ECON 103 LC4
Suppose Alexandra is willing to pay $200 for a tablet and she has $53 worth of consumer surplus. What is the market price of the tablet?
$147 Consumer Surplus = Willingness-to-pay − Price. The price would be Willingness-to-pay − Consumer Surplus = $200 − $53 = $147.
Which of the following is an example of a price ceiling?
A law imposes price caps on electric services to customers in remote locations. A price ceiling is a government-mandated maximum price that can be charged for a product or service.
Which of these statements is WRONG about market efficiency?
It occurs when total surplus increases after markets deviate from equilibrium. Markets are efficient at equilibrium where the total benefits to all parties involved are maximized.
Suppose the equilibrium price for double-scoop ice cream cones is $4 but the market price rises to $6. Miguel is a seller in this market. All of Miguel's customers are not willing to buy ice cream at the higher price. What has happened to Miguel's producer surplus?
Miguel's producer surplus decreases to zero. Miguel's producer surplus falls to zero because he is not able to sell ice cream at the higher price.
The figure shows the market for hockey pucks. Which of these statements is NOT true about this market?
Point E represents the consumer's willingness-to-pay at $6, which yields the highest consumer surplus. The difference between a willingness-to-pay of $6 and the price is zero, indicating that there is no consumer surplus.
If increased demand drives up prices, who is harmed by the price increase?
consumers who no longer purchase the good because the price is high Consumer surplus falls when the price rises and some consumers no longer purchase the good.
Markets are efficient when:
they generate the largest possible amount of net benefits to all parties involved. Markets are efficient when the sum of consumer surplus and producer surplus is maximized.
The figure shows the market for portable DVD players. Assume the government sets a price ceiling at $40. This price ceiling will:
have no effect. The maximum price is the same as the market price, so the price ceiling does not cause any changes. The market will stay in equilibrium.
The figure shows the market for portable DVD players. Assume the government sets a price ceiling at $60. This price ceiling will:
have no effect. There is no effect when a price ceiling, a maximum price, is set above or at the equilibrium price.
The figure shows the market for portable DVD players. Assume the government sets a price floor at $40. This price floor will:
have no effect. A price floor set at or below the equilibrium price is nonbinding, and the market stays in equilibrium.
The figure shows the market for portable DVD players. Assume the government sets a price floor at $25. This price floor will:
have no effect. A price floor set below the equilibrium price is nonbinding, and the market stays in equilibrium.
Increased demand has driven up helium prices dramatically over the past several years. Because of this, the cost of helium-filled birthday balloons has quadrupled. Who might benefit from this price increase?
helium producers still able to sell helium at the higher price A higher price benefits producers still able to sell the product.
Markets work most efficiently when:
there are many buyers and sellers. Competitive markets, with many buyers and sellers, are more likely to be efficient than noncompetitive markets.
If Sue is willing to pay $40 for a $50 sweater, how much consumer surplus will she get from it?
$0 Sue does not buy the sweater because her willingness-to-pay is less than market price. Therefore, she does not experience consumer surplus.
If Brad buys a textbook costing $100 for which he is willing to pay $110, then his consumer surplus is:
$10. Consumer Surplus = Willingness-to-pay − Price. Brad's consumer surplus is $10, found by: $110 − $100 = $10.
The difference between what a producer is willing to sell a good or service for and the price a producer actually receives is called:
producer surplus. Producer surplus is the difference between market price and the price at which firms are willing to supply the product.
Suppose the equilibrium price for bicycle tires is $42 but the market price rises to $67. Jerry, who is a seller in this market, sells the tires for $67 each. Madison buys new tires at the higher price. Marcus no longer buys new tires because the price is too high. Which individual has been priced out of the market?
Marcus Marcus no longer buys the product because the price is too high.
Which of the following is an example of a price ceiling?
rent-controlled apartments in New York City during World War II A price ceiling is a government-mandated maximum price.
The figure shows the market for hockey pucks. How much consumer surplus does Gabby receive?
$1 Gabby's consumer surplus is calculated by: Willingness-to-pay - Price = $7 - $6 = $1.
