CHAPTER 6

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does the coffee shop receive when Kevin purchases the latte? $1 $6 $2 $4

$1

Gary Parker is willing to pay $700 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $600. It costs Apple $400 to produce this iPad. How much economic surplus does Apple receive if Gary purchases this iPad? $600 $100 $700 $200

$200

Amanda Mendez goes to a local cafe and orders a sandwich. Her willingness to pay for that sandwich is $10. The price of the sandwich is $4. The cost to the cafe to produce that sandwich is $1. How much economic surplus does the café receive when Amanda purchases the sandwich? $4 $3 $1 $6

$3

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte? $2 $6 $4 $1

$4

Amanda Mendez goes to a local café and orders a sandwich. Her willingness to pay for that sandwich is $10. The price of the sandwich is $4. The cost to the cafe to produce that sandwich is $1. How much economic surplus does Amanda receive when she purchases the sandwich? $6 $10 $4 $3

$6

Alice, Amber, and Andi make and sell pottery. Alice is willing to sell a 5 inch pot for $35, Amber is willing to sell a 5 inch pot for $38, and Andi is willing to sell a 5 inch pot for $68. If each of the ladies is able to sell one 5 inch pot for $70, what is their combined producer surplus? combined producer surplus:

$69

Which statement is TRUE? -A competitive market pushes the quantity produced to its efficient level. -When the efficient quantity is produced, consumer surplus is minimized. -When the efficient quantity is produced, producer surplus is minimized. -When supply is greater than demand, producer surplus is less than consumer surplus.

A competitive market pushes the quantity produced to its efficient level.

Assume Aaron and José each own a small ranch, and each produces milk and cheese. One of them is better than the other at producing both milk and cheese (but we do not know who). Which of the statements cannot be true regarding absolute or comparative advantage? -José could have an absolute advantage in producing both milk and cheese. -Aaron could have an absolute advantage in producing milk. -José could have a comparative advantage in producing cheese. -José could have an absolute advantage in producing cheese. -Aaron could have a comparative advantage in producing both milk and cheese.

Aaron could have a comparative advantage in producing both milk and cheese.

Which describes the fairness-efficiency trade‑off? -There is always a more equitable outcome that is also more efficient. -The least efficient economic outcome is the fairest outcome. -Government intervention can increase efficiency in a market. -Actions intended to make economic outcomes fairer can cause efficiency to decrease.

Actions intended to make economic outcomes fairer can cause efficiency to decrease.

Alice, Amber, and Andi make and sell pottery. Alice is willing to sell a 5 inch pot for $35, Amber is willing to sell a 5 inch pot for $38, and Andi is willing to sell a 5 inch pot for $68 If the price of a 5 inch pot is $45$45, which of the ladies will sell their pots?

Alice and Amber

In a market without prices, where goods are allocated by a central planner, which is likely to happen? -Inputs, like workers and raw materials, will not go to the companies that can use them to produce the most value. -Consumers will not receive the amount of any given product that they want. -Consumers will not receive the products they want, and new products are unlikely to appear. -All of the above.

All of the above.

Which transaction fails to produce gains from trade for both buyers and sellers? -Charlene's job requires her to work on an oil rig, and she must alternate two weeks on the rig and two weeks off. When she is on the rig, she rents out her apartment through Airbnb. -Elijah decides that his family should eat more healthy meals, but they are very pressed for time. He decides to subscribe to a service that sends healthy pre-planned meals to his home three times a week. -Callie turns down an extra shift at work to take care of household chores. -Neighbors Jordan and Chelsea are both working parents. They can hire a single babysitter to care for both of their toddlers for 75 percent of what they would collectively have to pay two separate babysitters.

Callie turns down an extra shift at work to take care of household chores.

Which statement about consumer surplus is TRUE? -Consumer surplus is the gains from trade on the part of the consumer that result from a market transaction. -Consumer surplus is the difference between the minimum price the consumer is willing to pay and the market price. -Total consumer surplus is equal to the price the consumers paid multiplied by the quantity they purchased. -Consumer surplus is the gross benefit to consumers from the exchange that occurs in a market.

Consumer surplus is the gains from trade on the part of the consumer that result from a market transaction.

Which of the following statements about economic surplus is FALSE? -Economic surplus equals marginal benefit minus marginal cost. -Economic surplus is consumer surplus plus producer surplus. -Economic surplus is the area below the supply curve, above the demand curve, and to the right of quantity sold. -Economic surplus is the area between the supply curve and the demand curve to the left of quantity sold.

Economic surplus is the area below the supply curve, above the demand curve, and to the right of quantity sold.

