Deck 7: Consumers, Producers and the Efficiency of Markets

Question 1

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 1

maximum amount they are willing to pay for a good.

Question 2

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.

Answer 2

how much a buyer values a good.

Question 3

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.

Answer 3

Many consumers would be willing to pay more than the market price for the good.

Question 4

This table refers to five possible buyers' willingness to pay for a take-away meal.
$\begin{array}{l}\text { Buyer Willingness To }\\\begin{array} { l l } & \text { Pay } \\\text { David } & \text { R85.00 } \\\text { Laura } & \text { R70.00 } \\\text { Megan } & \text { R55.00 } \\\text { Mallory } & \text { R40.00 } \\\text { Audrey } & \text { R35.00 }\end{array}\end{array}$

-Refer to the table above. Which of the following is not true?

A) At a price of R90.00, no buyer is willing to purchase take-away meal.
B) At a price of R55.00, Megan is indifferent between buying a take-away meal and not buying one.
C) At a price of R40.00, total consumer surplus in the market will be R90.00.
D) All of the above are correct.

Question 5

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

Question 6

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

Question 7

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 8

If a buyer's willingness to pay for a new car is R200 000 and she is able to actually buy it for R180 000, her consumer surplus is

A) R0.
B) R20 000.
C) R180 000.
D) R200 000.
E) R380 000.

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

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

Question 11

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

Question 12

Equilibrium in a competitive market maximises total surplus.

Question 13

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

Question 14

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 15

If you had been willing to pay R21.90 for the litre of milk purchased at the supermarket, but were required to pay only R12.90, you have gained

A) a refund of R9.00 from the cashier.
B) a consumer surplus amounting to R9.00.
C) excess marginal benefit of R21.90.
D) producer surplus of R9.00.

Question 16

This table refers to five possible buyers' willingness to pay for a take-away meal.
$\begin{array}{l}\text { Buyer Willingness To }\\\begin{array} { l l } & \text { Pay } \\\text { David } & \text { R85.00 } \\\text { Laura } & \text { R70.00 } \\\text { Megan } & \text { R55.00 } \\\text { Mallory } & \text { R40.00 } \\\text { Audrey } & \text { R35.00 }\end{array}\end{array}$

-Refer to the table above. If the price of a take-away meal is R69.00, who will purchase the good?

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

Question 17

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 18

If your willingness to pay for a hamburger is R30.00 and the price is R20.00, your consumer surplus is R50.00.

Question 19

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

Question 20

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

Question 21

If it costs Wilfred the window cleaner R96.00 to clean the windows in a house, but he is paid R150.00 for doing the job:

A) Wilfred's customer receives consumer surplus of R54.00.
B) Wilfred's customer receives consumer surplus of R150.00.
C) Wilfred receives producer surplus of R54.00.
D) Wilfred receives producer surplus of R96.00.

Question 22

Yusuf produces nails at a cost of R2 000 per ton. If he sells the nails for R3 500 per ton, his producer surplus per ton is

A) R1 500.
B) R2 000.
C) R3 500.
D) R5 500.

Question 23

If Lihle sells a shirt for R40, and her producer surplus from the sale is R32, her cost must have been

A) R72.
B) R32.
C) R8.
D) We would have to know the consumer surplus in order to make this determination.

Question 24

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 25

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 26

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 maximised.
D) total surplus is maximised.
E) producer surplus is maximised.

Question 27

This table refers to five possible buyers' willingness to pay for a take-away meal.
$\begin{array}{l}\text { Buyer Willingness To }\\\begin{array} { l l } & \text { Pay } \\\text { David } & \text { R85.00 } \\\text { Laura } & \text { R70.00 } \\\text { Megan } & \text { R55.00 } \\\text { Mallory } & \text { R40.00 } \\\text { Audrey } & \text { R35.00 }\end{array}\end{array}$

-Refer to the table above. If the market price is R55.00, the consumer surplus in the market will be

A) R30.00.
B) R45.00.
C) R155.00.
D) R210.00.

Question 28

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay R300 for one, buyer 2 is willing to pay R250 for one, and buyer 3 is willing to pay R200 for one. If the price is R250, 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 R800.
B) One vase will be sold and consumer surplus is R50.
C) One vase will be sold and consumer surplus is R300.
D) Three vases will be sold and consumer surplus is R0.
E) Two vases will be sold and consumer surplus is R50.

Question 29

If buyers are irrational then:

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

Question 30

Refer to the image above. 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 31

This table refers to five possible buyers' willingness to pay for a take-away meal.
$\begin{array}{l}\text { Buyer Willingness To }\\\begin{array} { l l } & \text { Pay } \\\text { David } & \text { R85.00 } \\\text { Laura } & \text { R70.00 } \\\text { Megan } & \text { R55.00 } \\\text { Mallory } & \text { R40.00 } \\\text { Audrey } & \text { R35.00 }\end{array}\end{array}$

-Refer to the table above. If the market price is R38.00,

A) David's consumer surplus is R47.00 and total consumer surplus for the five individuals is R95.00.
B) Megan's consumer surplus is R17.00 and total consumer surplus for the five individuals is R96.00.
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 32

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 33

A competitive market outcome

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

Question 34

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 35

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 36

Refer to the image above. Suppose the willingness to pay of the marginal buyer of the 3rd unit is R225. Then total surplus is maximised if:

A) 1 unit of the good is produced and sold.
B) 2 units of the good are produced and sold.
C) 3 units of the good are produced and sold.
D) 4 units of the good are produced and sold.

Question 37

In general, if a benevolent social planner wanted to maximise 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 38

Refer to the image above. When the price is P2, producer surplus is:

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

Question 39

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

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

Question 40

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 41

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 42

Suppose that the price of a new bicycle is R3 000. Natalie values a new bicycle at R4 000. It costs R2 000 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike?

A) R5000
B) R3000
C) R2000
D) R4000
E) R1000

Question 43

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 44

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 45

a. At the equilibrium price, how many burgers would Ali be willing to purchase?
b. How much is Ali willing to pay per burger for 20 burgers?
c. What is the magnitude of Ali's consumer surplus at the equilibrium price?
d. At the equilibrium price, how many burgers would the restaurant be willing to sell?
e. How high must the price of burgers be for the restaurant to supply 20 burgers to the market?
f. At the equilibrium price, what is the magnitude of total surplus in the market?
g. If the price of burgers rose to R100, what would happen to Ali's consumer surplus?
h. If the price of burgers fell to R50, what would happen to the restaurant's producer surplus?
i. Explain why the graph that is shown verifies the fact that the market equilibrium (quantity) maximises the sum of producer and consumer surplus.

Question 46

What is consumer surplus, and how is it measured?

Question 47

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 maximises the sum of consumer and producer surplus.
D) the market allocates output to the buyers that value it the most.

Question 48

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 49

What is producer surplus, and how is it measured?

Question 50

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

Question 51

Thandi loves toffees. The table shown reflects the value Thandi places on each toffee she eats:

a. Use this information to construct Thandi's demand curve for toffees.
b. If the price of toffees is R0.20, how many toffees will Thandi buy?
c. Show Thandi's consumer surplus on your graph. How much consumer surplus would she have at a price of R0.20?
d. If the price of toffees rose to R0.40, how many toffees would she purchase now? What would happen to Thandi's consumer surplus? Show this change on your graph.

Question 52

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

Question 53

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 54

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

Question 55

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