The figure shows the market for hockey pucks. Jen, Ryan, Liam, Jordan, Laurie, and Mike have a willingness-to-sell equal to $2.67, $3.33, $4.00, $4.67, $5.33, and $6, respectively. How much producer surplus is there in this market?
$10 Total producer surplus is calculated by adding the producer surpluses of all sellers. Total producer surplus is ($6 - $2.67) + ($6 - $3.33) + ($6 - $4) + ($6 - $4.67) + ($6 - $5.33) + ($6 -$6) = $3.33 + $2.67 + $2 + $1.33 + $0.67 + $0 = $10.
Suppose Futurebook Co.'s willingness-to-sell for an e-reader is $50 and the firm has $57 of producer surplus. What is the market price of the tablet?
$107 Producer Surplus = Price − Willingness-to-sell. The price is calculated as Price = Producer Surplus + Willingness-to-sell = $57 + $50 = $107.
Suppose a mechanic's willingness-to-sell for oil changes is $50 and the mechanic has $97 of producer surplus. What is the market price of an oil change?
$147 Producer Surplus = Price − Willingness-to-sell. The price is calculated as Price = Producer Surplus + Willingness-to-sell = $97 + $50 = $147.
The figure shows the market for hockey pucks. How much consumer surplus is there in this market?
$15 Total consumer surplus is calculated by adding consumer surpluses received by all buyers. Total consumer surplus is ($11 - $6) + ($10 - $6) + ($9 - $6) + ($8 - $6) + ($7 - $6) + ($6 - $6) = $5 + $4 + $3 + $2 + $1 + $0 = $15.
Suppose Kelly buys a washing machine for $450 that she was willing to pay $600 for. What is her consumer surplus?
$150 Consumer Surplus = Willingness-to-pay − Price. Kelly is willing to pay $600 so her consumer surplus is $150, found by: $600 − $450.
Dana, Brit, and Divya are each willing to pay $200 for a tablet. Their total consumer surplus is $120. What is the market price of the tablet?
$160 Since each consumer has the same WTP, their consumer surplus would be the same, $40 each. Consumer Surplus = Willingness-to-pay (WTP) − Price. The market price would be WTP - Price = $200 - $40 = $160.
Suppose the price of a good is $179. The first customer is willing to pay $200, the second customer is willing to pay $210, and the third customer is willing to pay $300. How much consumer surplus is there in this market?
$173 Consumer Surplus = Willingness-to-pay − Price. The consumer surplus in this market is ($200 - $179) + ($210 - $179) + ($300 - $179) = $21 + $31 + $121 = $173.
The figure shows the market for hockey pucks. How much producer surplus does Liam receive?
$2 Liam's producer surplus is calculated by Price - Willingness-to-sell = $6 - $4 = $2.
Suppose the price of a tablet is $179. Rodrigo buys the tablet and receives $21 worth of consumer surplus. How much was he willing to pay?
$200 Consumer Surplus = Willingness-to-pay − Price. His willingness-to-pay is Consumer Surplus + Price = $21 + $179 = $200.
Suppose the price of a good in a market with three customers is $200. The first customer is willing to pay $200. The second customer is willing to pay $205. The total consumer surplus in the market is $15. How much is the third customer willing to pay?
$210 Consumer Surplus = Willingness-to-pay − Price. The first customer has no consumer surplus; the second customer has $5 of consumer surplus, and the third customer has $10 of consumer surplus. So the third customer's willingness-to-pay is Price + Consumer Surplus = $200 + $10 = $210.
Suppose the price of a tablet is $200 and there are three buyers in the market. Dana is willing to pay $190, Brit is willing to pay $195, and the total consumer surplus in the market is $15. How much is Divya willing to pay for the tablet?
$215 Consumer Surplus = Willingness-to-pay − Price. Consumers will not buy the product if price is greater than their willingness-to-pay. In this case, only Divya would gain consumer surplus and buy the product. Her willingness-to-pay is calculated by Consumer Surplus + Price = $15 + $200 = $215.