Which of the following pieces of advice is consistent with the principle of comparative advantage? -Relative preferences are key to understanding who should do what. -Focus on what you do best. -If someone else is faster than you at a task, trade with them, so they do it for you. -Focus on what you are relatively good at doing, even if you are not the best at it.

Focus on what you are relatively good at doing, even if you are not the best at it.

Suppose resources are directed by means of a central planner who receives information on all the different uses of these resources. Why might sellers have an incentive to not provide truthful information to the central planner? -In order to continue producing their product, sellers may overstate the importance of that product. -The information system is too complex to provide correct information. -Sellers want to be able to charge the minimum price for their product. -They want resources to be able to travel to the highest-value uses possible.

In order to continue producing their product, sellers may overstate the importance of that product.

Which statement is NOT an important function of an efficient market? -It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay. -It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost. -It ensures that every consumer who makes a purchase values the good less than every seller who makes a sale, so that all transactions are mutually beneficial. -It ensures that every potential buyer who doesn't make a purchase values the good less than every potential seller who doesn't make a sale, so that no mutually beneficial transactions are missed.

It ensures that every consumer who makes a purchase values the good less than every seller who makes a sale, so that all transactions are mutually beneficial.

Which of the following is NOT one of the three key roles that prices play in markets? -Prices have purchasing power. -Prices are signals. -Prices aggregate information. -Prices create incentives.

Prices have purchasing power

Barlow and Rusia own a nail salon. A manicure takes Barlow 60 minutes to complete and takes Rusia 45 minutes to complete. Completing a pedicure takes Barlow 45 minutes and takes Rusia 30 minutes. Who has a comparative advantage in pedicures? -Barlow because he has a lower opportunity cost. -Rusia because she has a lower opportunity cost. -Rusia because she is faster. -Barlow because he is faster.

Rusia because she has a lower opportunity cost.

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece. Around this time, blacksmiths developed iron- and steel-making techniques. After the development of iron, did the supply or demand for bronze shift? -The demand for bronze shifted to the left because of the availability of iron and steel. -The supply for bronze shifted to the right because of higher incentives to produce it. -The demand for bronze shifted to the right because of the availability of iron and steel.

The demand for bronze shifted to the left because of the availability of iron and steel.

Katie is much faster than her husband, Brett, at putting up a tent and starting a fire. Who should take care of these tasks on their camping trip if they want to maximize their time sitting around a campfire? -Katie should be in charge, directing the work while Brett does it. -Katie should complete both tasks because she is a more efficient worker. Brett could watch and learn from her. -They each have a comparative advantage in a particular task, and they should focus on doing that. Katie can help Brett when she finishes her task. -They should complete both tasks together, sharing all the work.

They each have a comparative advantage in a particular task, and they should focus on doing that. Katie can help Brett when she finishes her task.

Efficient production occurs when: -output is minimized and cost is falling. -the marginal cost curve is downward sloping. -a given level of cost is able to produce a higher output level than before. -a given level of output is produced at the lowest possible cost.

a given level of output is produced at the lowest possible cost.

One question that economics students often ask is, "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question: "Everyone" and "No one." Make selections to fill in the blanks to make sense of both answers. a. Everyone sets the price because everyone has ______ influence in the market. b. No one sets the price because all suppliers want a ______ price and all consumers want a ______ price.

a- small b- higher; lower

Producer surplus is shown graphically as the area -above the supply curve and above the market price. -above the supply curve and below the market price. -under the demand curve and below the market price. -under the demand curve and above the market price.

above the supply curve and below the market price.

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. Production represents consumer preferences

allocative efficiency

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. The price consumers pay is equal to the marginal cost of producing the good

allocative efficiency

Consumer surplus is the amount that consumers: -are willing to pay for a good minus what they actually pay for it. -actually pay for a good. -are willing to pay for a good. -are willing to pay for a good plus the amount that they actually pay for it.

are willing to pay for a good minus what they actually pay for it.

People gain consumer surplus when they purchase an item: -at a price above marginal revenue but lower than the cost of production. -at an equitable price. -at a price below the value of the benefit they receive from the item. -with a marginal benefit below the price of the item.

at a price below the value of the benefit they receive from the item.

