Question 1

In a market the demand curve is given by P = 100 - 2q and supply by P = 2q.What is PS in the market equilibrium?&#10;A)PS = 725&#10;B)PS = 125&#10;C)PS = 500&#10;D)PS = 625&#10;E)None of the above.

Accepted Answer

To find the producer surplus (PS), first find the equilibrium quantity (q) and price (P) by setting demand equal to supply: 100 - 2q = 2q. Solving gives q = 25 and P = 50. PS is the area above the supply curve and below the price level, calculated as 0.5 * base * height = 0.5 * 25 * 50 = 625.

Question 2

In a market the demand curve is given by P = 120 - 2q and supply by P = q.What are the equilibrium price and quantity traded?&#10;A)P* = 60, q* = 60&#10;B)P* = 40, q* = 80&#10;C)P* = 40, q* = 40&#10;D)P* = 20, q* = 40&#10;E)None of the above.

Accepted Answer

To find the equilibrium, set demand equal to supply: 120 - 2q = q. Solving for q gives q* = 40. Substitute q* into either equation to find P*: P = 40. Thus, the equilibrium price and quantity are P* = 40 and q* = 40.

Question 3

Which statement is true?&#10;A)Consumer surplus is the benefit a consumer receives from consuming a product, net of the price they have to pay for it.&#10;B)Consumer surplus is the area underneath the demand curve above the price line.&#10;C)Consumer surplus is the area underneath the price line above the demand curve.&#10;D)a and b.&#10;

Accepted Answer

Consumer surplus is the benefit a consumer receives from consuming a product, net of the price they have to pay for it. This is because consumer surplus represents the difference between what consumers are willing to pay for a good or service—indicated by the demand curve—and what they actually pay—the market price. Additionally, consumer surplus is graphically represented as the area underneath the demand curve and above the price line. This area visually captures the excess willingness to pay over the actual price for all units sold. Therefore, both statements A and B are true, making D the correct answer.

Question 4

Producer surplus:&#10;A)Is the area under the supply curve above the price line.&#10;B)Is the price a firm receives for a good minus its marginal cost of production, for every unit it sells.&#10;C)Is the firm's marginal cost minus the price it receives for selling the good for every unit sold.&#10;D)The area between the MB and MC curves&#10;E)None of the above.

Accepted Answer

Producer surplus is the difference between what producers are willing to accept (marginal cost) and what they actually receive (price) for each unit sold.

Question 5

In a market the demand curve is given by P = 120 - 2q and supply by P = q.What is PS in the market equilibrium?&#10;A)PS = 1600&#10;B)PS = 3200&#10;C)PS = 1200&#10;D)PS = 800&#10;E)None of the above.

Accepted Answer

To find the producer surplus (PS), first find the equilibrium quantity (q) and price (P) by setting demand equal to supply: 120 - 2q = q, solving gives q = 40 and P = 40. PS is the area above the supply curve and below the equilibrium price, calculated as 0.5 * q * P = 0.5 * 40 * 40 = 800.

Question 6

Which statement is true?&#10;A)A competitive market maximizes total surplus as all the gains from trade are realized.&#10;B)In a competitive market all trade for which the MB is greater than or equal to the MC of production take place.&#10;C)If output was increased beyond the traded in a competitive market total surplus would decrease&#10;D)The competitive equilibrium outcome is Pareto efficient.&#10;E)All of the above.

Accepted Answer

All the statements are true regarding competitive markets. A) Competitive markets maximize total surplus by ensuring all gains from trade are realized. B) Trades occur in a competitive market when the marginal benefit (MB) is greater than or equal to the marginal cost (MC) of production, ensuring efficient allocation of resources. C) Increasing output beyond the equilibrium point in a competitive market would lead to a decrease in total surplus, as the cost of producing additional units would exceed the benefit derived from them. D) The competitive equilibrium outcome is Pareto efficient because it is impossible to make any one individual better off without making someone else worse off, indicating an optimal allocation of resources.

Question 7

In a market the demand curve is given by P = 100 - 2q and supply by P = 2q.What is CS in the market equilibrium?&#10;A)CS = 625&#10;B)CS = 1250&#10;C)CS = 750&#10;D)CS = 500&#10;E)None of the above.

Accepted Answer

Consumer Surplus (CS) is calculated as the area above the price level and below the demand curve, up to the quantity traded. To find the market equilibrium, set the demand and supply equations equal to each other: 100 - 2q = 2q. Solving for q gives q = 25. The equilibrium price (P) is found by substituting q into one of the equations, giving P = 50. CS is the area of a triangle with a base of 25 (quantity) and a height of 50 (the difference between the maximum price consumers are willing to pay at q=0, which is 100, and the equilibrium price, which is 50). Thus, CS = 0.5 * base * height = 0.5 * 25 * 50 = 625.

Question 8

In a market the demand curve is given by P = 120 - 2q and supply by P = q.What is CS in the market equilibrium?&#10;A)CS = 3200&#10;B)CS = 1600&#10;C)CS = 3600&#10;D)CS = 800&#10;E)None of the above.

Accepted Answer

To find the consumer surplus (CS) at market equilibrium, first find the equilibrium quantity (q) and price (P) by setting demand equal to supply: 120 - 2q = q, solving gives q = 40 and P = 40. CS is the area of the triangle above the price level and below the demand curve: CS = 0.5 * (base * height) = 0.5 * (40 * (120 - 40)) = 1600.

Question 9

In a market the demand curve is given by P = 100 - 2q and supply by P = 2q.What are the equilibrium price and quantity traded?&#10;A)P* = 25, q* = 25&#10;B)P* = 100, q* = 50&#10;C)P* = 50, q* = 50&#10;D)P* = 50, q* = 25&#10;E)None of the above.

Accepted Answer

To find the equilibrium, set the demand equal to supply: 100 - 2q = 2q. Solving gives q* = 25. Substitute q* into either equation to find P*: P = 2(25) = 50. Thus, P* = 50, q* = 25.

Question 10

Consider the competitive markets for running shoes and gym memberships, two complementary products.Assume that the laws of demand supply hold in each market.You observe the following facts in the two markets: in the running shoe market both the price and quantity traded fall; and in the gym membership market the price increases and the quantity traded falls.What change could explain these changes?

A)The cost of rubber, an input into running shoes, increases.
B)The cost of rubber, an input into running shoes, falls.
C)New computer and security technology allows gyms to operate with fewer staff.
D)New medical research shows that people that exercise regularly live longer and are happier.
E)A new workplace safety law requires that all gyms need to have more and better trained staff.

Accepted Answer

The new workplace safety law increases the cost of operating gyms, leading to a decrease in supply, which raises prices and reduces quantity. This decrease in gym memberships reduces demand for complementary running shoes, causing both price and quantity to fall in that market.

Deck 9: Equilibrium and Welfare