Question 1

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 2

The opportunity cost for a seller should only include their cash expenses on inputs.

Accepted Answer

The opportunity cost for a seller should not only include their cash expenses on inputs, but also the benefits and profits they could have earned from using those resources in another way or investing them elsewhere. Opportunity cost includes all of the trade-offs involved in a decision, not just the immediate or visible expenses.

Question 3

In a competitive market, sales go to those producers who are willing to supply the product with the best after-sales service.

Accepted Answer

In a competitive market, sales go to those producers who can offer the best combination of price, quality, and service, not just after-sales service alone.

Question 4

Lee can sell coffee at $1 per cup. The market equilibrium price of coffee is $2.50. Suppose Lee sells 200 cups of coffee. The producer surplus captured by Lee is $500.

Accepted Answer

The producer surplus is calculated as the difference between the market price ($2.50) and the cost of production (which is not given in the question). If Lee is selling the coffee at $1 per cup and the market equilibrium price is $2.50, then Lee is likely experiencing a loss, rather than a surplus. Therefore, the statement that Lee captured a producer surplus of $500 is false.

Question 5

When a good is purchased, the difference between what a consumer is willing to pay and what they actually have to pay is consumer surplus.

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they pay for a good.

Question 6

Each seller of a product is willing to sell as long as the price he or she can receive is greater than the opportunity cost of producing the product.

Accepted Answer

This statement is true according to the law of supply, which states that producers will supply more of a good as its price increases and less as its price decreases, as long as the price they receive is greater than their opportunity cost of production.

Question 7

Welfare economics is the study of the welfare system.

Accepted Answer

Welfare economics is the study of how resources are allocated and how goods and services are distributed from an economic perspective. It is not the study of the welfare system itself.

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 pay less for the same amount of the good, which increases their consumer surplus. In addition, more buyers are willing to enter the market at the lower price, increasing the total consumer surplus.

Question 9

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

The height of the demand curve represents the maximum amount that buyers are willing to pay for a good, also known as their willingness to pay. Therefore, the height of the curve reflects the value that buyers attach to the good.

Question 10

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

Accepted Answer

This statement correctly defines producer surplus, which is the difference between the price a seller receives for a good or service and the cost of producing it.

Question 11

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 12

Any goods not sold in a vegetable market at the end of the day are producer surplus.

Accepted Answer

Goods that are not sold at the end of the day in a vegetable market are not necessarily considered producer surplus. Producer surplus refers to the difference between the amount a producer is willing to accept for a good or service and the amount they actually receive. If the goods are not sold, the producer does not receive any revenue and therefore does not have any surplus. Additionally, there may be other factors affecting why the goods were not sold, such as quality or quantity, which may not be related to producer surplus.

Question 13

A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but would refuse to buy a product at a price less than his willingness to pay.

Accepted Answer

A buyer is willing to buy a product at a price less than or equal to his willingness to pay, but would refuse to buy a product at a price greater than his willingness to pay.

Question 14

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 15

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

In an equilibrium, the price and quantity reflect the point where the supply and demand curves intersect, ensuring that all units of the good that are produced are sold and that buyers and sellers have the opportunity to transact at the market price. This results in a situation where both buyers and sellers are able to maximise their respective benefits, leading to a welfare-enhancing outcome for the society as a whole.

Question 16

The appropriate measure for buyers' valuation of a good is how willing they are to pay.

Accepted Answer

The willingness to pay of buyers is an important measure of the value they attach to a good or service. It reflects the maximum amount they are willing to give up in order to obtain the good, which can be used as an indicator of their perceived benefits or satisfaction from consuming it. Therefore, it is a relevant criteria for understanding consumer preferences and demand.

Question 17

A supply curve provides a graphical measure of a producer's true willingness to sell.

Accepted Answer

The supply curve is a graphical representation of the quantity of a good or service a producer is willing to supply at different prices. It shows the producer's willingness to sell at various price levels.

Question 18

Consumer surplus is closely related to the demand curve for a product.

Accepted Answer

Consumer surplus is the difference between the highest price a consumer is willing to pay for a product and the actual price they pay. The demand curve shows the different quantities of a product that consumers are willing and able to purchase at various price levels. Therefore, as the price of a product decreases, the consumer surplus increases because consumers are willing to pay more for the product than the actual price they are paying. This relationship between price and consumer surplus is reflected in the demand curve, which slopes downwards from left to right.

Question 19

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 20

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

Accepted Answer

This statement is true. The willingness to pay is the maximum amount a buyer is willing to pay for a good or service, based on their perceived value of the good or service. Ultimately, the price paid for the good or service will depend on various factors including the perceived value of the good or service, other available options, and the bargaining power of the buyer and seller.

Quiz 7: Consumers, Producers and the Efficiency of Markets