Question 1

Consumer surplus arises in a market because

Accepted Answer

Consumer surplus arises when the market price is below what some consumers are willing to pay for the product. This means that some consumers are able to purchase the product at a price lower than their maximum willingness to pay, resulting in a surplus benefit or value to them. It is the difference between the price that consumers are willing to pay and the actual market price, up to the point where quantity demanded equals quantity supplied.

Question 2

The minimum acceptable price for a product that producer Sam is willing to receive is $15. The price he could get for the product in the market is $18. How much is Sam's producer surplus?

Accepted Answer

Producer surplus is the difference between what the producer is willing to accept and what they actually receive in the market. In this case, Sam is willing to accept a minimum of $15 but he can receive $18 in the market. Therefore, his producer surplus is the difference, which is $3.

Question 3

Charlie is willing to pay $10 for a T-shirt that is priced at $9. If Charlie buys the T-shirt, then his consumer surplus is

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Charlie is willing to pay $10 but pays $9, so his consumer surplus is $1.

Question 4

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total maximum amount that consumers would have been willing to pay for the
Product is represented by the area

Accepted Answer

At equilibrium, the total maximum amount that consumers are willing to pay is represented by the area under the demand curve up to the equilibrium quantity, which is a + b + c. Therefore, the correct answer is choice B, which includes the areas of both consumer surplus (a + b) and producer surplus (c).

Question 5

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair, while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of these shoes is $65. What is
The total amount of the two girls' combined consumer surplus?

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Jena's consumer surplus is $75 - $65 = $10, and Jane's consumer surplus is $85 - $65 = $20. Combined, their consumer surplus is $10 + $20 = $30.

Question 6

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to take is called the producer

Accepted Answer

The difference between the actual price and the minimum acceptable price is called producer surplus. It is the amount that the producer earns above and beyond their costs of production, and represents the benefit or profit that they receive from selling their goods or services. The other options are not correct: revenues are the total amount of money that a producer earns from selling their output, costs are the expenses associated with production, and utility is a measure of the satisfaction or happiness that consumers receive from consuming a good or service.

Question 7

A competitive market produces the economically eﬃcient outcome if the following conditions are met, except

Accepted Answer

The condition mentioned in option D is incorrect. The economically efficient outcome occurs when the market produces only units for which the marginal benefit is equal to the marginal cost. This means that the value consumers place on the last unit produced (marginal benefit) is equal to the cost of producing that unit (marginal cost). Thus, option D should state "the market produces only units for which marginal benefit is equal to marginal cost."

Question 8

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a
result of the contract in ways that are costly to the other party.

Accepted Answer

This is a correct definition of the moral hazard problem.

Question 9

The amount of revenue that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

Accepted Answer

The amount of revenue sellers receive over and above the minimum acceptable amount is called producer surplus. It represents the benefit that producers receive for selling their product at a certain price.

Question 10

If the unit price of a product is P, then the amount of money buyers would need to pay for a given quantity Q is equal to

Accepted Answer

The amount of money buyers would need to pay for a given quantity Q is equal to the unit price P multiplied by the quantity Q. Therefore, the formula for calculating the total cost is P × Q.

Question 11

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Accepted Answer

The adverse selection problem refers to the tendency for high-risk individuals to be more likely to seek insurance coverage. It is not related to the behavior of insured drivers.

Question 12

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called

Accepted Answer

Consumer surplus refers to the amount of value that consumers receive from purchasing a product, which is greater than the actual price paid for the product. It is the difference between the maximum price a consumer is willing to pay for a product and the actual price paid. Consumer utility refers to the satisfaction or pleasure that consumers derive from using a product. Consumption expenditures refer to the total amount of money spent by consumers on goods and services. Consumer demand refers to the quantity of a product that consumers are willing and able to purchase at a certain price, and is influenced by factors such as price, income, and availability of substitutes.

Question 13

If the unit price of a product is P and buyers buy a given quantity Q, then sellers would collect total revenues equal to

Accepted Answer

Total revenues would be equal to the unit price (P) multiplied by the quantity sold (Q), so the correct formula is P x Q.

Question 14

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, consumer surplus would be represented by the area

Accepted Answer

The answer of  In the provided graph, the equilibrium...

Question 15

If the market price of a product increases, then the total

Accepted Answer

If the market price of a product increases, consumers will be willing to purchase less of the good, and some consumers who would have been willing to purchase the good at the original lower price will no longer be willing to do so. This leads to a decrease in consumer surplus. The revenues of sellers may increase or decrease depending on the price elasticity of demand, but it is not a definite outcome.

Question 16

Professor Gullible agreed to cancel the ﬁnal examination if students promised to study for it anyway.
The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Accepted Answer

Moral hazard refers to the situation where one party takes more risks because another party bears the cost of those risks. In this case, students may not study for the exam because they know that the consequences of not studying (i.e. failing the exam) have been eliminated by the professor's offer to cancel it. This creates a moral hazard where students are less incentivized to study.

Question 17

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay for a product and what they actually pay. It represents the benefit or surplus value that the consumer receives from purchasing the product at a lower price. Utility refers to the total satisfaction or benefit a consumer receives from consuming a product, while consumer demand refers to the quantity of a product that consumers are willing and able to buy at a certain price. Market failure refers to a situation where the market fails to efficiently allocate resources or achieve a socially optimal outcome.

Question 18

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the total amount of spending that consumers would be paying for the product is
Represented by the area

Accepted Answer

The answer of  In the provided graph, the equilibrium...

Question 19

Asymmetric information always results in adverse selection.

Accepted Answer

Asymmetric information can lead to adverse selection, but it can also result in other market inefficiencies like moral hazard. Adverse selection is just one possible outcome of asymmetric information.

Question 20

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral
hazard.

Accepted Answer

Insurance co-pays and deductibles require the insured to share in the cost of medical services, which reduces the likelihood of overusing and abusing the insurance benefits, thus reducing moral hazard.

Quiz 4: Market Failures Caused by Externalities Asymmetric Information