Problem Set #5: Welfare Economics (Consumers, Producers, and the Efficiency of Markets)

Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market? a. $625 b. $3,125 c. $2,500 d. $5,625

a. $625

When the demand for a good increases and the supply of the good remains unchanged, consumer surplus: a. increases. b. may increase, decrease, or remain unchanged. c. is unchanged. d. decreases.

b. may increase, decrease, or remain unchanged.

Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is: a. $64. b. $56. c. $40. d. $12

a. $64.

Refer to Figure 7-5. If the demand curve is D and the supply curve shifts from S' to S, what is the change in producer surplus? a. Producer surplus increases by $1,875. b. Producer surplus decreases by $1,875. c. Producer surplus decreases by $625. d. Producer surplus increases by $625.

a. Producer surplus increases by $1,875.

Which of the following will cause an increase in producer surplus? a. The price of a substitute increases b. Buyers expect the price of the good to be lower next month c. The imposition of a binding price ceiling in the market d. Income increases and buyers consider the good to be inferior

a. The price of a substitute increases

A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise . As a result, the consumer surplus in the market for red grapes: a. decreases, and the consumer surplus in the market for red wine decreases. b. increases, and the consumer surplus in the market for red wine decreases. c. decreases, and the consumer surplus in the market for red wine increases. d. increases, and the consumer surplus in the market for red wine increases.

a. decreases, and the consumer surplus in the market for red wine decreases.

Refer to Table 7-11. At a price of $2.00, total surplus is a. smaller than it would be at the equilibrium price. b. the same as it would be at the equilibrium price. c. larger than it would be at the equilibrium price. d. There is insufficient information to make this determination.

a. smaller than it would be at the equilibrium price.

A simultaneous increase in both the demand for tablets and the supply of tablets would imply that: a. both the value of tablets to consumers and the cost of producing tablets has decreased. b. the value of tablets to consumers has increased, and the cost of producing tablets has decreased. c. both the value of tablets to consumers and the cost of producing tablets has increased. d. the value of tablets to consumers has decreased, and the cost of producing tablets has increased.

b. the value of tablets to consumers has increased, and the cost of producing tablets has decreased.

Refer to Table 7-3. If you have two (essentially) identical tickets that you sell to the group in an auction, assuming that each person can only buy one ticket, which of the following is closest to the selling price for each ticket? a. $61 b. $51 c. $26 d. $2

c. $26

Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, total surplus will be a. $60. b. $42. c. $54. d. $48.

c. $54.

Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, producer surplus will be a. $24. b. $26. c. $16. d. $18.

d. $18.

Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, consumer surplus will be a. $21. b. $42. c. $28. d. $36.

d. $36.

Refer to Table 7-2. Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22? a. Ming-la b. Quilana c. Wilbur d. All three buyers experience the same loss of consumer surplus.

d. All three buyers experience the same loss of consumer surplus.

Steak and chicken are substitutes. A sharp reduction in the supply of steak would: a. decrease consumer surplus in the market for steak and decrease producer surplus in the market for chicken. b. increase consumer surplus in the market for steak and increase producer surplus in the market for chicken. c. increase consumer surplus in the market for steak and decrease producer surplus in the market for chicken. d. decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken

d. decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.

A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it: a. minimizes the level of welfare payments. b. maximizes both the total revenue for firms and the quantity supplied of the product. c. minimizes costs and maximizes output. d. maximizes the combined welfare of buyers and sellers .

d. maximizes the combined welfare of buyers and sellers .