MicroEconomics Problem Set #7 (Chapter #7 and #8)

Consumer surplus is a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. b. the amount a buyer is willing to pay for a good minus the cost of producing the good. c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good. d. a buyer's willingness to pay for a good plus the price of the good.

A

Deadweight loss measures the a. loss in a market to buyers and sellers that is not offset by an increase in government revenue. b. loss in revenue to the government when buyers choose to buy less of the product because of the tax. c. loss of equity in a market due to government intervention. d. loss of total revenue to business firms due to the price wedge caused by the tax.

A

For the purpose of analyzing the gains and losses from a tax on a good, we use tax revenue as a direct measure of a. government's benefit from the tax. b. government's loss from the tax. c. the deadweight loss of the tax. d. the overall net gain to society of the tax.

A

Producer surplus measures a. the benefits to sellers of participating in a market. b. the costs to sellers of participating in a market. c. the price that buyers are willing to pay for sellers' output of a good or service. d. the benefit to sellers of producing a greater quantity of a good or service than buyers demand.

A

Refer to Figure 7-9. At the equilibrium price, consumer surplus is a. $480. b. $640. c. $1,120. d. $1,280.

A

Refer to Figure 8-7. The tax causes producer surplus to decrease by the area a. D + F. b. D + F + G. c. D + F + J. d. D + F + G + H

A

Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendras's willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct? a. For the three individuals together, consumer surplus amounts to $35. b. Having bought the cell phone, Kristen is better off than she would have been had she not bought it. c. Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been buyers and Kristen definitely would not have been a buyer. d. The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed the same value on that cell phone.

A

A deadweight loss is a consequence of a tax on a good because the tax a. induces the government to increase its expenditures. b. induces buyers to consume less, and sellers to produce less, of the good. c. causes a disequilibrium in the market. d. imposes a loss on buyers that is greater than the loss to sellers.

B

Marjorie is willing to pay $68 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48. Marjorie's consumer surplus is a. $10. b. $20. c. $48. d. $68.

B

Noah drinks Dr. Pepper. He can buy as many cans of Dr. Pepper as he wishes at a price of $0.50 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Noah is rational in deciding how many cans to buy. His consumer surplus is a. $0.50. b. $0.85. c. $1.05. d. $1.20.

B

On a graph, consumer surplus is the area a. between the demand and supply curves. b. below the demand curve and above price. c. below the price and above the supply curve. d. below the demand curve and to the right of equilibrium price.

B

Refer to Figure 7-5. If the price of the good is $8.50, then producer surplus is a. $6.50. b. $8.00. c. $9.50. d. $11.00.

B

Refer to Figure 7-9. At the equilibrium price, producer surplus is a. $480. b. $640. c. $1,120. d. $1,280.

B

Refer to Figure 8-7. If the government imposes a price ceiling of $8 on this market. The resulting deadweight loss would be a. the area C + F. b. greater than the area C + F. c. smaller than the area C + F. d. zero.

B

Refer to Figure 8-7. The government collects tax revenue that is represented by the area a. L. b. B + D. c. C + F. d. F + G + L.

B

Refer to Figure 8-7. The tax causes consumer surplus to decrease by the area a. A. b. B + C. c. A + B + C. d. A + B + C+ D + F.

B

Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10; the cost of mowing the second lawn is $12; and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is a. $25. b. $30. c. $36. d. $45.

B

Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4, a. any possible increase in consumer surplus would be larger than the loss of producer surplus. b. any possible increase in consumer surplus would be smaller than the loss of producer surplus. c. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus. d. the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.

B

Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons? a. It increases. b. It decreases. c. It is not affected by this change in market forces. d. We would have to know whether the demand for lemons is elastic or inelastic to make this determination.

B

A consumer's willingness to pay directly measures a. the extent to which advertising and other external forces have influenced the consumer's decisions regarding his or her purchases of goods and services. b. the cost of a good to the buyer. c. how much a buyer values a good. d. consumer surplus.

C

If an allocation of resources is efficient, then a. consumer surplus is maximized. b. producer surplus is maximized. c. all potential gains from trade among buyers are sellers are being realized. d. the allocation is necessarily equitable as well.

C

Inefficiency exists in an economy when a good is a. being produced with less than all available resources. b. not distributed fairly among buyers. c. not being produced by the lowest-cost producers. d. being consumed by buyers who value it most highly.

C

Refer to Figure 7-5. If the price of the good is $14, then producer surplus is a. $17. b. $22. c. $25. d. $28.

C

Refer to Figure 7-9. At the equilibrium price, total surplus is a. $480. b. $640. c. $1,120. d. $1,280.

C

Sally sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife for as many knives as Sally is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $1.75, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.25. Assume Sally is rational in deciding how many knives to sharpen. Her producer surplus is a. $0.25. b. $0.50. c. $1.00. d. $1.75.

C

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweight loss of the tax is a. $200. b. $400. c. $600. d. $1,200.

C

Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus a. would necessarily increase even if the higher price resulted in a surplus of widgets. b. would necessarily decrease because the higher price would create a surplus of widgets. c. might increase or decrease. d. would be unaffected.

C

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it a. maximizes costs of the seller. b. maximizes tax revenue for the government. c. maximizes the combined welfare of buyers and sellers. d. minimizes the expenditure of buyers.

C

To fully understand how taxes affect economic well-being, we must a. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed. b. know the dollar amount of all taxes raised in the country each year. c. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises. d. take into account the fact that almost all taxes reduce the w

C

We can say that the allocation of resources is efficient if a. producer surplus is maximized. b. consumer surplus is maximized. c. total surplus is maximized. d. sellers' costs are minimized.

C

In which of the following circumstances would a buyer be indifferent about buying a good? a. The amount of consumer surplus the buyer would experience as a result of buying the good is zero. b. The price of the good is equal to the buyer's willingness to pay for the good. c. The price of the good is equal to the value the buyer places on the good. d. All of the above are correct.

D

Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus is equal to a. $210. b. $360. c. $480. d. $570.

D

Refer to Figure 8-7. The decrease in consumer and producer surpluses that is not offset by tax revenue is the area a. C. b. F. c. G. d. C + F.

D

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged.

D

Total surplus in a market is represented by the total area a. under the demand curve and above the price. b. above the supply curve and up to the equilibrium price. c. under price and up to the point of equilibrium. d. between the demand and supply curves up to the point of equilibrium.

D

Total surplus with a tax is equal to a. consumer surplus plus producer surplus. b. consumer surplus minus producer surplus. c. consumer surplus plus producer surplus minus tax revenue. d. consumer surplus plus producer surplus plus tax revenue.

D

Which of the following statements is not correct about a market in equilibrium? a. The price determines which buyers and which sellers participate in the market. b. Those buyers who value the good more than the price choose to buy the good. c. Those sellers whose costs are less than the price choose to produce and sell the good. d. Consumer surplus will be equal to producer surplus.

D

A government subsidy would improve upon the market efficiency because such a policy makes both consumers and producers better off.

False

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.

False

Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost.

True

In a competitive market, sales go to those producers who are willing to supply the product at the lowest price.

True

Normally, both buyers and sellers of a good become worse off when the good is taxed.

True

Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade

True

The area below the price and above the supply curve measures the producer surplus in a market.

True

The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of participating in that market.

True

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.

True

When market price increases, producer surplus increases because (1) producer surplus received by existing sellers increases, and (2) new sellers enter the market.

True