Question 1

Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus?

Accepted Answer

When the demand curve becomes less elastic, consumers are less sensitive to price changes, meaning they are willing to pay more for the same quantity. This increases consumer surplus because the area under the demand curve and above the price increases. Producer surplus remains the same because the price-quantity equilibrium is maintained, indicating that the cost to producers and the market price have not changed.

Question 2

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P₂, area A is:

Accepted Answer

Area A represents the portion of consumer surplus that is transferred to producer surplus due to the imposition of a minimum price P2, which is higher than the equilibrium price.

Question 3

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P₂,

Accepted Answer

When the minimum price is set above the equilibrium price, it creates a situation where the quantity supplied exceeds the quantity demanded, resulting in a deadweight loss. In this case, the quantity supplied would be Q₃, which is greater than the quantity demanded at Q₂, leading to a deadweight loss.

Question 4

In an unregulated, competitive market we could calculate consumer surplus if we knew the equations representing supply and demand. For this problem assume that supply and demand are as follows:
Supply P = 4 + 0.116Q
Demand P = 25 - 0.10Q,
where P represents unit price in dollars and Q represents number of units sold each year. Calculate the annual value of aggregate consumer surplus.

Accepted Answer

The answer of In an unregulated, competitive market we could...

Question 5

The market demand curve for a popular teen magazine is given by Q = 80 - 10P where P is the magazine price in dollars per issue and Q is the weekly magazine circulation in units of 10,000. If the circulation is 400,000 per week at the current price, what is the consumer surplus for a teen reader with maximum willingness to pay of $3 per issue?

Accepted Answer

The answer of The market demand curve for a popular...

Question 6

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P₂, area C in the figure is best interpreted as:

Accepted Answer

The loss in producer surplus as a result of the decrease in quantity supplied.

Question 7

Under a binding price ceiling, what does the change in consumer surplus represent?

Accepted Answer

A binding price ceiling results in a lower price, benefiting consumers who can still purchase the product (A), but it also leads to a shortage, causing a loss for those who can't buy the product anymore (B).

Question 8

The demand and supply functions for oil on the world market are given as:  and  Calculate consumer surplus. If the Clinton Administration puts a price ceiling of $20 per unit, calculate the resulting consumer surplus. Are consumers better off?

Accepted Answer

The answer of The demand and supply functions for oil...

Question 9

Governments may successfully intervene in competitive markets in order to achieve economic efficiency:

Accepted Answer

Governments may intervene in competitive markets to address both positive and negative externalities. In the case of positive externalities, such as education or vaccination programs, the market may under-supply these goods as they generate benefits to society beyond just the individuals consuming them. Therefore, the government may subsidize or fund these programs to increase their provision. In the case of negative externalities, such as pollution or traffic congestion, the market may over-produce these goods as the costs to society are not fully accounted. Therefore, the government may regulate or tax these activities to reduce their negative impact on society. Addressing both positive and negative externalities can lead to a more efficient allocation of resources in the economy.

Question 10

Under a binding price ceiling, what does the change in producer surplus represent?

Accepted Answer

The change in producer surplus represents the loss of surplus associated with those units that used to be produced at the higher price but are no longer produced at the lower price. This is because the binding price ceiling prevents producers from selling their goods at the market-clearing price, leading to a decrease in the quantity supplied and a reduction in producer surplus. Choices A and C are incorrect because the gain in surplus for willing sellers and the excess demand created by the price ceiling are not reflected in the change in producer surplus.

Question 11

The elected officials in a west coast university town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university estimates the demand and supply curves as: Q_D = 5600 - 8P Q_S = 500 + 4P, where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical. a. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both). b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus. c. Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy?

Accepted Answer

The answer of The elected officials in a west coast...

Question 12

In an unregulated competitive market, supply and demand have been estimated as follows:
Demand P = 25 - 0.10Q Supply P = 4 + 0.116Q,
where P represents unit price in dollars, and Q represents number of units sold per year.
a. Calculate annual aggregate consumer surplus.
b. Calculate annual aggregate producer surplus.
c. Define what producer surplus means.

Accepted Answer

The answer of In an unregulated competitive market, supply and...

Question 13

In a competitive market, the following supply and demand equations are given:
Supply P = 5 + 0.36Q
Demand P = 100 - 0.04Q,
where P represents price per unit in dollars, and Q represents rate of sales in units per year.
a. Determine the equilibrium price and sales rate.
b. Determine the deadweight loss that would result if the government were to impose a price ceiling of 40 dollars per unit.

Accepted Answer

The answer of In a competitive market, the following supply...

Question 14

The demand and supply functions for basic cable TV in the local market are given as:  Calculate the consumer and producer surplus in this market. If the government implements a price ceiling of $15 on the price of basic cable service, calculate the new levels of consumer and producer surplus. Are all consumers better off? Are producers better off?

Accepted Answer

The answer of The demand and supply functions for basic...

Question 15

Figure 9.2.1 -Refer to Figure 9.2.1 above. After the minimum P₂ is imposed,

Accepted Answer

After the minimum P₂ is imposed, the price increases from P0 to P₂, which results in no consumer being better off. However, some producers benefit because they are able to sell their goods at a higher price. Therefore, choice C is the best answer.

Question 16

The utilities commission in a city is currently examining pay telephone service in the city. The commission has been asked to evaluate a proposal by a city council member to place a $0.10 price ceiling on local pay phone service. The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows: Q_D = 1600 - 2400P Q_S = 200 + 3200P, where P = price of a pay telephone call, and Q = number of pay telephone calls per month. a. Determine the equilibrium price and quantity that will prevail without the price ceiling. b. Analyze the quantity that will be available with the price ceiling (in the long-run). c. The city council realizes that the telephone company could curtail pay phone service in response to the ceiling. To prevent this, the council plans to impose a requirement that the telephone company must maintain the current number of pay phones. In light of this additional restriction, what will be the likely impact of the price ceiling?

Accepted Answer

The answer of The utilities commission in a city is...

Question 17

Government intervention can increase total welfare when:

Accepted Answer

Government intervention can increase total welfare when there are externalities (costs or benefits external to the market) or when consumers lack perfect information about product quality. These situations can lead to market failures, where the market on its own does not allocate resources efficiently. High prices making a product unaffordable is not necessarily a justification for government intervention from an economic welfare perspective, as it does not indicate a market failure in the same way externalities or information asymmetries do.

Question 18

Figure 9.2.1
-Refer to Figure 9.2.1 above. The result of the minimum imposed price:

Accepted Answer

The minimum imposed price is above the equilibrium price, so it will decrease the quantity demanded and increase the quantity supplied. This will lead to a decrease in the number of consumers and a decrease in the number of producers.

Question 19

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P₂, areas B + C are:

Accepted Answer

Areas B + C represent the deadweight loss to both producers and consumers as a result of the price control. This represents the loss of potential surplus that would have been created if the market was allowed to reach equilibrium without the price control.

Question 20

The consumer's gain from the imposition of a price ceiling is higher when:

Accepted Answer

The answer of The consumer's gain from the imposition of...

Quiz 9: The Analysis of Competitive Markets

Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus?

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P2, area A is:

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P2,

Figure 9.2.1 -Refer to Figure 9.2.1 above. When the minimum imposed price is P2, area C in the figure is best interpreted as: