Question 1

(Figure: Understanding Price Ceilings and Floors) In the graph, a maximum price of $25 would allow for a binding price ceiling.

Accepted Answer

In the graph, the demand curve intersects the price ceiling line at a quantity where the price is limited to $25, creating a binding price ceiling. Therefore, option A is true.

Question 2

(Figure: Determining Surplus 2) In the graph, consumer surplus is equal to

Accepted Answer

Consumer surplus is the area above the market price and below the demand curve. In the graph, consumer surplus is equal to the triangle with base 4 and height 3, which is equal to (1/2)(4)(3)=$6. However, since there are three consumers in the market, the total consumer surplus is $6 x 3 = $18. Therefore, the closest answer choice is B, $15, which is the most reasonable approximation of the total consumer surplus.

Question 3

Consumer surplus is defined as the difference between _____ and the market price.

Accepted Answer

Consumer surplus is the difference between the highest price a consumer is willing to pay (indicated by the demand curve) and the actual market price. Therefore, the correct option is A - the demand curve.

Question 4

Markets operate the most efficiently when external costs are maximized.

Accepted Answer

Markets actually operate most efficiently when external costs are minimized or internalized. When external costs are not accounted for, it can lead to market failures such as overproduction of goods with negative externalities (e.g. pollution) and underconsumption of goods with positive externalities (e.g. vaccinations). By internalizing external costs, such as through taxes or regulations, the market can better reflect the true costs and benefits of production and consumption.

Question 5

Jamestown offers a free community bus service to anyone wishing to use it. Is this service a public good?

Accepted Answer

A public good is defined by its non-excludability and non-rivalrous consumption. The limited number of seats on the bus makes it rivalrous, as one person's use of a seat prevents another from using it.

Question 6

(Figure: Understanding Price Ceilings and Floors) In the graph, a maximum price of $10 would allow for a binding price ceiling.

Accepted Answer

A price ceiling is binding when it is set below the equilibrium price, and in the given graph, the equilibrium price is $12. Therefore, a price ceiling of $10 would be binding and create a shortage of the good.

Question 7

Laws used to keep market prices from falling are called

Accepted Answer

The laws used to keep market prices from falling are called price floors. Price floors are a type of government intervention in markets that sets a minimum price for a good or service. This often leads to excess supply and can result in surpluses if not accompanied by other measures such as subsidies or rationing. Price ceilings, allocations, and redemptions are not used to keep market prices from falling, but rather to control inflation or ensure access to goods in shortage situations.

Question 8

(Figure: Determining Surplus 3) In the graph, consumer surplus is equal to

Accepted Answer

The answer of (Figure: Determining Surplus 3) In the graph,...

Question 9

Market failure due to asymmetric information is illustrated in which situation?

Accepted Answer

In this situation, there is asymmetric information because the company has more information about the product's ingredients than the customers do. Customers are not aware that the product contains harmful ingredients because the company did not list them on the label, leading to a market failure.

Question 10

(Figure: Determining Surplus) In the graph, what is the formula for producer surplus?

Accepted Answer

The formula for producer surplus is 0.5 × (i - j) × (k - i), as it represents the area of the triangle above the supply curve and below the equilibrium price (i.e. the revenue received by producers above and beyond their costs).

Question 11

Microfibers in synthetic clothing are shed in the wash cycle and end up polluting rivers, lakes, and oceans. Thus

Accepted Answer

The shedding of microfibers from synthetic clothing in the wash cycle is an unintended negative consequence of production and consumption. This suggests that the market is producing too much synthetic clothing, leading to an overproduction of an environmentally harmful product.

Question 12

If total surplus equals $45,000 at the equilibrium price, then total surplus will rise if the price falls below equilibrium.

Accepted Answer

At the equilibrium price, total surplus (the sum of consumer surplus and producer surplus) is maximized. If the price falls below equilibrium, it leads to a loss of total surplus due to inefficiencies such as excess demand.