Suppose the price of a tablet is $179. Kimdle Co. is willing to sell the tablet for $79, Maxis Tech is willing to sell the tablet for $100, and Dexus Co. is willing to sell the tablet for $115. How much producer surplus do the three sellers receive?
$243 Kimdle Co. has $100 worth of producer surplus, Maxis Tech has $79 worth of producer surplus, and Dexus has $64 of producer surplus. The total producer surplus is $100 + $79 + $64 = $243.
Suppose Marco is willing to tutor for $15 an hour. On Tuesday, he will tutor Kelly for one hour and Mike for three hours. Kelly will pay $30 an hour, but Mike will pay only $20 an hour since he has a longer tutoring session. How much producer surplus will Marco gain from tutoring both Kelly and Mike?
$30 He earns $15 in producer surplus from Kelly (found by $30 − $15) and $15 (found by ($20 − $15) × 3 hours = $15) from Mike.
Suppose Kendra sells cheesecakes for $10 each and would be willing to sell cheesecakes for $8 each. If Austin buys five and he is willing to pay $80 in total, how much is his total consumer surplus?
$30. Consumer Surplus = Willingness-to-pay − Price. His consumer surplus is $30, found by: $80 − $50 − $30.
Suppose the price of a tablet is $279. Angela has $53 worth of consumer surplus. How much is she willing to pay?
$332 Consumer Surplus = Willingness-to-pay − Price. Her willingness-to-pay is Price + Consumer Surplus = $53 + $279 = $332.
The figure shows the market for hockey pucks. How much consumer surplus does Amy receive?
$5 Amy's consumer surplus is calculated by: Willingness-to-pay - Price = $11 - $6 = $5.
Suppose the price of a tablet is $129 and there are three suppliers of tablets. Kimdle Co. is willing to sell the tablet for $129, and Maxis Tech is willing to sell the tablet for $129. The producer surplus is $30. For how much is Dexus Co. willing to sell the tablet?
$99 If Dexus's WTS is $99, its producer surplus would be $129 - $99 = $30. Thus, the total producer surplus would be $30 because Kimdle and Maxis Tech have no producer surplus.
Which of these is an example of asymmetric information?
A seller of a used car knows more about the true condition of the car than a potential buyer. Asymmetric information occurs when one party to a transaction has more information than the other party.
Suppose the equilibrium price in a market is $10. The government sets a price floor of $13. What is most likely to occur?
A surplus is most likely to occur. A binding price floor is set above the equilibrium, where quantity supplied is greater than quantity demanded.
Suppose the equilibrium price for bicycle tires is $42 but the market price falls to $37. Jerry is still able to make a profit at this lower price, so he stays in business. Anat, who was able to make a small profit by selling tires at $42, goes out of business as prices fall. Madison bought the tires at the higher price from Anat and is delighted to buy them at a lower price from Jerry. Marcus, who previously did not purchase tires, is willing to pay the lower price, so he buys new tires from Jerry. Which individual's situation contributes to a reduction in total surplus?
Anat's When Anat goes out of business, she no longer has any producer surplus.
Suppose the equilibrium price for bicycle tires is $42 but the market price falls to $37. Jerry is still able to make a profit at this lower price, so he stays in business. Anat, who was able to make a small profit by selling tires at $42, goes out of business as prices fall. Madison bought the tires at the higher price from Anat and is delighted to buy them at a lower price from Jerry. Marcus, who previously did not purchase tires, is willing to pay the lower price, so he buys new tires from Jerry. Which individual's actions contribute to a reduction in producer surplus?
Anat's actions Anat's decision to leave the market reduces producer surplus.
The figure shows a market for kayaks with an equilibrium price of $300. Suppose that due to unrealistic expectations of demand, the price for kayaks is set at $400. Which of these statements is FALSE?
Area C + F represents a loss in producer surplus caused by consumers not making purchase. The area C + F represents a deadweight loss. This loss is represented by the area F alone.
Suppose the equilibrium price for double-scoop ice cream cones is $4 but the market price rises to $6. Miguel is a seller in this market. Benny still pays the higher price and buys double-scoop ice cream from Miguel. April no longer buys double-scoop ice cream cones because the price is too high. What has happened to consumer surplus in this market?
