macroeconomics chapter 7 - exam 3

Deborah buys an iPhone for $240 and gets a consumer surplus of $160. Her willingness to pay for an iPhone is$400 If the price of the iPhone had been $450, her consumer surplus would have been

$0 because the price is greater than her willingness to pay

Suppose a firm that produces for this market employs a private security force that makes town residents, many of whom have no business with the company, feel safer. This scenario is characterized by (_) and is an example of (_)

-externality - market failure

area representing consumer surplus

1/2 x base x height

area representing producer surplus

1/2 x base x height

to find total consumer surplus from a graph

1st find who will be a consumer based on if their willingness to pay is higher than the market price 2nd compute all possible consumers individual consumer surplus equation: individual consumer surplus = willingness to pay - market price 3rd add all individual consumer surplus to equal total consumer surplus

If a buyer's willingness to pay for a new Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is a. $2,000. b. $28,000. c. $30,000. d. $0. e. $58,000.

a. $2,000.

Suppose that the price of a new bicycle is $300. Sue 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 Sue buys a new bike? a. $200 b. $400 c. $500 d. $300 e. $100

a. $200

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. Two vases will be sold, and consumer surplus is $5. b. One vase will be sold, and consumer surplus is $30. c. Three vases will be sold, and consumer surplus is $80. d. Three vases will be sold, and consumer surplus is $0. e. One vase will be sold, and consumer surplus is $5.

a. Two vases will be sold, and consumer surplus is $5

Producer 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 supply curve and above the price. d. above the demand curve and below the price. e. below the demand curve and above the supply curve.

a. above the supply curve and below the price

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. allow the market to seek equilibrium on its own. b. 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). c. choose a price below the market equilibrium price. d. choose a price above the market equilibrium price.

a. allow the market to seek equilibrium on its own.

An increase in the price of a good along a stationary supply curve a. increases producer surplus. b. decreases producer surplus. c. improves market equity. d. does all of the above.

a. increases producer surplus.

Medical care clearly enhances people's lives. Therefore, we should consume medical care until a. the benefit buyers place on medical care is equal to the cost of producing it. b. everyone has as much as they would like. c. we must cut back on the consumption of other goods. d. buyers receive no benefit from another unit of medical care.

a. the benefit buyers place on medical care is equal to the cost of producing it

If a benevolent social planner chooses to produce less 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. consumer surplus is maximized. c. producer surplus is maximized. d. the cost of production on the last unit produced exceeds the value placed on it by buyers. e. total surplus is maximized.

a. the value placed on the last unit of production by buyers exceeds the cost of production.

Externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

If a market generates a side effect or externality, then free market solutions a. generate equality. b. are inefficient. c. maximize producer surplus. d. are efficient.

b. are inefficient

Consumer surplus is the area a. above the demand curve and below the price. b. below the demand curve and above the price. c. below the supply curve and above the price. d. below the demand curve and above the supply curve. e. above the supply curve and below the price.

b. below the demand curve and above the price.

An increase in the price of a good along a stationary demand curve a. increases consumer surplus. b. decreases consumer surplus. c. improves market efficiency. d. improves the material welfare of the buyers

b. decreases consumer surplus.

Adam Smith's "invisible hand" concept suggests that a competitive market outcome a. minimizes total surplus. b. maximizes total surplus. c. generates equality among the members of society. d. does both b and c.

b. maximizes total surplus.

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then a. total surplus is maximized. b. the cost of production on the last unit produced exceeds the value placed on it by buyers. c. the value placed on the last unit of production by buyers exceeds the cost of production. d. producer surplus is maximized. e. consumer surplus is maximized.

b. the cost of production on the last unit produced exceeds the value placed on it by buyers.

how can consumer surplus be found

by computing the area below the demand curve and above the price.

how can producer surplus be found

by computing the area below the price and above the supply curve.

Joe has ten baseball gloves and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize a. efficiency, Sue should receive the glove. b. equality, Joe should receive the glove. c. efficiency, Joe should receive the glove. d. consumer surplus, both should receive a glove.

c. efficiency, Joe should receive the glove.

