Deck 7: Consumers, Producers and the Efficiency of Markets

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.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

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.

Question 7

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

Question 9

Total surplus = Value to buyers - Costs to sellers.

Question 10

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

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.

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.

Question 13

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

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.

Question 15

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

Question 16

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

Question 17

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

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.

Question 19

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

Question 20

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

Question 21

Public policy can improve market efficiency when there are instances of market failure.

Question 22

A perfectly competitive free market will maximise total surplus.

Question 23

The less elastic demand is, the higher the consumer surplus ceteris paribus.

Question 24

Sharon is bidding on a new camera on an internet auction. She values the camera at $700 and wins the auction with a bid of $650, therefore:

A) Sharon's willingness to pay is $700 and her consumer surplus is 0
B) Sharon's willingness to pay is $700 and her consumer surplus is $50
C) Sharon's willingness to pay is $650 and her consumer surplus is $50
D) Sharon's willingness to pay is $650 and her consumer surplus is $0

Question 25

Restrictions against ticket scalping actually drive up the cost of many tickets.

Question 26

Michele is willing to pay $12.00 to see St Trinians for the fourth time. She finds a theatre showing St Trinians for $12.00. Michele's consumer surplus is:

A) $0
B) $12
C) $8
D) $9

Question 27

A group of people are bidding on an internet auction for a used car. Each bidder will not bid more than a maximum amount that is unique to them. This maximum is called:

A) a strategic price
B) willingness to pay
C) consumer surplus
D) price elasticity of demand

Question 28

If all sellers in the market have an identical willingness to sell, then producer surplus will be zero.

Question 29

Legalising ticket scalping would make everyone worse off.

Question 30

Ticket scalping leads to a reduction in economic efficiency and therefore to a reduction in economic wellbeing.

Question 31

If a seller is able to control the market price, the seller has market power and the market outcome will be inefficient.

Question 32

Lee is willing and able to pay $250 for an iPhone, but is able to buy it for $199. Lee's consumer surplus is:

A) $0
B) $51
C) $199
D) $250

Question 33

In order for market outcomes to maximise the total benefits to buyers and sellers, the markets must be perfectly competitive.

Question 34

Many economists believe that a market in human organs would lead to both an efficient allocation and fair distribution of organs.

Question 35

Many economists believe that a market in human organs would lead to an efficient allocation of organs.

Question 36

Pollution and other externalities, while bothersome, do not interfere with efficiency.

Question 37

Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum amount of output was produced from a given number of inputs.

Question 38

An allocation of resources that maximises total surplus is said to be equitable.

Question 39

Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced and distributed.

Question 40

Market failure refers to firms that go bankrupt because they do not produce the goods and services that consumers want.

Question 41

Consumer surplus is the:

A) quantity of a good consumers get free
B) amount a consumer has to pay less the amount the consumer was willing to pay
C) amount a consumer is willing to pay less the amount the consumer actually pays
D) total value of a good to a consumer

Question 42

Graph 7-1

Refer to Graph 7-1. What area represents consumer surplus when the price is P₁?

A) A
B) B
C) C
D) D

Question 43

Graph 7-1

Refer to Graph 7-1. What area represents producer surplus when the price is P₁?

A) A
B) B
C) C
D) D

Question 44

Other things being equal, if the price of a good falls, the consumer surplus:

A) decreases
B) increases
C) is unchanged
D) may increase, decrease or remain unchanged

Question 45

Graph 7-2

Refer to Graph 7-2. At the higher price P₂, consumer surplus is:

A) A
B) B
C) A + B
D) A + B + C

Question 46

Table 7-1
This table refers to five possible buyers' willingness to pay for good Z.

Refer to Table 7-1. If the price of good Z is $9.99, who will not purchase the good?

A) Jeremy and Sarah
B) John, Jeremy and Sarah
C) Cassie, Jamie and John
D) Cassie and Jamie

Question 47

Suppose hail storms damage vineyards in South Australia. The supply of grapes to local winemakers declines. What happens to consumer surplus in the market for South Australian wine?

A) it increases
B) there is no change
C) it decreases
D) it could rise or fall

Question 48

Amy buys a new dog for $1500. She receives consumer surplus of $300 on her purchase. Her willingness to pay is:

A) $1500
B) $300
C) $1200
D) $1800

Question 49

Graph 7-2

Refer to Graph 7-2. When the price is P₁, consumer surplus is:

A) A
B) A + B
C) A + B + C
D) A + B + D

Question 50

If you pay a price exactly equal to your willingness to pay, then:

A) you have little consumer surplus
B). your consumer surplus is negative
C) you have no consumer surplus
D) you place little value on the good

Question 51

Economists generally agree that the goal in developing the concept of consumer surplus is to:

A) make positive judgements about the desirability of market outcomes
B) make normative judgements about the desirability of market outcomes
C) measure the profit of firms producing the good
D) assess the forgone value when the price is too high

Question 52

Graph 7-2

Refer to Graph 7-2. When the price rises from P₁ to P₂, consumer surplus:

A) increases by an amount equal to A
B) decreases by an amount equal to B + C
C) increases by an amount equal to B + C
D) decreases by an amount equal to C

Question 53

Graph 7-1

Refer to Graph 7-1. What area represents total surplus in the market when the price is P₁?