Consumer surplus decreases. Benny's consumer surplus falls when he pays a higher price. April exits the market and no longer has any consumer surplus. Therefore, total consumer surplus falls.
Suppose the equilibrium price for bicycle tires is $42 but the market price rises to $67. Jerry is a seller in this market. Madison buys new tires at the higher price because she would have been willing to pay $75. Marcus no longer buys new tires because the price is too high. What has happened to consumer surplus in this market?
Consumer surplus decreases. Madison's consumer surplus falls when she pays a higher price. Marcus exits the market and no longer has any consumer surplus. Therefore, total consumer surplus falls.
Suppose the equilibrium price of a product is $500 but the product currently sells for $200 below this equilibrium price. Who benefits from the price being set below the equilibrium price?
Consumers who are still able to purchase the product benefit. When the price falls, the quantity supplied to the market falls. Only those who are still able to purchase the product benefit by paying a lower price.
Suppose the equilibrium price for double-scoop ice cream cones is $4 but the market price falls to $2. Miguel is still able to make a profit at this lower price, so he stays in business. Jen, who was able to make a small profit by selling ice cream cones at $4, goes out of business as prices fall. Benny bought the ice cream cones at the higher price from Jen and is delighted to buy them at a lower price from Miguel. April, who previously did not purchase ice cream cones, is willing to pay the lower price, so she buys them from Miguel. Which individual experiences a reduction in his or her surplus?
Jen Jen's decision to leave the market has a negative effect on total surplus.
Suppose the equilibrium price for bicycle tires is $42 but the market price falls to $37. Jerry, who is a seller in this market, sells the tires for $37 each. Madison continues to buy the product from Jerry but at a lower price. Marcus, who did not buy tires at the higher price, decides to buy new tires from Jerry. Which individual is no longer priced out of the market?
Marcus Marcus previously did not buy the product because the price was too high.
Jerry and Anat each own a bicycle tire shop and sell bicycle tires. Suppose the equilibrium price for bicycle tires is $42 but the market price falls to $37. Neither is able to earn a profit at the lower price, and both go out of business. If there are no other sellers in this market, what effect does this have on producer surplus?
Producer surplus decreases to zero. Producers who exit the market no longer have any producer surplus.
Suppose the equilibrium price for bicycle tires is $42 but the market price rises to $67. Jerry is a seller in this market. All of Jerry's customers are not willing to pay this higher price, but other firms are able to sell some tires at the higher price. What has happened to producer surplus in this market?
Producer surplus decreases. Jerry's producer surplus falls to zero, but other firms do still have some producer surplus.
Suppose the equilibrium price for double-scoop ice cream cones is $4 but the market price rises to $6. Miguel is a seller in this market. Benny buys double-scoop ice cream from Miguel at the higher price. April no longer buys double-scoop ice cream cones because the price is too high. What has happened to total surplus in this market?
Total surplus decreases. Deadweight loss occurs when prices are set above equilibrium, so total surplus decreases.
Suppose the equilibrium price for bicycle tires is $42 but the market price rises to $67. Jerry is a seller in this market. All of Jerry's customers are not willing to pay this higher price. What has happened to total surplus in this market?
Total surplus decreases. When no one buys the product, there is no surplus at all, only deadweight loss.
Which of the following could cause an increase in consumer surplus?
a decrease in price due to a reduction in sales tax A lower price generally increases consumer surplus.
Which of the following would cause a decrease in producer surplus?
a decrease in prices that sellers receive because of a sales tax A lower price generally causes producer surplus to fall.
During World War II, New York City instituted rent-control laws limiting the maximum amount that could be charged to renters. What was the likely result of this action? Assume the market was in equilibrium before the rent controls were passed and the rent controls are binding.
a shortage of apartments When a price ceiling is set below the equilibrium, quantity demanded is greater than quantity supplied, and a shortage results.
The equilibrium price for a game console is $500, but the government has put a price ceiling of $400 on all game consoles. What will be the result of this price ceiling?
a shortage of game consoles When a price ceiling is set below the equilibrium, quantity demanded is greater than quantity supplied, and shortages result.