A buyer's willingness to pay is a. that buyer's consumer surplus. b. that buyer's producer surplus. c. that buyer's maximum amount he is willing to pay for a good. d. that buyer's minimum amount he is willing to pay for a good. e. none of the above.

c. that buyer's maximum amount he is willing to pay for a good

Identify whether the following statement best illustrates the concept of consumer surplus, producer surplus, or neither. Even though I was willing to pay up to $46 for a jersey sweater, I bought a jersey sweater for only $38.

consumer surplus

total surplus

consumer surplus + producer surplus

consumer surplus equation

consumer surplus = willingness to pay - price

Deborah buys an iPhone for $240 and gets a consumer surplus of $160. Her willingness to pay for an iPhone is (_)

consumer surplus = willingness to pay - price 160 = willingness to pay - 240 willingness to pay = $400

Deborah buys an iPhone for $240 and gets a consumer surplus of $160. Her willingness to pay for an iPhone is$400 If she had bought the iPhone on sale for $180, her consumer surplus would have been

consumer surplus = willingness to pay - price consumer surplus = 400-180 = $220

If a market is efficient, then a. the market allocates output to the buyers who value it the most. b. the market allocates buyers to the sellers who can produce the good at least cost. c. the quantity produced in the market maximizes the sum of consumer and producer surplus. d. all of the above are true. e. none of the above is true.

d. all of the above are true

If a producer has market power (can influence the price of the product in the market) then free market solutions a. maximize consumer surplus. b. are efficient. c. generate equality. d. are inefficient.

d. are inefficient.

Total surplus is the area a. below the demand curve and above the price. b. above the supply curve and below the price. c. below the supply curve and above the price. d. below the demand curve and above the supply curve. e. above the demand curve and below the price.

d. below the demand curve and above the supply curve

The seller's cost of production is a. the seller's consumer surplus. b. the seller's producer surplus. c. the maximum amount the seller is willing to accept for a good. d. the minimum amount the seller is willing to accept for a good. e. none of the above

d. the minimum amount the seller is willing to accept for a good

If buyers are rational and there is no market failure, a. free market solutions are efficient. b. free market solutions generate equality. c. free market solutions maximize total surplus. d. all of the above are true. e. a and c are correct.

e. a and c are correct

what are policy makers often concerned with in terms of economics

efficiency, as well as the equality, of economic outcomes.

to tell from a graph how many consumers will pay

if their willingness to pay is higher than the market price

An allocation of resources that maximizes total surplus

is efficient

how does externality cause market failure

it forces resources to be allocated inefficiently. For resources to be allocated efficiently, the equilibrium output should be higher in order to reflect the benefits

Identify whether each of the following statements best illustrates the concept of consumer surplus, producer surplus, or neither. I sold a watch for $57 on eBay last week. This week, someone offered me $167 for it

neither

Identify whether each of the following statements best illustrates the concept of consumer surplus, producer surplus, or neither. I sold a used laptop for $169, even though I was willing to go as low as $160 in order to sell it.

producer surplus

market failture

situation in which a market left on its own fails to allocate resources efficiently

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

what does consumer surplus measure

the benefit buyers receive from participating in a market

what does producer surplus measure

the benefit sellers receive from participating in a market

willingness to pay

the maximum amount that a buyer will pay for a good

Efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

equality

the property of distributing economic prosperity uniformly among the members of society

welfare economics

the study of how the allocation of resources affects economic well-being

In a free market, the equilibrium quantity (QEQE) maximizes

the sum of consumer surplus and producer surplus, because QE is the level of output where the value to buyers is just equal to the cost to sellers. For units of output below QE, the value to buyers is greater than the cost to sellers, while for units of output above QE, the value to buyers is less than the cost to sellers.

cost

the value of everything a seller must give up to produce a good

Markets do or do not allocate resources efficiently in the presence of market failures such as market power or externalities.

they do not

The equilibrium of supply and demand maximizes

total surplus

Suppose Nick is willing to pay a total of $240,000 for an antique car. True or False: Keeping his maximum willingness to pay for an antique car in mind, Nick will not buy the antique car because it would be worth less to him than its market price of $300,000.

true Nick will not purchase the antique car, because the market price ($300,000) is greater than his willingness to pay ($240,000).