Question 1

Suppose that Firms A and B each produce high-resolution computer monitors,but Firm A can do so at a lower cost.Cassie and David each want to purchase a high-resolution computer monitor,but David is willing to pay more than Cassie.Which of the following market outcomes is efficient?
A) Firm A produces a monitor that Cassie buys. David does not purchase a monitor.
B) Firm A produces a monitor that David buys.
C) Firm B produces a monitor that Cassie buys. David does not purchase a monitor.
D) Firm B produces a monitor that David buys.

Accepted Answer

Efficiency in a market is achieved when goods are produced and consumed at the lowest possible cost. In this scenario, since Firm A can produce high-resolution monitors at a lower cost, it is efficient for them to produce the monitor that David is willing to pay more for. This ensures that the monitor is produced at the lowest possible cost and also ends up in the hands of the person who values it the most (David). Therefore, choice B - Firm A produces a monitor that David buys - is the efficient market outcome.

Question 2

If the current allocation of resources in the market for wallpaper is efficient,then it must be the case that
A) producer surplus equals consumer surplus in the market for wallpaper.
B) the market for wallpaper is in equilibrium.
C) on the last unit of wallpaper that was produced and sold, the value to buyers exceeded the cost to sellers.
D) All of the above are correct.

Accepted Answer

If the market for wallpaper is in equilibrium, it means that the quantity demanded equals the quantity supplied at the current price, indicating that the allocation of resources is efficient. The other options may be true in certain circumstances but do not necessarily imply market efficiency.

Question 3

If a market is allowed to adjust freely to its equilibrium price and quantity,then an increase in demand will
A) increase producer surplus.
B) reduce producer surplus.
C) not affect producer surplus.
D) Any of the above are possible.

Accepted Answer

An increase in demand will shift the demand curve to the right, leading to a higher equilibrium price and quantity. Producers will therefore be able to charge a higher price for their goods and sell more units, increasing their producer surplus.

Question 4

Raisin bran and milk are complementary goods.A decrease in the price of raisins will
A) increase consumer surplus in the market for raisin bran and decrease producer surplus in the market for milk.
B) increase consumer surplus in the market for raisin bran and increase producer surplus in the market for milk.
C) decrease consumer surplus in the market for raisin bran and increase producer surplus in the market for milk.
D) decrease consumer surplus in the market for raisin bran and decrease producer surplus in the market for milk.

Accepted Answer

A decrease in the price of raisins will lower the cost of producing raisin bran, resulting in a decrease in the price of raisin bran. This will increase the quantity demanded of raisin bran, which will, in turn, increase the demand for milk. As a result, the increase in the demand for milk will increase its price, resulting in an increase in producer surplus. Thus, a decrease in the price of raisins will increase consumer surplus in the market for raisin bran and increase producer surplus in the market for milk.

Question 5

If a market is allowed to move freely to its equilibrium price and quantity,then an increase in supply will
A) increase consumer surplus.
B) reduce consumer surplus.
C) not affect consumer surplus.
D) Any of the above are possible.

Accepted Answer

The answer of If a market is allowed to move...

Question 6

Economists say that a market where goods are not consumed by those valuing the goods most highly is
A) laissez-faire..
B) unequal.
C) inefficient.
D) rational.

Accepted Answer

An inefficient market is one where goods are not consumed by those valuing them the most highly. This is because resources are not being allocated to their highest valued use, leading to a potential waste of resources and a decrease in overall welfare. Laissez-faire refers to a hands-off approach to market regulation, while unequal and rational do not necessarily relate to the issue of resource allocation in a market.

Question 7

Coffee and tea are substitutes.Bad weather that sharply reduces the coffee bean harvest would
A) increase consumer surplus in the market for coffee and decrease producer surplus in the market for tea.
B) increase consumer surplus in the market for coffee and increase producer surplus in the market for tea.
C) decrease consumer surplus in the market for coffee and increase producer surplus in the market for tea.
D) decrease consumer surplus in the market for coffee and decrease producer surplus in the market for tea.

Accepted Answer

Since coffee and tea are substitutes, a decrease in the coffee bean harvest will lead to an increase in the price of coffee, which will lead consumers to switch to tea. As a result, demand for tea will increase and its price will also increase, leading to an increase in producer surplus for tea producers. However, coffee producers will experience a decrease in producer surplus due to reduced demand for their product. Consumers of coffee will experience a decrease in surplus due to having to pay a higher price for their preferred beverage, while consumers of tea will experience an increase in surplus due to the increased availability and lower prices of their preferred beverage. Therefore, the correct answer is C.

Question 8

If the current allocation of resources in the market for hammers is inefficient,then it must be the case that
A) producer surplus exceeds consumer surplus in the market for hammers.
B) consumer surplus exceeds producer surplus in the market for hammers.
C) the sum of consumer surplus and producer surplus could be increased by moving to a different allocation of resources.
D) the costs that sellers of hammers are incurring could be reduced by moving to a different allocation of resources.

