Microeconomics Chapter 7

Refer to the figure. If the government imposes a price ceiling of $48 in this market, then the total surplus will be

$320.... Total surplus is measured by the area above the supply curve and below the demand curve up to equilibrium

Refer to the Table. If the market price of a cookie is $2.35, then the market quantity of cookies demanded per day is

3

Producer surplus is the area

above the supply curve and below the price

If a market is efficient, then

all of the above 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, and the quantity produced in the market maximizes the sum of consumer and producer surplus

If a market generates a side effect or externality, then free market solutions

are inefficient

Refer to the Figure. At the equilibrium price, producer surplus is

$160.

If a buyer's willingness to pay for a Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is

$2,000

Refer to the figure. If producer surplus is $42, then the price of the good is

$21.....

Refer to the Table. Both the demand curve and the supply curve are straight lines. At equilibrium, producer surplus is

$48.

Refer to the Table. Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is

$96.

If the cost for Moe to mow a lawn is $5, for Larry to mow a lawn is $7, and for Curly to mow a lawn is $9, what is the value of their producer surplus if each mows a lawn and the price for lawn mowing is $10?

Ans- $9. ($10-$5) + ($10-$7) + ($10- $9)= $9.

What is consumer surplus, and how is it measured?

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays. It is measured as the area below the demand curve and above the price.

Consumer surplus is the amount a buyer is willing to pay for a good minus the sellers' cost?

False

Consumer surplus is the difference between the price buyers are willing to pay and the price which sellers are willing to sell.

False

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

False

Producer surplus is a measure of the unsold inventories of suppliers in a market.

False

Total surplus is the cost to sellers minus the value to buyers

False

Refer to the figure. Which area represents the increase in producer surplus when the price rises from P1 to P2?

HJMN

Refer to the Figure. Which area represents producer surplus when the price is P2?

HKN

Refer to the figure. When the price falls from $45 to $35, consumer surplus

Increase by $300 from consumers who were already buying the good now paying a lower price

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

True

Cost to the seller includes the opportunity cost of the sellers' time.

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

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient

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

Refer to the figure. When the price falls from P1 to P2, which area represents the increase in consumer surplus from buyers who were already buying the good before the price decrease?

VXYW

Is a competitive market efficient? Why or why not?

Yes, because it maximizes the area below the demand curve and above the supply curve, or total 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 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

Celia manufactures backpacks for a living. Celia's out-of-pocket expenses (for fabric, zippers, etc.) plus the value that she places on her own time amount to her

cost of producing backpacks

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

If buyers are rational and there is no market failure,

free market solutions are efficient and free market solutions maximize total surplus

an increase in the price of a good along a stationary supply curve

increase producer surplus

Refer to the figure. When the price falls from $45 to $35, consumer surplus

increases by $50 from new customers entering the market.

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

Producer surplus is the area above the supply curve and below the price

True

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

Refer to the Figure. If the price of the good is $60, then consumer surplus amounts to

$80.

Refer to the figure. At the equilibrium price, consumer surplus is

$800.

Total surplus is the area

Below the demand curve and above the supply curve

Refer to the table. If the market price of a cookie increases from $2.00 to $2.50, then consumer surplus

Decreases by $1.50

An increase in the price of a good along a stationary demand curve

Decreases consumer surplus

If your willingness to pay for a hamburger is $3.00 and the price is $2.00, your consumer surplus is $5.00.

False

Producing more of a product always adds to total surplus

False-- it reduces total surplus b/c units are produced for which cost exceeds the value to buyers.

Can a benevolent social planner choose a quantity that provides greater economic welfare than the equilibrium quantity generated in a competitive market? Why?

Generally, no. At any quantity below the equilibrium quantity, the market fails to produce units where the value to the marginal buyer exceeds the cost. At any quantity above the equilibrium quantity, the market produces units where the cost to the marginal producer exceeds the value to the buyers.

What happened to Mr. Painter's producer surplus when the price to paint apartments rose? Why?

He received greater producer surplus on the unit he would have produced anyways plus additional surplus on the units he now closes to produce due to the increase in price

What happened to Ms. Landlord's consumer surplus when the price of having her apartments repainted fell? Why?

Her CS rose b/c she gains surplus on the unit she would have already purchased at the old price plus she gains surplus on the new units she now purchases due to the lower price.

What does an economist mean by efficiency?

It is a resource allocation that maximizes the total surplus received by all members of society.

How does a competitive market choose which producers will produce and sell a product?

Only those producers who have costs at or below the market price will be able to produce and sell that good.

When the price of a good rises, what happens to producer surplus? Why?

Producer surplus increases b/c existing sellers receive a greater surplus on the units they were already going to sell and new sellers enter the market b/c the price is now above their cost.

What is producer surplus, and how is it measured?

Producer surplus is the amount a seller is paid for a good minus the sellers' cost of providing it. It is measured as the area below the price and above the supply curve.

What is the relationship between the buyers' willingness to pay for a good and the demand curve for that good?

The height of the demand curve at any quantity is the marginal buyers' willingness to pay. Therefore, a plot of buyers' willingness to pay for each quantity is a plot of the demand curve.

What is the relationship between the sellers' cost to produce a good and the supply curve for that good?

The height of the supply curve at any quantity is the marginal sellers' cost. Therefore, a plot of the sellers' cost for each quantity is a plot of the supply curve.

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 is placed on the last unit of production by buyers exceeds the cost of production

Equilibrium in a competitive market maximizes total surplus

True

The height of the supply curve is the marginal sellers' cost

True

The two main types of market failure are market power and externalities

True

Refer to the Figure. When the price falls from P1 to P2, which area represents the increase in consumer surplus to new buyers entering the market?

UVW

Refer to the Figure. Which area represents consumer surplus at a price of P1?

WYZ

Is it true that you cannot have too much of a good thing? Conversely, is it possible to overproduce unambiguously good things such as food, clothing, and shelter? Why or why not?

You can have too much of a good thing. Yes, any good with a positive cost and a declining willingness to pay from the consumer can be overproduced. This is because at some point of production, the cost per unit will exceed the value to the buyer and there will be a loss to a total surplus associated with additional production.

What is the value of consumer surplus for the marginal buyer? Why?

Zero, because the marginal buyer is the buyer who would leave the market if the price were any higher. Therefore, they are paying willingness to pay and are receiving no surplus.

If the cost of producing flip-flops decreases, then consumer surplus in the flip-flop market will

increase

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

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

Which of the following would not be considered a cost of Sheryl's Sweeties cupcake business?

the price buyers are willing to pay for Sheryl's cupcakes