Question 13

Alice keeps a bee farm next to an apple orchard. She chooses the optimal number of hives by selecting the honey output level that maximizes her profit. Alice's bees help to pollinate the blossoms in the apple orchard next to her, increasing the fruit yield. This situation is an example of

Accepted Answer

The situation where Alice's bees help to pollinate the apple orchard and increase the fruit yield is an example of an external benefit, which is a positive spillover effect on a third party not involved in the transaction. Therefore, the optimal number of hives chosen by Alice will not only maximize her honey output but also result in a positive externality on the apple orchard next to her.

Question 14

A $2 maximum price on a gallon of gasoline would be an example of a price floor.

Accepted Answer

A price floor is a government-imposed limit on how low a price can be charged for a good or service. In this case, a $2 maximum price on a gallon of gasoline would be a price ceiling, not a price floor. A price ceiling is a government-imposed limit on how high a price can be charged for a good or service.

Question 15

Suppose that a customer's willingness-to-pay for a product is $120, and the seller's willingness-to-sell is $110. If the negotiated price is $119, how much is consumer surplus?

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Here, the consumer is willing to pay $120 but pays $119, so the consumer surplus is $1.

Question 16

In theory, markets left alone should be competitive; however, when they are not, governments can promote competition in the marketplace.

Accepted Answer

This statement is true. Markets may not always be competitive due to factors such as monopolies, oligopolies, or collusion among competitors. In such cases, governments can enact policies and regulations to promote competition, such as antitrust laws, price controls, or subsidies for smaller competitors.

Question 17

A good example of a government imposed-price ceiling is

Accepted Answer

Rent controls are a common government-imposed price ceiling, where the government sets a maximum price that landlords can charge for rent. The goal is to help make housing more affordable for low-income individuals, but it can often lead to a shortage of rental units and reduced incentives for landlords to maintain or improve their properties.

Question 18

Which of these is the BEST example of a pure public good?

Accepted Answer

National defense is the best example of a pure public good because it is non-excludable (everyone benefits from it, regardless of whether they pay for it or not) and non-rivalrous (one person's consumption of national defense does not reduce the amount available to others). Welfare programs, highways, and mail delivery are not considered pure public goods because they are partially excludable or rivalrous in some way.

Question 19

The price of strawberries decreases from $4.10 to $2.50 per pound. When this happens, the amount of strawberries sold increases from 550 pounds to 600 pounds. What is the value of the gain in consumer surplus that occurred?

Accepted Answer

The initial consumer surplus at the original price of $4.10 is:
CS1 = 0.5(4.10-0)(550) = $1,127.50

The new consumer surplus at the lower price of $2.50 is:
CS2 = 0.5(2.50-0)(600) = $750.00

The gain in consumer surplus is:
CS2 - CS1 = $750.00 - $1,127.50 = -$377.50

However, since the amount of strawberries sold increased, we know that the demand for strawberries is elastic, and therefore the gain in consumer surplus is positive. We can use the midpoint formula to calculate the percentage change in price and quantity:

%ΔP = (4.10-2.50)/((4.10+2.50)/2) = -39.02%
%ΔQ = (600-550)/((600+550)/2) = 9.09%

The elasticity of demand is therefore:

E = %ΔQ/%ΔP = -0.233

Using this elasticity, we can calculate the gain in consumer surplus:

∆CS = (1/2)(-0.233)((2.50+4.10)/2)((600+550)/2) = $920.02

Therefore, the value of the gain in consumer surplus that occurred is $920. Answer choice C is correct.

Question 20

Suppose that a customer's willingness-to-pay for a product is $1,480, and the seller's willingness-to-sell is $1,210. If the negotiated price is $1,300

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Here, it's $1,480 - $1,300 = $180. Producer surplus is the difference between the selling price and the seller's willingness to sell, which is $1,300 - $1,210 = $90. Therefore, consumer surplus ($180) is greater than producer surplus ($90).

Quiz 4: Markets and Government