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, producer surplus is $1.

Accepted Answer

Producer surplus is the difference between the actual selling price of a product and the lowest price the producer is willing to accept for it. In this case, the negotiated price is $3, which is between the customer's willingness to pay of $5 and the seller's willingness to sell of $2. Therefore, the producer surplus is $1 ($3 - $2).

Question 2

The gap between the supply curve and the market price is called "producer surplus."

Accepted Answer

This statement is true. Producer surplus is the difference between the market price and the minimum price at which producers are willing to sell a certain quantity of a good or service. It represents the amount of profit that producers are able to make above and beyond their production costs.

Question 3

Consumer surplus is defined as the gap between the supply curve and the market price.

Accepted Answer

Consumer surplus is actually the gap between the demand curve and the market price, not the supply curve.

Question 4

The gap between the demand curve and the market price is called "consumer surplus."

Accepted Answer

This is correct. Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual market price they have to pay. This is represented by the area under the demand curve and above the market price.

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, consumer surplus is $5.

Accepted Answer

Consumer surplus is the difference between the willingness to pay and the actual price paid, which in this case is $2 ($5 - $3).

Question 6

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

Accepted Answer

An effective price ceiling holds prices down below the equilibrium price, just as a physical ceiling holds a helium balloon down below its natural level.

Question 7

The gap between the demand curve and the market price is called "deadweight loss."

Accepted Answer

Deadweight loss is the area between the demand and supply curves that is lost due to market inefficiency, and it is not necessarily the gap between the demand curve and the market price.

Question 8

An effective price ceiling is imposed in a market. This 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 ceiling?

Accepted Answer

An effective price ceiling sets the legal price below the equilibrium price, leading to a shortage. In response, a black market may develop where the product is sold at a higher price than the legal market price due to the excess demand.

Question 9

Laws that prohibit price gouging are often politically:

Accepted Answer

Laws that prohibit price gouging may be popular among consumers as they protect them from higher prices during emergencies, but they can result in shortages because suppliers have no incentive to increase the supply of goods at a lower price. This is because they cannot obtain higher prices during the emergency period, meaning they will not make a profit, so they do not invest in increasing production or moving goods to the affected area. As a result, demand outstrips supply, which can result in shortages.

Question 10

A price floor is effective when it:

Accepted Answer

A price floor is effective when it sets a minimum price above the equilibrium price in a free market, causing the price to be higher than it would naturally be.

Question 11

Producer surplus is defined as the gap between the supply curve and the market price.

Accepted Answer

This is the correct definition of producer surplus. It represents the difference between what the producer is willing to sell a good for (as shown by the supply curve) and the price they receive in the market. The larger the producer surplus, the more profitable the producer is.

Question 12

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, producer surplus is $4.

Accepted Answer

Producer surplus is the difference between the seller's willingness to sell and the actual price they receive. In this case, the seller's willingness to sell is $64 and the actual price is $68, so the producer surplus is $4. Therefore, the statement is true.

Question 13

The gap between the supply curve and the market price is called "consumer surplus."

Accepted Answer

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. The gap between the supply curve and the market price is called producer surplus.

Question 14

Merchants' raising prices of necessary goods during a crisis or disaster is known as:

Accepted Answer

Price gouging is the practice of raising prices of necessary goods during a crisis or disaster when demand is high and supplies are low. This often takes advantage of consumers who have no other choice but to pay the increased prices. Therefore option B is the correct answer.

Question 15

"Price gouging" laws are types of _____ and often result in _____.

Accepted Answer

Price gouging laws are a form of price ceilings, which set a maximum price that can be charged for goods, often leading to shortages as the price is kept below the equilibrium, discouraging supply.

Question 16

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, producer surplus is greater than consumer surplus.

Accepted Answer

Producer surplus is the difference between the price the seller actually receives and the minimum amount they are willing to accept, which in this case is $3 - $2 = $1. Consumer surplus is the difference between the maximum amount the consumer is willing to pay and the price they actually pay, which is $5 - $3 = $2. Therefore, consumer surplus is greater than producer surplus.

Question 17

An effective price floor is imposed in a market. This 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?

Accepted Answer

An effective price floor sets a minimum price above the equilibrium, leading to a surplus. In a black market, the price is typically lower than the legal market price to attract buyers who are unwilling to pay the higher legal price.

Question 18

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.

Accepted Answer

The answer of Suppose that a customer's willingness to pay...

Question 19

The market for an agricultural crop has an effective price floor. Then poor weather causes the market supply to decrease. What impact does this have on the effectiveness of the price floor in the market, ceteris paribus?

Accepted Answer

A decrease in supply due to poor weather will lead to a higher equilibrium price, potentially reducing the gap between the price floor and the equilibrium price, thus reducing the effectiveness of the price floor.

Question 20

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 $65, producer surplus is greater than consumer surplus.

Accepted Answer

Producer surplus is the difference between the willingness-to-sell and the actual selling price, which in this case is $64 - $65 = -$1. Since the negotiated price is below the seller's willingness-to-sell, the producer will experience a loss, and therefore producer surplus is 0 or negative. On the other hand, consumer surplus is the difference between the willingness-to-pay and the actual selling price, which in this case is $79 - $65 = $14. Since consumer surplus is positive, it is greater than (or at least equal to) producer surplus. Therefore, the statement is false.

Quiz 4: Markets and Government