A+ Test Prep 7.1

Refer to the Figure. Which area represents consumer surplus at a price of P1? a.WYZ b.WVXY c.UXZ d.UVW

a.WYZ Correct. The area below the demand curve and above the price is the consumer surplus.

Refer to the Figure. Which area represents consumer surplus at a price of P2? a.WYZ b.WVXY c.UXZ d.UVW

c.UXZ Correct. The area below the demand curve and above the price is the consumer surplus.

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

False Correct. Consumer surplus is the difference between the price buyers are willing to pay and the market price. The price at which sellers are willing to sell is shown on the supply curve.

Refer to the figure. When the price falls from $45 to $35, the increase in the benefit that buyers receive from the good, as the buyers themselves perceive it, is a.$350. b.$50. c.$300. d.$100.

a.$350. Correct. The benefit that buyers receive from the good, as the buyers themselves perceive it, is consumer surplus. When the price falls from $45 to $35, consumer surplus increases for two reasons. Additional consumer surplus to initial consumers is ($45−$35) × 30 units = $300. Consumer surplus from new buyers who enter the market is (1/2 × (40 − 30) × (45 − 35) =) $50.The total increase in consumer surplus is $350.

If the production technology for smart televisions improves, what happens to consumer surplus in the market for smart televisions? a.Consumer surplus increases. b.Consumer surplus will not change; only producer surplus changes. c.Consumer surplus decreases. d.Consumer surplus depends on what event led to the improvement in production technology.

a.Consumer surplus increases. Correct. When production technology improves, supply shifts to the right and the equilibrium price decreases. When the price decreases, consumer surplus increases.

Refer to the Table. If price of the product is $700, then who would be willing to purchase the product? a.Tessa b.Tessa, Joey, and John c.Tessa and Joey d.Helen, John, and Joey

a.Tessa Correct. Tessa is the only buyer whose willingness to pay is greater than or equal to the product price so only Tessa will purchase the product.

If the cost of producing flip-flops decreases, then consumer surplus in the flip-flop market will a.increase. b.remain constant. c.decrease. d.increase for some buyers and decrease for other buyers.

a.increase. Correct. When the cost of production decreases, supply shifts to the right and the equilibrium price decreases. When the price decreases, consumer surplus increases.

Refer to the Table. If the market price of a cookie is $1.75, then consumer surplus amounts to a.$0.50. b.$3.25. c.$2.25. d.$7.50.

b.$3.25. Correct. If the market price of a cookie is $1.75, then Regina buys one cookie and has $0.25 in consumer surplus ($2.00 - $1.75). Sarah buys two cookies and has $0.75 in consumer surplus [($2.50 - $1.75) + ($1.75 - $1.75)]. Tarek buys three cookies and has $2.25 in consumer surplus [($3.00 - $1.75) + ($2.50 - $1.75) + ($2.00 - $1.75)]. Summing the consumer surplus of all three buyers gives total consumer surplus of $3.25.

Refer to the Table. If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the good will sell for a.$32 or slightly less. b.$48 or slightly more. c.$40 or slightly more. d.$56 or slightly less.

b.$48 or slightly more. Correct. The buyers will bid up to their willingness to pay amount. Padraig is only willing to bid $48, while Marisol is willing to pay more. When Padraig stops bidding, Marisol will not have to bid higher to win the right to purchase the good, so the good will sell for $48 or slightly more.

Refer to the Figure. If the price of the good is $60, then consumer surplus amounts to a.$20. b.$80. c.$30. d.$120.

b.$80. Correct. If the price is $60, three units will be demanded. Consumer surplus is $30 ($90 - $60) on the first unit, an additional $30 ($90 - $60) on the second unit, and $20 ($80 - $60) on the third unit. Total consumer surplus amounts to $80.

Refer to the Table. If the market price of a cookie is $1.00, then the market quantity of cookies demanded per day is a.5 b.7. c.6. d.9.

b.7. Correct. When the market price of a cookie is $1.00, Regina buys two cookies, Sarah buys two cookies, and Tarek buys three cookies for a total of seven cookies demanded per day.

Which of the following will cause a decrease in consumer surplus? a.An improvement in production technology for the good b.Sellers expect the price of the good to be higher next month. c.A decrease in the price of one of the inputs for the good d.The imposition of a binding price ceiling in the market

b.Sellers expect the price of the good to be higher next month. Correct. When sellers expect the price of the good to be higher next month, they decrease supply today. When supply shifts to the left, the equilibrium price increases and consumer surplus decreases.

Suppose your own demand curve for sweaters slopes downward. Suppose also that, for the last sweater you bought this week, you paid a price exactly equal to your willingness to pay. Then a.you should buy more sweaters before the end of the week. b.your consumer surplus on the last sweater you bought is zero. c.you already have bought too many sweaters this week. d.your consumer surplus on all of the sweaters you have bought this week is zero.

b.your consumer surplus on the last sweater you bought is zero. Correct. Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Since the price for the last sweater was exactly equal to your willingness to pay, your consumer surplus on the last sweater you bought is zero.