Accepted Answer

If the current allocation of resources in the market for hammers is inefficient, it means that there is a way to allocate resources that would increase the total surplus (i.e. the sum of consumer and producer surplus) in the market. This implies that there is a way to make both buyers and sellers better off, which is the definition of Pareto efficiency. Therefore, choice C is the best option, as it represents the possibility of moving to a more efficient allocation of resources that increases total surplus. Choices A and B are incorrect, as they focus on the distribution of surplus between consumers and producers, rather than the total surplus. Choice D is also incorrect, as it does not necessarily follow that moving to a different allocation of resources will reduce costs for sellers.

Question 9

Coffee and tea are substitutes.Good weather that sharply increases the coffee bean harvest would
A) increase consumer surplus in the market for coffee and decrease producer surplus in the market for tea.
B) increase consumer surplus in the market for coffee and increase producer surplus in the market for tea.
C) decrease consumer surplus in the market for coffee and increase producer surplus in the market for tea.
D) decrease consumer surplus in the market for coffee and decrease producer surplus in the market for tea.

Accepted Answer

Good weather increasing the coffee bean harvest would lead to a higher supply of coffee, reducing its price and increasing consumer surplus in the coffee market. As coffee becomes cheaper, demand for its substitute, tea, would decrease, leading to a decrease in producer surplus in the tea market.

Question 10

Total surplus measures the
A) loss to buyers from paying higher prices plus the benefit to sellers from receiving lower prices.
B) buyers' willingnesses to pay less the sellers' costs.
C) fairness of the distribution of resources in society.
D) value to the government of goods and services sold in society.

Accepted Answer

Total surplus is the difference between the buyers' willingness to pay and the sellers' cost of producing a good or service. It represents the overall benefit to society from a market transaction.

Question 11

A simultaneous decrease in both the demand for MP3 players and the supply of MP3 players would imply that
A) both the value of MP3 players to consumers and the cost of producing MP3 players has increased.
B) both the value of MP3 players to consumers and the cost of producing MP3 players has decreased.
C) the value of MP3 players to consumers has decreased, and the cost of producing MP3 players has increased.
D) the value of MP3 players to consumers has increased, and the cost of producing MP3 players has decreased.

Accepted Answer

The answer of A simultaneous decrease in both the demand...

Question 12

PlayStations and PlayStation games are complementary goods.A technological advance in the production of PlayStations will
A) increase consumer surplus in the market for PlayStations and decrease producer surplus in the market for PlayStation games.
B) increase consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games.
C) decrease consumer surplus in the market for PlayStations and increase producer surplus in the market for PlayStation games.
D) decrease consumer surplus in the market for PlayStations and decrease producer surplus in the market for PlayStation games.

Accepted Answer

An increase in the production of PlayStations could lead to a decrease in the price of PlayStations which would increase the quantity demanded of PlayStations. As a result, this would lead to an increase in consumer surplus in the market for PlayStations. Since PlayStations and PlayStation games are complementary goods, an increase in the quantity demanded of PlayStations would also increase the demand for PlayStation games. This shift in demand would result in an increase in the price and quantity sold of PlayStation games, thereby increasing producer surplus in the market for PlayStation games.

Question 13

Raisin bran and milk are complements.An increase in the price of raisins will
A) increase consumer surplus in the market for raisin bran and decrease producer surplus in the market for milk.
B) increase consumer surplus in the market for raisin bran and increase producer surplus in the market for milk.
C) decrease consumer surplus in the market for raisin bran and increase producer surplus in the market for milk.
D) decrease consumer surplus in the market for raisin bran and decrease producer surplus in the market for milk.

Accepted Answer

An increase in the price of raisins will raise the cost of producing raisin bran, leading to higher prices for raisin bran. This will decrease consumer surplus in the raisin bran market. Since raisin bran and milk are complements, a decrease in raisin bran consumption will also decrease milk consumption, reducing producer surplus in the milk market.

Question 14

Suppose that Firms A and B each produce high-resolution computer monitors,but Firm A can do so at a lower cost.Cassie and David each want to purchase a high-resolution computer monitor,but David is willing to pay more than Cassie.If Firm B produces a monitor that David buys,then the market outcome illustrates which of the following principles?
(i)Free markets allocate the supply of goods to the buyers who value them most highly,as measured by their willingness to pay.
(ii)Free markets allocate the demand for goods to the sellers who can produce them at the least cost.
A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Accepted Answer

The market outcome described in the scenario illustrates the principle that free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. David, who is willing to pay more than Cassie, purchases from Firm B. This means that David values the monitor more highly than Cassie and is willing to pay a higher price for it. Therefore, the market is allocating the supply of monitors to the buyer who values them most highly. The scenario does not illustrate the principle of allocating the demand for goods to the sellers who can produce them at the least cost as Firm A, which produces monitors at a lower cost, does not necessarily receive a greater share of the market demand.

Question 15

Five hundred units of good x are currently bought and sold.The marginal buyer is willing to pay $40 for the 500ᵗʰ unit,and the cost to the marginal seller is $35 for the 500ᵗʰ unit.We know that
A) the equilibrium price of good x is somewhere between $35 and $40.
B) the equilibrium quantity of good x exceeds 500 units.
C) 500 units is not an efficient quantity of good x.
D) All of the above are correct.