The state of Florida caps the price of homeowners insurance. As a result, State Farm pulled out of the homeowners insurance market in Florida. What was the likely result of this binding price ceiling?
a shortage of homeowners insurance coverage When a price ceiling is set below the equilibrium, more homeowners want insurance, but fewer insurance companies want to provide it, and shortages result.
A regulation forcing a chemical plant to reduce the amount of pollution it creates will likely:
lessen producer surplus and lessen external costs. Stricter regulations increase input costs. This causes the supply curve to shift to the left. This results in a greater market price but lower quantity produced. Because production has decreased, the amount of pollution emitted falls, as do external costs. The amount of producer surplus also decreases because less product is being supplied to the market.
Which of the following is an example of a price ceiling?
limits on tuition hikes at public universities A price ceiling is a government-mandated maximum price.
Which of the following would cause a decrease in consumer surplus?
an increase in prices due to a sales tax A higher price generally reduces consumer surplus.
Suppose the price of a smart phone is $235. Smallphone Inc. sells smart phones and has no producer surplus. How much is Smallphone's willingness-to-sell?
at least $235 If the firm's willingness-to-sell is greater than the market price, the firm will not sell the product (and thus will not earn any producer surplus). If the firm's willingness-to-sell is equal to the market price, the firm will sell the product but will not earn any producer surplus.
The figure shows the market for portable DVD players. Assume the government sets a price ceiling at $20. This price ceiling will:
cause a shortage. When a price ceiling is set below the equilibrium, quantity demanded is greater than quantity supplied.
The figure shows the market for portable DVD players. Assume the government sets a price floor at $55. This price floor will:
cause a surplus. A price floor that is set above equilibrium is a binding price floor; this would cause a surplus. A surplus occurs when quantity supplied is greater than quantity demanded.
A minimum wage that is set higher than the equilibrium wage:
causes a surplus of labor. A surplus occurs when the government sets a price floor above the equilibrium price.
The equilibrium price for a gallon of milk is $3, but the government has put a price ceiling of $4 on all gallon bottles of milk. What will be the result of this price ceiling?
no effect There is no effect when a price ceiling is set above the equilibrium price. A maximum set higher than the market price does not change anything in the market.
The equilibrium price for a bushel of wheat is $6.50. The government has put a price ceiling of $8 on a bushel of wheat. What will be the result of this price ceiling?
no effect There is no effect when a price ceiling is set above the equilibrium price. Farmers are still free to sell their wheat for $6.50 because this is below the $8 maximum price.
The equilibrium price for a gallon of milk is $3. The government has put a price floor of $2 on all gallon bottles of milk. What will be the result of this price floor?
no effect There is no effect when a price floor is set below the equilibrium price. A minimum set lower than the market price does not change anything in the market.
The equilibrium price for a bushel of wheat is $6.50. The government has put a price floor of $5 on a bushel of wheat. What will be the result of this price floor?
no effect There is no effect when a price floor is set below the equilibrium price. Farmers are still free to sell their wheat at $6.50 because this price is higher than the minimum price of $5.
Suppose the price of a tablet is $279. Lexi has no consumer surplus. How much is she willing to pay?
no more than $279 This means the price is greater than (or equal to) her willingness-to-pay. A consumer will not buy the product if price is greater than her willingness-to-pay.
The figure represents the price per bushel of avocado and its quantity (bushels). A few years ago, avocado farmers were able to sell avocados at $70 per bushel, but now the market price of avocados is $40 per bushel. What policy should a government use to smooth out the income of farmers?
price floor set above $40 To increase the incomes of farmers, the government would set the price support above the equilibrium price.
Many governments have implemented their action plans to tackle the problems of climate change. One goal is to promote sustainable production because it generates:
external benefits. These countries implement incentives to promote resource conservation, which creates external benefits to others.
The figure shows the market for hockey pucks. How much consumer surplus does Greg receive?
$0 Greg's willingness-to-pay is $6, which is the same as the market price. Thus, he has no consumer surplus.
The figure shows the market for hockey pucks. How much producer surplus does Mike receive?
