LC Chapter 4

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

Which of the following is an example of an external cost?

A company dumps pollutants into a river that flows into another country and kills off fish.

Suppose the equilibrium price in a market is $10. The government sets a price ceiling of $7. What is most likely to occur?

A shortage is most likely to occur.

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.

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.

_____ can cause competitive markets to have suboptimal outcomes.

External costs

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. Madison buys new tires at the higher price. Marcus no longer buys new tires because the price is too high. Which individual stays in the market but has a drop in consumer surplus?

Madison

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. 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

What happens to consumer surplus and producer surplus if the equilibrium price of a product is $500 but the product currently sells for $200?

Producer surplus decreases, but consumer surplus could either increase or decrease.

Suppose the equilibrium price of a product is $500 but the product currently sells for $200 above this equilibrium price. Who benefits from the price being set above the equilibrium price?

Producers who can sell the product benefit.

Which of the following statements is correct?

Public goods are nonrival and nonexclusive.

Miguel sells double-scoop ice cream cones at the market equilibrium price of $4. Assume the government intervenes and sets the price at $6. None of Miguel's customers are 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.

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. None of Jerry's customers are willing to pay this higher price. What has happened to total surplus in this market?

Total surplus decreases.

Which of the following is an example of a price floor?

a legally mandated minimum wage for food-service workers

A shortage exists when _____ is set below the equilibrium price for a good.

a price ceiling

A surplus exists when _____ is set above the equilibrium price for a good.

a price floor

Beth listens to National Public Radio (NPR) without paying. NPR is an example of:

a public good.

Which of the following is an example of a price ceiling?

a rent-control law setting a maximum price for housing

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

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

Consumer surplus is represented by the area:

above the market price and below the demand curve.

Which of the following would cause an increase in producer surplus?

an increase in price due to rising consumer income

When NASA uses contractors, the contractors know better than the space agency the true cost of the projects it bids on. This is an example of:

asymmetric information.

Producer surplus is represented by the area:

below the market price and above the supply curve.

A _____ is set below the equilibrium price for a good.

binding price ceiling

Suppose the equilibrium price in a market is $10. The government sets a maximum price of $7. This price of $7 is an example of a(n):

binding price ceiling.

A _____ is set above the equilibrium price for a good.

binding price floor

According to the following figure, a price floor set at $50 will:

cause a surplus.

The difference between what a consumer is willing to pay and what he or she actually pays for a good or service is known as:

consumer surplus

The difference between what a consumer is willing to pay and what he or she actually pays for a good or service is known as:

consumer surplus.

Which of the following occurs when a transaction between two parties has a positive impact on a third party not involved with the transaction?

external benefit

Which of the following occurs when a transaction between two parties has a negative impact on a third party not involved with the transaction?

external cost

According to the following figure, a price floor set at $30 will:

have no effect.

According to the following figure, a price floor set at $40 will:

have no effect.

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

All else equal, when the market price falls below equilibrium, consumer surplus:

increases

Markets work efficiently when:

information is widely available

If a market is not competitive, then:

it does not allocate resources efficiently.

Tom is looking to buy a new laptop battery online. He wants to save money by buying used, but the problem is that he doesn't know how much life is left in the battery he's going to buy. This problem of asymmetric information could lead to:

market failure.

Consumer surplus is the difference between willingness to pay and:

market price.

Producer surplus is the difference between willingness to sell and:

market price.

A price floor is a(n) _____ price for a good.

minimum

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

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $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

Public goods are described as:

nonrival and nonexclusive.

Asymmetric information:

prevents markets from reaching a socially desirable outcome.

A binding _____ is set below the equilibrium price for a good.

price ceiling

Suppose the equilibrium price in a market is $10. The government sets a maximum price of $12. This price of $12 is an example of a(n):

price ceiling.

A(n) _____ is the minimum price for a good allowed by law.

price floor

Suppose the equilibrium price in a market is $10. The government sets a minimum price in the market of $8. This price of $8 is an example of a(n):

price floor.

Suppose the equilibrium price in a market is $10. The government sets a minimum price of $12. This price of $12 is an example of a(n):

price floor.

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.

For a price floor to be effective, or binding, it must be:

set above the equilibrium price.

A _____ exists when a price ceiling is set below the equilibrium price for a good.

shortage

Markets with external costs produce more than the _____optimal output.

socially

A _____ exists when a price floor is set above the equilibrium price for a good.

surplus

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

If the price of a product falls below the equilibrium price:

the height of the triangle that represents producer surplus will decrease.

The expansion of the Internet and sites like Yelp has probably reduced:

the problem of asymmetric information.

Markets work most efficiently when:

there are many buyers and sellers.

If the price of a product rises above the equilibrium price, the height of the triangle that represents consumer surplus:

will decrease.

Consumer surplus is the difference between market price and:

willingness to pay.

Producer surplus is the difference between market price and:

willingness to sell.