price rises from P₁ to P₂, consumer surplus​

A)​increases by area D + E
B)​increases by area B + C
C)​decreases by area B + C
D)​decreases by area C

Question 68

If the government wanted a tax to raise a great deal of revenue but not burden producers much, it would want to tax an industry with​

A)​elastic supply and demand curves.
B)​inelastic supply and demand curves.
C)​inelastic supply and elastic demand.
D)​elastic supply and inelastic demand.

Question 69

Which of the following is true?​

A)​If the consumer is a buyer of several units of a good, the earlier units will have greater marginal value and therefore create more consumer surplus, because marginal willingness to pay falls as greater quantities are consumed in any period.
B)​When some units of output can be produced at a cost that is lower than the market price, the seller receives a surplus, or net benefit, from producing those units.
C)​At the market equilibrium both consumers and producers benefit from trading every unit up to the market equilibrium output.
D)​All of the above are true.

Question 70

Fred's demand schedule for movie DVDs is as follows: At $60, he would buy 1; at $50, he would buy two; at $30, he would buy 3; and at $20, he would buy 4. If the price of movie DVDs equals $40, the consumer surplus Fred receives from purchasing movie DVDs would be:

A)​$20.
B)​$30.
C)​$40.
D)​$110.

Question 71

The more elastic the demand curve, the ____ will be the effect of a tax on the quantity exchanged and the ____ will be the welfare cost.​

A)​greater; greater.
B)​greater; smaller.
C)​smaller; greater.
D)​smaller; smaller.

Question 72

A tax in an industry would result in:

A)​a decrease in consumer surplus.
B)​a decrease in producer surplus
C)​a decrease in the gains from trade.
D)​all of the above.

Question 73

Other things equal, for a given tax, if the demand curve is more elastic,

A)​the greater the tax revenue raised and the greater the deadweight cost of the tax.
B)​the greater the tax revenue raised and the smaller the deadweight cost of the tax.
C)​the less the tax revenue raised and the greater the deadweight cost of the tax.
D)​the less the tax revenue raised and the smaller the deadweight cost of the tax.

Question 74

Fred's demand schedule for movie DVDs is as follows: At $30, he would buy 1; at $25, he would buy two; at $15, he would buy 3; and at $10, he would buy 4. If the price of movie DVDs equals $25, the consumer surplus Fred receives from purchasing movie DVDs would be:​

A)​zero.
B)​$5.
C)​$25.
D)​$55.

Question 75

Which of the following is true about consumer surplus?​

A)​Consumer surplus is how much more consumers have to pay than they are willing to pay.
B)​Consumer surplus is shown graphically as the area under the demand curve but above the supply curve.
C)​An increase in the market price due to a decrease in supply will increase consumer surplus.
D)​A decrease in market price due to an increase in supply will increase consumer surplus.

Question 76

A subsidy in an industry would result in:

A)​an increase in consumer surplus.
B)​an increase in producer surplus
C)​both (a) and (b).
D)​none of the above.

Question 77

If a tax is increased,

A)​consumers will pay a higher price.
B)​consumers will lose consumer surplus.
C)​producers will receive a lower price after taxes.
D)​all of the above are true.

Question 78

Which of the following is true?​

A)​Once the equilibrium price and output is reached, all the mutually beneficial trade opportunities between suppliers and demanders will have taken place, and the sum of consumer and producer surplus is maximized.
B)​The deadweight loss of a tax is the difference between the lost consumer and producer surplus and the tax revenue generated.
C)​Those goods that are heavily taxed often have a relatively inelastic demand curve in the short run, so that the burden falls mainly on the buyer, and the deadweight loss to society is smaller than if the demand curve was more elastic.
D)​All of the above are true.

Question 79

Welfare effects are the gains and losses associated with ____ in markets.​

A)​supply shocks
B)​government intervention
C)​excess production
D)​demand supply gap

Question 80

Which of the following is true about producer surplus?

A)​Producer surplus is how much more it costs sellers than they are paid.
B)​Producer surplus is shown graphically as the area under the demand curve but above the supply curve.
C)​An increase in the market price due to an increase in demand will increase producer surplus.
D)​All of the above are true about producer surplus.