Question 1

When trade is voluntary, who gains from it?

Accepted Answer

When trade is voluntary, both the seller and the buyer are willing to engage in the transaction because they both perceive that they will benefit from it. Therefore, both parties gain from the trade, although their gains may not necessarily be equal. This is known as the principle of mutual gains from trade.

Question 2

Voluntary exchange occurs when:

Accepted Answer

Voluntary exchange occurs when both the buyer and the seller agree to a trade because they both believe that they will benefit from it. Therefore, both parties gain from the trade.

Question 3

Which principle helps buyers and sellers make decisions about whether to trade?

Accepted Answer

The cost-benefit principle helps buyers and sellers weigh the potential costs and benefits of a transaction in order to determine if it is worth pursuing. It involves comparing the expected benefits of an action to the expected costs, and only going through with the action if the potential benefits outweigh the potential costs.

Question 4

When trade is voluntary, neither the buyer nor the seller will:

Accepted Answer

When trade is voluntary, both parties engage in the trade because they believe they will benefit from it. Therefore, neither the buyer nor the seller will be worse off after the trade. If they were worse off, they wouldn't have engaged in the trade in the first place. While it is possible for one party to generate more surplus than the other, both parties will still benefit to some extent from the trade. Additionally, in some cases, one or both parties may need to make payments (such as in a cash transaction).

Question 5

Which of the following statements about economic surplus is FALSE?

Accepted Answer

The answer of Which of the following statements about economic...

Question 6

The marginal benefit minus the marginal cost equals:

Accepted Answer

The marginal benefit minus the marginal cost is known as the net benefit or economic surplus, which is the total benefit gained by a society from an economic transaction or activity. Therefore, option D is the correct answer.

Question 7

Two ways to calculate economic surplus are _____ and _____.

Accepted Answer

Economic surplus is the difference between total benefits (consumer and producer) and total costs (opportunity cost of resources used). The two ways to calculate economic surplus are:
1. Marginal benefit minus marginal cost: This method calculates the difference between the additional benefit received and the additional cost incurred for each unit produced or consumed. Economic surplus is the sum of all positive differences between marginal benefit and marginal cost.
2. Consumer surplus plus producer surplus: This method calculates the difference between the maximum price consumers are willing to pay and the minimum price producers are willing to accept for a product. Economic surplus is the sum of consumer surplus and producer surplus.

Question 8

Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. How large is the economic surplus associated with her purchase of the boots?

Accepted Answer

The economic surplus is the difference between the maximum amount a buyer is willing to pay for a good and the amount that the seller actually receives. To calculate the economic surplus, we first need to determine the value that Bae places on the boots:

Value to Bae = $160 (the most she's willing to pay)

Next, we subtract the price she actually pays from the value she places on the boots:

Value to Bae - Price Paid = Economic Surplus
$160 - $120 = $40

However, we also need to take into account the marginal cost of producing the boots. The marginal cost is the additional cost incurred by producing one more unit of the good. In this case, since Bae is buying the boots that have already been produced, the marginal cost is not directly relevant to her purchase decision. But we can use it to calculate the producer surplus, which is the difference between the price the producer receives and the marginal cost:

Price Paid - Marginal Cost = Producer Surplus
$120 - $70 = $50

The economic surplus is the sum of the consumer surplus and producer surplus:

Economic Surplus = Consumer Surplus + Producer Surplus
$40 + $50 = $90

Therefore, the economic surplus associated with Bae's purchase of the boots is $90. The best choice is (C).

Question 9

Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. Which of the following is TRUE regarding the economic surplus associated with her purchase of the boots?

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay, so $160 - $120 = $40. Producer surplus is the difference between the selling price and the marginal cost of production, so $120 - $70 = $50.

Question 10

(Figure: Market) Use the bath towel market graph to answer the question.
The bath towel market is at equilibrium. How large is the economic surplus?

Accepted Answer

The answer of (Figure: Market) Use the bath towel market...

Question 11

(Figure: Market 2) Use the market graph for pairs of socks to answer the question.
The sock market is at equilibrium. How much economic surplus is being generated in the sock market?

Accepted Answer

The answer of (Figure: Market 2) Use the market graph...

Question 12

On a market graph, economic surplus can be identified as the area that is to the:

Accepted Answer

Economic surplus, which includes both consumer and producer surplus, is found to the left of the equilibrium quantity and between the demand and supply curves on a market graph. This area represents the total benefits received by consumers and producers in the market.

Question 13

The price of a carton of eggs is $2, and 100 cartons are sold. The consumer surplus is $80, and total surplus equals $150. What is the producer surplus?

Accepted Answer

Total surplus can be calculated as the sum of consumer surplus and producer surplus. Therefore, producer surplus is equal to total surplus minus consumer surplus, which is:

Producer Surplus = Total Surplus - Consumer Surplus
Producer Surplus = $150 - $80
Producer Surplus = $70

Therefore, the answer is (C) $70.

Question 14

In modern society, most goods are allocated by:

Accepted Answer

Markets are the primary mechanism for allocating goods in modern society. The supply and demand for goods, along with their associated prices, determine how they are distributed among consumers. This process is known as market allocation, which is largely driven by market competition and consumer preferences. While governments and banks may play a role in regulating markets and providing financial support, they do not directly determine how goods are distributed. Ethnicity is also not a factor in the allocation of goods.

Question 15

Producing a given quantity of output at the lowest possible cost and lowest marginal cost is called:

Accepted Answer

Efficient production involves producing a given quantity of output at the lowest possible cost and lowest marginal cost, making it the best choice for businesses looking to maximize their profits. Minimizing production and marginal minimization do not necessarily result in the lowest cost production, while efficiency surplus is not a recognized term in economics.

Question 16

Efficient production occurs when:

Accepted Answer

Efficient production occurs when a given level of output is produced at the lowest possible cost, which is represented by the point of minimum average total cost on the curve. Marginal cost may be downward sloping but it is not a sufficient condition for efficient production as it only represents the cost of producing one additional unit of output. Output minimization and falling costs are not indicators of efficient production.

Question 17

Efficient production decisions occur when _____ forces lead firms to produce the output level where ____.

Accepted Answer

Efficient production decisions occur when market forces lead firms to produce the output level where price equals marginal cost. At this output level, the firm is producing at the lowest possible cost and is maximizing its profits.

Question 18

When market forces lead to efficient production, each producer is _____, and the product is produced _____.

Accepted Answer

Market forces lead to producers acting in their self-interest in order to maximize profits, which naturally leads to production at the lowest possible marginal cost. This is because producers will only produce goods if the revenue they receive from selling the goods exceeds the cost of producing them. To maximize profit, producers will produce goods where the marginal cost equals the market price, which is the lowest possible cost at which they can produce the good.

Question 19

Markets distribute production across companies in a way that:

Accepted Answer

Markets distribute production in a way that aims to minimize costs, as firms seek to produce goods and services as efficiently as possible to maximize profits.

Question 20

When goods are allocated in a way that creates the largest economic surplus:

Accepted Answer

When goods are allocated in a way that creates the largest economic surplus, it means that resources are being used efficiently and the allocation is optimal. This occurs when the marginal benefit of the last unit purchased is equal to the marginal cost of producing it. Therefore, option C, efficient allocation has been achieved, is the correct answer.

Quiz 7: Welfare and Efficiency