Accepted Answer

The equilibrium price is between the marginal buyer's willingness to pay and the marginal seller's cost. The equilibrium quantity is where the marginal buyer's willingness to pay equals the marginal seller's cost. 500 units is not an efficient quantity because the marginal buyer is willing to pay more than the marginal seller's cost.

Question 16

Which of the following is not equal to total surplus?
A) consumer surplus - producer surplus
B) buyers' willingnesses to pay - sellers' costs
C) value to buyers - amount paid by buyers + amount received by sellers - cost to sellers
D) value to buyers - cost to sellers

Accepted Answer

Total surplus is equal to the sum of consumer surplus and producer surplus. Option A subtracts producer surplus from consumer surplus, which is not equal to total surplus.

Question 17

Total surplus in a market will increase when the government
A) imposes a binding price floor or a binding price ceiling on that market.
B) imposes a tax on that market.
C) Both a and b are correct.
D) Neither a nor b is correct.

Accepted Answer

Both a binding price floor or ceiling and a tax imposed by the government create market inefficiencies that reduce total surplus. A price floor or ceiling creates a deadweight loss, while a tax increases the cost of production and reduces supply, leading to higher prices and a decrease in consumer surplus. Therefore, neither option will increase total surplus in the market.

Question 18

Suppose that Firms A and B each produce high-resolution computer monitors,but Firm A can do so at a lower cost.Cassie and David each want to purchase a high-resolution computer monitor,but David is willing to pay more than Cassie.If Firm A produces a monitor that Cassie buys but David does not,then the market outcome illustrates which of the following principles?
(i)Free markets allocate the supply of goods to the buyers who value them most highly,as measured by their willingness to pay.
(ii)Free markets allocate the demand for goods to the sellers who can produce them at the least cost.
A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Accepted Answer

In this scenario, Firm A is able to produce the high-resolution computer monitor at a lower cost, which means they may be able to sell it at a lower price. Cassie may not be willing to pay as much for the monitor as David, but if she buys the monitor from Firm A, it demonstrates that she values the monitor at a higher price point than what Firm B is offering. This shows that free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. The fact that Firm A can produce the monitor at a lower cost is not relevant in this case.

Question 19

Total surplus in a market will increase when the government
A) imposes a tax on that market.
B) imposes a binding price floor on that market.
C) removes a binding price ceiling from that market.
D) None of the above is correct.

Accepted Answer

When a binding price ceiling is removed from a market, the price is allowed to increase to its equilibrium level, which often results in an increase in the quantity supplied and a decrease in the quantity demanded. This increase in quantity and the resulting increase in price results in an increase in total surplus. Therefore, total surplus in a market will increase when a binding price ceiling is removed from that market. None of the other options listed will necessarily increase total surplus.

Question 20

A simultaneous increase in both the demand for MP3 players and the supply of MP3 players would imply that
A) both the value of MP3 players to consumers and the cost of producing MP3 players has increased.
B) both the value of MP3 players to consumers and the cost of producing MP3 players has decreased.
C) the value of MP3 players to consumers has decreased, and the cost of producing MP3 players has increased.
D) the value of MP3 players to consumers has increased, and the cost of producing MP3 players has decreased.

Accepted Answer

A simultaneous increase in both demand and supply of MP3 players indicates that consumers value the product more and that it has become cheaper to produce. This leads to an increase in both the equilibrium price and quantity. Therefore, the value of MP3 players to consumers has increased, and the cost of producing MP3 players has decreased.

Quiz 7: Consumers, Producers, and the Efficiency of Markets.

Suppose that Firms A and B each produce high-resolution computer monitors,but Firm A can do so at a lower cost.Cassie and David each want to purchase a high-resolution computer monitor,but David is willing to pay more than Cassie.Which of the following market outcomes is efficient?

If the current allocation of resources in the market for wallpaper is efficient,then it must be the case that

If a market is allowed to adjust freely to its equilibrium price and quantity,then an increase in demand will

Raisin bran and milk are complementary goods.A decrease in the price of raisins will

If a market is allowed to move freely to its equilibrium price and quantity,then an increase in supply will

Economists say that a market where goods are not consumed by those valuing the goods most highly is

Coffee and tea are substitutes.Bad weather that sharply reduces the coffee bean harvest would

If the current allocation of resources in the market for hammers is inefficient,then it must be the case that

Coffee and tea are substitutes.Good weather that sharply increases the coffee bean harvest would

Total surplus measures the

A simultaneous decrease in both the demand for MP3 players and the supply of MP3 players would imply that

PlayStations and PlayStation games are complementary goods.A technological advance in the production of PlayStations will

Raisin bran and milk are complements.An increase in the price of raisins will

Five hundred units of good x are currently bought and sold.The marginal buyer is willing to pay $40 for the 500ᵗʰ unit,and the cost to the marginal seller is $35 for the 500ᵗʰ unit.We know that

Which of the following is not equal to total surplus?

Total surplus in a market will increase when the government

Total surplus in a market will increase when the government

A simultaneous increase in both the demand for MP3 players and the supply of MP3 players would imply that