Question 1

Lee can sell coffee at $3 per cup. The market equilibrium price of coffee is $3.50. Suppose Lee sells 100 cups of coffee. The producer surplus captured by Lee is $100.

Accepted Answer

If the market equilibrium price is $3.50 and Lee is selling at $3, there will be excess demand which means Lee will not be able to sell all 100 cups at that price. Therefore, Lee's producer surplus cannot be $100.

Question 2

As a general rule, a consumer's willingness to pay is never greater than twice the product's price.

Accepted Answer

This statement is false. The willingness to pay for a product can vary greatly depending on factors such as the perceived value, quality, and competition in the market. There is no set rule that a consumer's willingness to pay is limited to twice the product's price.

Question 3

If a consumer is not willing to purchase a product, her willingness to pay must be below the market price.

Accepted Answer

This statement is true because willingness to pay is the maximum amount a consumer is willing to spend on a product, and if it is below the market price, the consumer will not make the purchase.

Question 4

Producer surplus is the amount a seller is paid minus the cost of production.

Accepted Answer

Producer surplus is calculated by subtracting the cost of production from the amount a seller receives for a product. Therefore, the statement is true.

Question 5

The tools of consumer surplus and producer surplus enables us to determine whether free-market allocation of resources is desirable.

Accepted Answer

Consumer surplus and producer surplus help us understand the benefits that both parties receive from the market exchange. If the total surplus (consumer plus producer) is maximized, it indicates that the allocation of resources in the free-market is efficient and desirable. Therefore, the tools of consumer and producer surplus are helpful in evaluating the efficiency of a free-market system.

Question 6

Suppose Jess can sell fruit smoothies for $5. The market price of fruit smoothies is $4.50. If Jess decided to produce 100 smoothies, her producer surplus would be positive $50.

Accepted Answer

The answer of Suppose Jess can sell fruit smoothies for...

Question 7

The highest price a buyer is prepared to spend on a good, is that buyer's willingness to pay.

Accepted Answer

This is the correct definition of willingness to pay.

Question 8

When the market price of a good falls, consumer surplus increases because (1) the consumer surplus received by existing buyers becomes larger and (2) more buyers enter the market at the lower price.

Accepted Answer

When the market price of a good falls, existing buyers are able to purchase the good at a lower price which increases their consumer surplus. Additionally, the lower price may attract new buyers to the market who were previously unwilling or unable to purchase the good at the higher price, further increasing overall consumer surplus.

Question 9

Total surplus = Value to buyers - Costs to sellers.

Accepted Answer

This equation represents the definition of total surplus in microeconomics. The total surplus is the difference between the total value that buyers receive from a good or service and the total cost that sellers incur to produce and sell that good or service.

Question 10

Information regarding the consumer's willingness to pay can be derived from the demand curve.

Accepted Answer

The demand curve illustrates the relationship between the price of a good and the quantity of that good that consumers are willing and able to buy. It can be used to estimate the consumer's willingness to pay at different price levels. As the price of a good decreases, the quantity demanded typically increases, indicating that consumers are willing to pay more for a lower price.

Question 11

To measure the total consumer surplus in a market, the area above the demand curve is added to the area below the price.

Accepted Answer

Consumer surplus is measured as the area below the demand curve and above the price, not above the demand curve.

Question 12

The height of the demand curve measures the value buyers place on the good, as measured by their willingness to pay for it.

Accepted Answer

This statement is true. The height of the demand curve represents the price that buyers are willing to pay for a good, which reflects their perceived value of the good. Buyers who value a good highly will be willing to pay more for it, resulting in a higher demand curve.

Question 13

For producers, the willingness to sell is equivalent to the marginal cost of the product.

Accepted Answer

This statement is true according to the law of supply, which states that producers are willing to sell a product at a price equal to or greater than its marginal cost, which represents the additional cost of producing one more unit of the product. Therefore, the willingness to sell is equivalent to the marginal cost.

Question 14

Suppose a market clears and this generates an equilibrium price and quantity. An important outcome of this equilibrium is that it maximises the total benefits to both buyers and sellers.

Accepted Answer

When a market clears and reaches equilibrium, it means that the quantity supplied by sellers matches the quantity demanded by buyers at a particular price. This equilibrium price and quantity are important because they maximize the total benefits to both buyers and sellers. At this price, buyers are willing to pay for the good or service because they receive more value than the cost of the item, and sellers are willing to supply the good or service because they receive more revenue than the cost of production. This leads to an efficient allocation of resources and maximizes social welfare. Therefore, the statement is true.

Question 15

For any given quantity, the price on a supply curve represents the marginal buyer's willingness to pay.

Accepted Answer

The price on a supply curve represents the minimum price at which a seller is willing to sell an additional unit, not the marginal buyer's willingness to pay. The marginal buyer's willingness to pay is represented on the demand curve.

Question 16

Total surplus in a market is consumer surplus plus firm profit.

Accepted Answer

This statement is true. Total surplus in a market is the sum of consumer surplus (the difference between the highest price a consumer is willing to pay and the actual price they pay) and firm profit (the difference between the price the firm charges and the cost of production).

Question 17

In all markets consumer surplus measures the economic wellbeing in that market.

Accepted Answer

Consumer surplus measures the difference between what consumers are willing to pay for a good or service and what they actually pay, which is one aspect of economic wellbeing. However, economic wellbeing in a market also includes producer surplus and can be influenced by factors such as market power, externalities, and distributional equity, which consumer surplus alone does not capture.

Question 18

Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it.

Accepted Answer

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually has to pay for it.

Question 19

Total surplus is the area under the demand curve up to the equilibrium quantity, minus the cost to producers.

Accepted Answer

This is the definition of total surplus, which is calculated by finding the difference between the consumer surplus (area under the demand curve but above the equilibrium price) and the producer surplus (area above the supply curve but below the equilibrium price). When these two surpluses are added together, the resulting area represents the total benefit gained by both consumers and producers in the market.

Question 20

The producer surplus in a market is the area above the price plus the area below the demand curve.

Accepted Answer

This statement accurately describes the formula for producer surplus in a market. It is calculated as the difference between the price at which producers are willing to supply a certain quantity and the actual market price, multiplied by the quantity sold (i.e. the area above the price). This is then added to the area below the demand curve, which represents the consumer surplus. Together, the producer and consumer surplus make up the total economic surplus in a market.

Quiz 7: Consumers, Producers and the Efficiency of Markets