Consumers, Producers and the Efficiency of Markets
producer surplus (equation)
= amount received by sellers - cost to sellers
Consumer surplus is a good measure of buyers' benefits if buyers are rational. (T or F?)
T
Cost to the seller includes the opportunity cost of the seller's time. (T or F?)
T
Equilibrium in a competitive market maximizes total surplus. (T or F?)
T
Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market. (T or F?)
T
consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays
producer surplus
the amount a seller is paid for a good minus the seller's cost
cost
the value of everything a seller must give up to produce a good
consumer surplus (equation)
= value to buyers - amount paid by buyers
total surplus (equation)
= value to buyers - amount paid by buyers + amount received by sellers - cost to sellers = value to buyers - cost to sellers
Adam Smith's "invisible hand" concept suggests that a competitive market outcome a. maximizes total surplus. b. generates equality among the members of society. c. minimizes total surplus. d. both maximizes total surplus and generates equality among the members of society.
A
An increase in the price of a good along a stationary supply curve a. increases producer surplus. b. does all of the things described in these answers. c. decreases producer surplus. d. improves market equity.
A
Consumer surplus is the area a. below the demand curve and above the price. b. above the supply curve and below the price. c. above the demand curve and below the price. d. below the supply curve and above the price. e. below the demand curve and above the supply curve.
A
An increase in the price of a good along a stationary demand curve a. improves the material welfare of the buyers. b. decreases consumer surplus. c. improves market efficiency. d. increases consumer surplus.
B
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then a. total surplus is maximized. b. the value placed on the last unit of production by buyers exceeds the cost of production. c. producer surplus is maximized. d. the cost of production on the last unit produced exceeds the value placed on it by buyers. e. consumer surplus is maximized.
B
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then a. the value placed on the last unit of production by buyers exceeds the cost of production. b. the cost of production on the last unit produced exceeds the value placed on it by buyers. c. consumer surplus is maximized. d. total surplus is maximized. e. producer surplus is maximized.
B
If a market is efficient, then a. the market allocates buyers to the sellers who can produce the good at least cost. b. all of these answers. c. none of these answers. d. the quantity produced in the market maximizes the sum of consumer and producer surplus. e. the market allocates output to the buyers that value it the most.
B
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should a. choose a price below the market equilibrium price. b. allow the market to seek equilibrium on its own. c. choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers). d. choose a price above the market equilibrium price.
B
Joe has ten pairs of football boots and Sue has none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots at €100 and Sue values a pair of boots at €40, then to maximize a. efficiency Sue should receive the glove. b. efficiency Joe should receive the glove. c. equity, Joe should receive the glove. d. consumer surplus both should receive a glove.
B
Medical care clearly enhances people's lives. Therefore, we should consume medical care until a. everyone has as much as they would like. b. the benefit buyers place on medical care is equal to the cost of producing it. c. buyers receive no benefit from another unit of medical care. d. we must cut back on the consumption of other goods.
B
The seller's cost of production is a. none of these answers. b. the minimum amount the seller is willing to accept for a good. c. the seller's producer surplus. d. the maximum amount the seller is willing to accept for a good. e. the seller's consumer surplus.
B
If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is a. €18,000. b. €20,000. c. €2,000. d. €0. e. €38,000.
C
If a market generates a side effect or externality, then free market solutions a. maximize producer surplus. b. are efficient. c. are inefficient. d. are equitable.
C
Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike? a. €500 b. €300 c. €200 d. €400 e. €100
C
Total surplus is the area a. above the supply curve and below the price. b. below the demand curve and above the price. c. below the demand curve and above the supply curve. d. below the supply curve and above the price. e. above the demand curve and below the price.
C
A buyer's willingness to pay is that buyer's a. minimum amount they are willing to pay for a good. b. producer surplus. c. consumer surplus. d. maximum amount they are willing to pay for a good. e. none of these answers.
D
If a producer has market power (can influence the price of the product in the market) then free market solutions a. are equitable. b. are efficient. c. maximize consumer surplus. d. are inefficient.
D
If buyers are rational and there is no market failure, a. free market solutions are efficient. b. free market solutions maximize total surplus. c. all of these answers. d. free market solutions are equitable. e. free market solutions are efficient and free market solutions maximize total surplus.
E
Producer surplus is the area a. below the supply curve and above the price. b. below the demand curve and above the supply curve. c. below the demand curve and above the price. d. above the demand curve and below the price. e. above the supply curve and below the price.
E
Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will be sold and what is the value of consumer surplus in this market? a. Three vases will be sold and consumer surplus is €80. b. One vase will be sold and consumer surplus is €5. c. One vase will be sold and consumer surplus is €30. d. Three vases will be sold and consumer surplus is €0. e. Two vases will be sold and consumer surplus is €5.
E
Consumer surplus is the buyer's willingness to pay minus the seller's cost. (T or F?)
F
Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price. (T or F?)
F
If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00. (T or F?)
F
Producer surplus is a measure of the unsold inventories of suppliers in a market. (T or F?)
F
Producing more of a product always adds to total surplus. (T or F?)
F
Total surplus is the seller's cost minus the buyer's willingness to pay. (T or F?)
F
If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases. (T or F?)
T
Producer surplus is the area above the supply curve and below the price. (T or F?)
T
The height of the supply curve is the marginal seller's cost. (T or F?)
T
The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient. (T or F?)
T
The two main types of market failure are market power and externalities. (T or F?)
T
the efficiency of the equilibrium qty
at qty's less than the equilibrium qty, the value to buyers exceeds the cost to sellers. At qty's greater than the equilibrium qty, the cost to sellers exceeds the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus
willingness to pay
the maximum amount that a buyer will pay for a good
Consumer surplus at price P2
the price falls from P1 to P2, the qty demanded rises form Q1 to Q2, and the consumer surplus rises to the area of the triangle ADF. The increase in consumer surplus (area BCFD) occurs in part because existing consumers now pay less (area BCED) and in part because new customers enter the market at the lower price (area CEF)
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equity
the property of distributing economic prosperity (Wohlstand) fairly among the members of society
Consumer surplus at price P1
the qty demanded is Q1 and consumer surplus equals the area of the triangle ABC
Producer surplus at price P1
the qty demanded is Q1 and producer surplus equals the area of the triangle ABC
welfare economics
the study how the allocation of resources affects economic well-being
Producer surplus at price P2
the supplied rises from Q1 to Q2 and the producer surplus rises to the area of the triangle ADF. The increase in producer surplus (area BCFD) occurs in part because existing producers now receive more (area BCED) and in part because new producers enter the market at the higher price (area CEF)