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece. Around this time, blacksmiths developed iron- and steel-making techniques. How is the increasing price an incentive? -because it clears the market and both sellers and buyers are satisfied -because it rewards people who make bronze less scarce -because it discourages people about the future of the economy

because it rewards people who make bronze less scarce

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece. Around this time, blacksmiths developed iron- and steel-making techniques. How is the increasing price of bronze a signal? -because it clears the market, where both consumers and producers are satisfied -because it tells producers and consumers that bronze is getting harder to produce and needs to be conserved -because it provides a prediction about the future, including when wars will start and end

because it tells producers and consumers that bronze is getting harder to produce and needs to be conserved

Consumer surplus is represented by the area _____ the demand curve and _____ the price that the consumer pays. above; below above; above below; above below; below

below; above

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction. -only the buyer -neither the buyer nor the seller -both the buyer and the seller -only the seller

both the buyer and the seller

The market solves the information problem when allocating resources by: -collapsing all the relevant information about inputs of the good into the level of output. -aggregating all the relevant information about the output of the good into the demand curve. -collapsing all the relevant information about uses of the good into its price. -aggregating all the relevant information about the output of the good into the supply curve.

collapsing all the relevant information about uses of the good into its price.

The "invisible hand" refers to the notion that -competitive markets send resources to their highest valued uses. -marginal cost increases as more is produced. -government intervention is necessary to ensure efficiency. -no matter what allocation method is used, the resulting production is efficient. -marginal benefit decreases as more is consumed.

competitive markets send resources to their highest valued use

Consumer surplus for an individual buyer is equal to the: -consumer's willingness to pay for the good, or the marginal benefit from the good, plus the marginal cost of producing the good. -price of the good plus the marginal cost of producing the good. -consumer's willingness to pay for the good, or the marginal benefit from the good, minus the price paid for the good. -marginal cost of the good minus the consumer's willingness to pay for the good or the marginal benefit from the good.

consumer's willingness to pay for the good, or the marginal benefit from the good, minus the price paid for the good.

The market solves the incentive problem when allocating resources because the: -suppliers will produce the good only if its cost is less than the value of use. -suppliers will produce the good only if its value of use is less than the cost. -consumers will pay for the good only if its price is greater than the value of use. -consumers will pay for the good only if its value of use is greater than the price.

consumers will pay for the good only if its value of use is greater than the price

When the economic surplus in a market is less than it would be if the market were efficient, the market is experiencing: -a situation in which marginal benefit equals marginal cost. -deadweight loss. -an inverse externality. -asymmetry problems.

deadweight loss.

Efficient allocation of output requires that: -each unit of output will go to the person who will get the highest marginal benefit from it. -output will be distributed evenly across consumers and producers. -each unit of output will be produced at minimum fixed cost. -consumers will each pay a price equal to the marginal benefit received from the good.

each unit of output will go to the person who will get the highest marginal benefit from it.

At the equilibrium quantity, marginal benefit is _______ marginal cost. Consuming _______means that some mutually beneficial exchanges do not take place, and producing ______means that some goods go unsold.

equal to; less; more

For suppliers to sell more than the equilibrium quantity, it would mean that: -the gains from trade increase. -suppliers gain from trade while buyers are unaffected. -it costs suppliers more to produce the good than its value to buyers. -it costs suppliers less to produce the good than its value to buyers.

it costs suppliers more to produce the good than its value to buyers.

Two ways to calculate economic surplus are _____ and _____. -marginal benefit minus price; marginal cost minus price -consumer surplus minus producer surplus; marginal benefit plus marginal cost -price minus marginal benefit; price minus marginal cost -marginal benefit minus marginal cost; consumer surplus plus producer surplus

marginal benefit minus marginal cost; consumer surplus plus producer surplus

To maximize economic surplus, keep increasing output as long as -marginal benefits equal marginal costs. -marginal benefits exceed marginal costs. -total benefits exceed total costs. -total benefits equal total costs.

marginal benefits exceed marginal costs.

Markets distribute production across companies in a way that: -minimizes production. -maximizes production. -maximizes the number of firms. -minimizes costs.

minimizes costs.

Classify each of the statements as an example of positive or normative analysis. International trade should be limited because it can cause some workers to lose their jobs

normative

Classify each of the statements as an example of positive or normative analysis. The US should impose import quotas in the market for consumer electronics to help domestic workers

normative

Classify each of the statements as an example of positive or normative analysis. The sugar quota in the US is a good public policy and should be made stronger

normative

Determine if the items represent an example of positive economics or normative economics. Social welfare spending in Sweden occupies too large a portion of the national budget.

normative

Determine if the items represent an example of positive economics or normative economics. The richest 1% of Americans should pay more taxes than the rest of the 99%.

normative

Identify whether each statement is positive or normative. At 8%, unemployment in the United States is too high

normative

Identify whether each statement is positive or normative. The richest 1% should be paying more in taxes

normative

statements say something about how the world ought to be.

normative

Congratulations! After working your way through college as a certified nursing assistant (CNA), you have now completed your nursing degree and are designated as a registered nurse (RN)! You are now a functioning RN at the hospital. Some of the tasks between a CNA and an RN overlap, but you should delegate some tasks to CNAs because they have a lower ________ of completing the tasks. Your ______ allows you to take on more complex nursing tasks.

