Econ Ch 7
An increase in the price of a good along a stationary demand curve
decreases consumer surplus.
An increase in the price of a good along a stationary supply curve
increases producer surplus.
Medical care clearly enhances people's lives. Therefore, we should consume medical care until
the benefit buyers place on medical care is equal to the cost of producing it.
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
efficiency, Joe should receive the glove.
Adam Smith's "invisible hand" concept suggests that a competitive market outcome
maximizes total surplus.
A buyer's willingness to pay is
that buyer's maximum amount he is willing to pay for a good.
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
the cost of production on the last unit produced exceeds the value placed on it by buyers.
The seller's cost of production is
the minimum amount the seller is willing to accept for a good.
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
the value placed on the last unit of production by buyers exceeds the cost of production.
Producer surplus is a measure of the unsold inventories of suppliers in a market.
False
Producing more of a product always adds to total surplus.
False
Total surplus is the cost to sellers minus the value to buyers.
False
Consumer surplus is a good measure of buyers' benefits if buyers are rational.
True
Cost to the seller includes the opportunity cost of the seller's time.
True
Equilibrium in a competitive market maximizes total surplus.
True
Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.
True
If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.
True
Producer surplus is the area above the supply curve and below the price.
True
The height of the supply curve is the marginal seller's cost.
True
The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient.
True
The two main types of market failure are market power and externalities.
True
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?
Two vases will be sold, and consumer surplus is $5.
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
$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?
$200
Consumer surplus is the amount a buyer is willing to pay for a good minus the seller's cost.
False
Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.
False
If your willingness to pay for a hamburger is $3.00 and the price is $2.00, your consumer surplus is $5.00.
False
Producer surplus is the area
above the supply curve and below the price.
If buyers are rational and there is no market failure,
all of these answers are true. free market solutions generate equality. free market solutions are efficient and free market solutions maximize total surplus. free market solutions are efficient. free market solutions maximize total surplus.
If a market is efficient, then
all of these answers are true. the market allocates output to the buyers who value it the most. the market allocates buyers to the sellers who can produce the good at least cost. the quantity produced in the market maximizes the sum of consumer and producer surplus.
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
allow the market to seek equilibrium on its own.
If a market generates a side effect or externality, then free market solutions
are inefficient.
If a producer has market power (can influence the price of the product in the market) then free market solutions
are inefficient.
Consumer surplus is the area
below the demand curve and above the price.
Total surplus is the area
below the demand curve and above the supply curve.