$0 Mike's willingness-to-sell is $6, which is the same as the market price. Thus, he would receive no producer surplus.
ElectriCo sells 5,000 light switches a month for $1 each. It would be willing to sell them for as little as 75 cents. Suppose the price of light switches increases to $1.10. Assuming that ElectriCo is still selling the same quantity, by how much has its producer surplus per month increased?
$500 Producer surplus is the difference between the market price and a firm's willingness-to-sell. Find the difference between the producer surplus before and after the price change. Producer surplus before the price change is $1,250 (found by ($1.00 − $0.75) × 5,000). Producer surplus after the price change is $1,750 (found by ($1.10 − $0.75) × 5,000). The difference is $500 (found by: $1,750 − $1,250).
If Dan buys three hard drives for $50 apiece and he is willing to pay $50 apiece for them, what is his consumer surplus?
0
The figure shows a market for kayaks with an equilibrium price of $300. Suppose that the price for kayaks is set at $200. Which of these statements is FALSE?
Area A + B + C + D + F represents consumer surplus. Only 10,000 kayaks will be sold in the market. Area C + F represents a deadweight loss. The consumer surplus is represented by the area A + B + D.
Airline ticket prices typically increase during the holidays. Madeline paid $800 for a ticket to San Francisco over the holiday break. Four months ago, she paid $450 to fly to San Francisco. Who benefits from this price increase?
The airlines still able to sell tickets during the holiday season benefit. Producer surplus rises for suppliers who are able to sell the product at a higher price.
The figure shows the market for hockey pucks. Which statement is TRUE about this market?
This market determines equilibrium price to be $6, and total sales for the market are 6,000 hockey pucks. Point e represents the equilibrium price and equilibrium quantity.
Suppose the equilibrium price for double-scoop ice cream cones is $4 but the market price rises to $6. Miguel is a seller in this market. All of Miguel's customers are not willing to pay this higher price, but other sellers do have a few customers. What has happened to total surplus in this market?
Total surplus decreases but not to zero. Miguel and his customers have no surplus, but some surplus is generated by other ice cream shops.
Suppose the equilibrium price for bicycle tires is $42 but the market price rises to $67. What has happened to total surplus in this market?
Total surplus decreases. Deadweight loss occurs when prices are set above equilibrium, so total surplus decreases.
The figure shows a market for kayaks with an equilibrium price of $300. Which of these statements is FALSE?
When the market price decreases to $200, producer surplus is represented by the area D + F. This area is the loss in producer surplus.
Whenever prices deviate from equilibrium, total surplus falls, resulting in:
a deadweight loss. Deadweight loss occurs when markets are not at equilibrium.
A seller of a unique used car is the only one seller in the country. In this case, the market for this used car is likely to fail due to the:
lack of competition. This is because there is no other seller in the market; there is no competition.
Suppose the equilibrium price for bicycle tires is $42 but the market price falls to $37. Jerry is still able to make a profit at this lower price, so he stays in business. Anat, who was able to make a small profit by selling tires at $42, goes out of business as prices fall. Madison bought the tires at the higher price from Anat and is delighted to buy them at a lower price from Jerry. Marcus, who previously did not purchase tires, is now willing to pay the lower price, so he buys new tires from Jerry. Which individual's actions contribute to a reduction in consumer surplus?
no one's actions Overall, total surplus falls when prices are set below equilibrium. In this market, however, the existing consumer (Madison) is able to purchase at a lower price, so her consumer surplus increases. The marginal buyer (Marcus) jumps into the market and buys the product at the lower price, so his consumer surplus also increases.
Madeline normally flies to San Francisco to visit family over the holidays, but airline ticket prices have increased by $400. Madeline no longer can afford this ticket, so she decides to stay home for the holidays. Who benefits from this price increase?
the airlines still able to sell tickets during the holiday season Producer surplus rises for suppliers that can sell the product at a higher price.
According to Adam Smith, the father of modern economics, markets promote efficiency through:
the incentives faced by individuals and firms. Smith observed that consumers wanting goods and services bid up the price, while suppliers eager to earn profit supply these goods and services.