opportunity cost; specialization

Classify each of the statements as an example of positive or normative analysis. Higher tariffs on imported automobiles would decrease the demand for the foreign made cars

positive

Classify each of the statements as an example of positive or normative analysis. International trade makes some people better off and some people worse off

positive

Classify each of the statements as an example of positive or normative analysis. The sugar quota in the United States costs consumers $6.08 billion a year

positive

Determine if the items represent an example of positive economics or normative economics. A decrease in the supply of coconut will increase the price of German chocolate cake, a good which requires coconut shavings as a key ingredient.

positive

Determine if the items represent an example of positive economics or normative economics. As minimum wage increases, the prices of all goods and services also tends to increase.

positive

Identify whether each statement is positive or normative. The richest 1% of the population earn 24% of the total income

positive

Identify whether each statement is positive or normative. The unemployment rate is 8.2%

positive

statements say something that describes how the world currently is.

positive

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. Goods and services are produced at their lowest opportunity cost

productive efficiency

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. The maximum output is obtained with given resources

productive efficiency

Select the correct definition of the term "comparative advantage." -the ability to produce a good or service at a lower opportunity cost than another -the ability to produce less of a good or service than another over a specified time period -the ability to produce more of a good or service than another over a specified time period -a nation offering more favorable trade policy with its allies than with other countries -the ability to produce a good or service at a higher opportunity cost than another

the ability to produce a good or service at a lower opportunity cost than another

Daniel is a baker who has decided to create his own brand of chain restaurants, Short and Sweet. He negotiates with three suppliers for weeks and ultimately signs contracts with these suppliers. Francis, who owns a new sugar plantation, agrees to sell Daniel freshly refined sugar on the condition that Daniel helps him advertise his brand of sugar. Diana runs an orchard and provides Daniel with fruit. She enters into the partnership knowing that she can dramatically increase her profits if she can sell fruit to Daniel. Lastly, Ryan, who owns a mill, decides to purchase a new piece of machinery so that he can sell Daniel flour at a lower price than his competitor. The end result of Daniel's interactions with his suppliers is that folks in his neighborhood have a chance to buy delicious baked goods at reasonable prices. Daniel's situation with his suppliers is an example of -a recession. -a command economy. -the invisible hand. -market failure.

the invisible hand.

Producer surplus is the difference between -the market price and the minimum price a seller is willing to accept. -the maximum price a seller is willing to accept and the market price. -the market price and the minimum price a buyer is willing to pay. -the maximum price a buyer is willing to pay and the market price.

the market price and the minimum price a seller is willing to accept.

Harrison is willing to buy the last ticket to the Billy Elliot play for $15, while Stefania is willing to pay $25. Harrison is first in line and buys a ticket for $15. He then resells his ticket to Stefania for $20. By reselling the ticket instead of going to the play himself, Harrison caused: -the sum of the consumer and producer surplus to increase. -the sum of the consumer and producer surplus to decrease. -a deadweight loss of $5. -the consumer surplus to decrease and the producer surplus to increase.

the sum of the consumer and producer surplus to increase.

Chose whether this sentence is typical for a market or nonmarket economies Firms attempt to satisfy consumers' desires

typical of market economies

Chose whether this sentence is typical for a market or nonmarket economies Prices are flexible

typical of market economies

Chose whether this sentence is typical for a market or nonmarket economies Rational decision making guides people

typical of market economies

Chose whether this sentence is typical for a market or nonmarket economies Consumers cannot make their wishes known to businesses

typical of nonmarket economies

Chose whether this sentence is typical for a market or nonmarket economies Information is limited and resources are misallocated

typical of nonmarket economies

Chose whether this sentence is typical for a market or nonmarket economies Prices are fixed

typical of nonmarket economies

Consumer Surplus can be found... (graphically)

using the triangle created above the equilibrium price and below the demand line (1/2*B*H)

producer surplus can be found... (graphically)

using the triangle created below the equilibrium price and to the left of the supply line (1/2*B*H)

Juan McDonald is willing to pay $600 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $700. It costs Apple $400 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. will not; only Apple will not; only Juan will; neither Juan nor Apple will; both Juan and Apple

will not; only Apple

Juan McDonald is willing to pay $900 for a new iPad. He offers to pay $800 for an iPad at the Apple store. It costs Apple $700 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because ____ would be better off due to the transaction. will; neither Juan nor Apple will; both Juan and Apple will not; only Apple will not; only Juan

will; both Juan and Apple

The efficient quantity prevails in a market when the market: -yields the largest possible economic surplus. -has the lowest average cost. -costs exceed benefit by the largest margin. -has benefit equal to cost.

yields the largest possible economic surplus.