A) A + B
B) B + C
C) C + D
D) A + B + C + D

Question 54

Cameron visits a sporting goods store to buy a new set of golf clubs. He has willing to pay $950 for the clubs but buys them on sale for $425. Cameron's consumer surplus from the purchase is:

A) $425
B) $525
C) $950
D) $1375

Question 55

Lucy often buys fish and is able to buy it for less than she is willing-to-pay. She later learns that fish has more health benefits than she realised. She now values fish even more than before. If the market price of fish does not change then:

A) Lucy's consumer surplus could go up or down
B) Lucy's consumer surplus will decrease
C) Lucy's consumer surplus will be unaffected because the price has not changed
D) Lucy's consumer surplus will increase

Question 56

If the cost of producing passenger motor vehicles increases, then consumer surplus will:

A) decrease
B) increase
C) decrease, then increase
D) increase, then decrease

Question 57

Table 7-1
This table refers to five possible buyers' willingness to pay for good Z.

Refer to Table 7-1. If the market price is $6.00, the consumer surplus in the market will be:

A) $1.50
B) $17.50
C) $6.00
D) $0

Question 58

Consumer surplus equals the:

A) value to buyers less the amount paid by buyers
B) amount received by sellers less the costs of sellers
C) value to buyers plus the amount paid by buyers
D) amount received by sellers plus the costs of sellers

Question 59

The area below a demand curve and above the price measures:

A) willingness to pay
B) total surplus
C) consumer surplus
D) producer surplus

Question 60

Graph 7-2

According to Graph 7-2, area C represents:

A) the decrease in consumer surplus that results from a downward-sloping demand curve
B) consumer surplus to new consumers who enter the market when the price falls from P₂ to P₁
C) an increase in producer surplus when the quantity sold increases from Q₂ to Q₁
D) a decrease in consumer surplus to each consumer in the market

Question 61

Producer surplus is the area:

A) under the supply curve
B) between the supply and demand curves
C) below the price and above the supply curve
D) under the demand curve and above the price

Question 62

Welfare economics is the study of:

A) how the allocation of resources affects economic wellbeing
B) why poor people have low incomes
C) the social welfare program adopted by the government
D) how charities deliver welfare to the needy

Question 63

A seller would be willing to sell a product ONLY if the price received is:

A) less than the cost of production
B) at least as great as the cost of production
C) equal to the cost of production
D) at least double the cost of production

Question 64

Suppose consumer income increases. If wine is a normal good, what will happen to the equilibrium price and producer surplus?

A) both the equilibrium price and the producer surplus will decrease
B) both the equilibrium price and the producer surplus will increase
C) the equilibrium price will decrease and the producer surplus will increase
D) the equilibrium price will increase and the producer surplus will decrease

Question 65

Table 7-2
The costs of five possible sellers

Refer to Table 7-2. If the market price is $10, the producer surplus in the market will be:

A) $10
B) $13
C) $7.50
D) $0

Question 66

Table 7-2
The costs of five possible sellers

Refer to Table 7-2. If the price is $11 who will be willing to supply the product?

A) Kyle and Nathan
B) Kyle, Nathan and Cheslea
C) Cheslea, Hillary and Landon
D) Hillary and Landon

Question 67

Suppose that the demand for coffee rises. This means that the producer surplus for coffee will:

A) increase
B) decrease
C) increase or decrease because the effect is ambiguous
D) neither increase nor decrease because the price hasn't changed

Question 68

The Health Ministry announces that eating chocolate increases tooth decay. As a result, the equilibrium market price _____ and producer surplus of chocolate _____.

A) increases and increases
B) increases and decreases
C) decreases and decreases
D) decreases and increases

Question 69

The economic meaning of cost is:

A) a seller's willingness to sell
B) a seller's consumer surplus
C) the price the buyer pays to obtain the good
D) a buyer's producer surplus

Question 70

The marginal seller is the seller who:

A) cannot compete with the other sellers in the market
B) would leave the market first if the price were any lower
C) can produce at the lowest cost
D) has the greatest producer surplus

Question 71

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it maximises:

A) costs of the seller
B) the total welfare of buyers and sellers
C) the expenditure of buyers
D) the profit of buyers

Question 72

Which of the following would be true of the seller's cost?

A) the seller would be eager to sell her services at a price higher than her cost
B) the seller would refuse to sell her services at a price lower than her cost
C) the seller would be indifferent about selling her services at a price equal to her cost
D) all of the above are true

Question 73

Table 7-2
The costs of five possible sellers

Refer to Table 7-2. If the price is $11, Landon's producer surplus will be:

A) $5
B) $11
C) $6
D) $11.50

Question 74

Graph 7-3

According to Graph 7-3, at the price P₁, producer surplus is:

A) A
B) A + B
C) C
D) A + B + C

Question 75

Out-of-pocket expenses plus the value of the seller's own resources used in production are considered to be:

A) the seller's total revenue
B) the seller's consumer surplus
C) producer surplus
D) the cost of production

Question 76

Table 7-2
The costs of five possible sellers

Refer to Table 7-2. If the market price is $8, the total cost in the market will be:

A) $13
B) $12.50
C) $19
D) $43

Question 77

At the equilibrium of supply and demand in a market:

A) costs of producers are minimised
B) total benefits received by buyers and sellers are maximised
C) total benefits received by buyers and sellers are minimised
D) expenditures of buyers are maximised

Question 78

Graph 7-3

According to Graph 7-3, when the price is P₂, producer surplus is:

A) A
B) A + C
C) A + B + C
D) D + E

Question 79

Producer surplus is the:

A) amount represented by the area under the demand curve
B) amount a seller is paid less the cost of production
C) amount represented by the area under the supply curve
D) amount a seller is paid plus the cost of production

Question 80

In most markets consumer surplus:

A) reflects economic wellbeing
B) reflects the total value that buyers place on goods or services
C) reflects the benefit to buyers mandated by government
D) all of the above are correct