Ch. 4 Economic Efficiency, Price Controls, & Taxes

Economic surplus changes from areas

ABE to ABCDEFG

Economists define economic efficiency in this way

All the above

How does consumer surplus change as the equilibrium price of a good rises or falls?

As the price of a good rises, consumer surplus decreases, and as the price of a good falls, consumer surplus increases

How does producer surplus change as the equilibrium price of a good rises or falls?

As the price of a good rises, producer surplus increases, and as the price of a good falls, producer surplus decreases

Consumer surplus increases by areas

BCD

The reduction in economic surplus resulting from a market not being in competitive equilibrium

Dead weight loss

Market outcome in which marginal benefit to consumers of the last unit produced is equal to marginal cost; market outcome in which the sum of consumer surplus and producer surplus is at a maximum

Economic Efficiency

The marginal benefit of consumption is equal to the marginal costs of production when

Economic surplus is maximized

Consumer surplus and producer surplus measure the total benefit consumers and producers receive from participating in a market

False

Why is the demand curve referred to as a marginal benefit curve?

It shows the willingness of consumers to purchase a product at different prices

Why is the supply curve referred to as a marginal cost curve?

It shows the willingness of firms to supply a product at different prices

The additional benefit from consuming one more unit

Marginal Benefit

the additional cost of producing one more unit

Marginal Cost

Do the people who are legally required to pay a tax always bear the burden of the tax?

No because whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government

Does it matter whether buyers or sellers are legally responsible for paying a tax?

No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax

The difference between the lowest price a firm would be willing to accept and the price it actually receives

Producer Surplus (area B, below shaded area A)

What is the impact of a production tax on the equilibrium price?

Rises and the equilibrium quantity falls

The actual division of the burden of a tax indicates

Tax incidence

If marginal cost is greater than marginal cost (just as when marginal benefit is greater than marginal cost),

There will be deadweight loss

The difference between the highest price a consumer is willing to pay and the price the consumer actually pays

consumer surplus (area A, above shaded area B)

Economic surplus in a market is the sum of ____ surplus and ____ surplus

consumer; producer

As a result, a tax on production reduces consumer surplus because ___ lose the ______ of the ___ quantity caused by the tax

consumers; marginal benefit minus marginal cost; decreased

Economic surplus at Q3 would be smaller than at Q2 bc if Q3 were produced, then some units for which marginal cost is ____ marginal benefit would ____ produced

greater than; be

Economic surplus at Q1 would be smaller than Q2, bc if Q1 units of output were produced, then some units for which marginal benefit is ____ marginal cost would ____ produced

greater than; not be

Assume your friend was not exaggerating, and really considers the product "priceless." His consumer surplus for this product would be

infinite because your friend's willingness to pay is infinite

In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a ___ when the market is in ___

maximum; equilibrium

Consumer and producer surplus measure the _____ benefit rather than the ____ benefit

net; total

Consumer surplus is equal to

the area of the blue triangle, which is one-half times the base, times the height