Which of the following statements is TRUE regarding free markets? I. The sum of consumer surplus and producer surplus are maximized. II. The sellers with the highest costs of production sell the goods. III. The buyers with the highest willingness to pay purchase the goods. IV. The government must subsidize firms to ensure that there are no unexploited gains from trade.

Question

Quizplus · Accepted Answer

I. is true because in a free market, prices and quantities are determined by the intersection of the supply and demand curves, resulting in the allocation of resources to the buyers and sellers with the highest willingness to pay and lowest costs of production. This maximizes the sum of consumer and producer surplus.

II. is false because in a free market, the sellers with the lowest costs of production will sell the goods, not the highest.

III. is true because in a free market, the buyers with the highest willingness to pay will purchase the goods, resulting in the highest allocation of resources to those who value the goods the most.

IV. is false because in a free market, there are no unexploited gains from trade, as everyone who can benefit from the trade will voluntarily engage in the exchange. Therefore, there is no need for government subsidies to ensure that gains from trade are not left unrealized.

Which of the Following Statements Is TRUE Regarding Free Markets