Refer to the Table. If the price is $45, then consumer surplus in the market is a.$18, and Yan and Alfredo purchase the good. b.$19, and Alfredo and Padraig purchase the good. c.$14, and Marisol and Padraig purchase the good. d.$90, and Padraig and Marisol purchase the good.

c.$14, and Marisol and Padraig purchase the good. Correct. If the price is $45, only Padraig and Marisol purchase the good because they are the only buyers whose willingness to pay is greater than or equal to the price. Padraig's consumer surplus is $48 - $45 = $3 and Marisol's consumer surplus is $56 - $45 = $11. Total consumer surplus in the market is $14.

Refer to the Figure. If the price of the good is $80, then consumer surplus amounts to a.$10. b.$80. c.$20. d.$160.

c.$20. Correct. If the price is $80, then two units will be purchased. For each of the two units purchased, the consumer is willing to pay $90. Consumer surplus is the willingness to pay minus the price, so the total consumer surplus amounts to $20.

Refer to the Figure. If the government imposes a price floor of $45 in this market, then consumer surplus will decrease by a.$300. b.$450. c.$350. d.$800.

c.$350. Correct. When the price is $35, consumer surplus is ½ x 40 x (75-35) = $800. With a price floor of $45, consumer surplus is ½ x 30 x (75-45) = $450. Consumer surplus decreases by ($800 - $450) = $350.

Refer to the Figure. The value of the good to consumers minus the cost of the good to consumers amounts to $120 if the price of the good is a.$40. b.$60. c.$50. d.$65.

c.$50. Correct. Consumer surplus is $120 if the price of the good is $50. When the price is $50, 4 units will be demanded. Consumer surplus is $40 each on the first two units, $30 on the third unit, and $10 on the fourth unit, for a total of $120.

Refer to the Table. If the price of the product is $600, then who would be willing to purchase the product? a.Helen and John b.Tessa, Joey, and John c.Tessa and Joey d.Helen, John, and Joey

c.Tessa and Joey Correct. Tessa and Joey both have a willingness to pay that exceeds the product price so they will purchase the product. John and Helen both have a willingness to pay that is less than the product price so they will not purchase the product.

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? a.WYZ b.VXYW c.UVW d.UXZ

c.UVW Correct. When the price falls from P1 to P2, quantity demanded increases from Q1 to Q2 indicating the new buyers entering the market. Consumer surplus from those buyers is the area below the demand curve and above the price from Q1 to Q2, shown as area UVW.

If a consumer places a value of $37 on a particular good and if the price of the good is $40, then the a.consumer has consumer surplus of $3 if (s)he buys the good. b.market is not in equilibrium. c.consumer does not purchase the good. d.demand for the good will fall.

c.consumer does not purchase the good. Correct. When the market price exceeds a consumer's willingness to pay, the consumer does not purchase the good.

Suppose Aila and Vika attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that she will bid for a spa weekend at a resort. This maximum is called a.social benefit. b.consumer surplus. c.willingness to pay. d.social welfare.

c.willingness to pay. Correct. The maximum amount a consumer has in mind when considering a purchase is called his/her willingness to pay.

Clarence would be willing to pay $50 to attend an opera, but he buys a ticket for $45. Clarence values the opera at a.$5. b.$45. c.$15. d.$50.

d.$50. Correct. Clarence is willing to pay $50 to attend the opera, so he values the opera at $50. When he buys a ticket for $45 he has consumer surplus of $5, which is the difference between the price he is willing to pay and the price he must pay to receive the item.

Refer to the Figure. At the equilibrium price, consumer surplus is a.$40. b.$600. c.$450. d.$800.

d.$800. Correct. Consumer surplus is the area below the demand curve and above the equilibrium price, which is $35 in this market. The area of this triangle is computed as ½ x 40 x (75-35) = $800.

Refer to the Table. If the market price for the good is $40, who will purchase the good? a.Yan only b.Marisol and Padraig only c.Yan and Alfredo only d.Marisol, Padraig, and Alfredo only

d.Marisol, Padraig, and Alfredo only Correct. Marisol, Padraig, and Alfredo have a willingness to pay that is greater than or equal to the product price, so they will purchase the product. Yan has a willingness to pay that is lower than the product price so she will not purchase the product.

Refer to the Table. If the price of the product is $500, then who would be willing to purchase the product? a.Tessa b.Tessa, Joey, and John c.Tessa and Joey d.Tessa, Joey, John, and Helen

d.Tessa, Joey, John, and Helen Correct. All four buyers have a willingness to pay that is greater than or equal to the product price so they will purchase the product.

Refer to the figure. When the price falls from $45 to $35, consumer surplus a.increases by $50 from consumers who were already buying the good now paying a lower price. b.decreases by $50 from consumers who were already buying the good now paying a lower price. c.increases by $100 from new consumers entering the market. d.increases by $50 from new consumers entering the market.

d.increases by $50 from new consumers entering the market. Correct. When the price falls from $45 to $35, new buyers enter the market increasing the quantity demanded from 30 to 40. The consumer surplus from these buyers is (1/2 × (40 − 30) × (45 − 35) =) $50.

Refer the Table. If the market price of a cookie increases from $2.00 to $2.50, then consumer surplus a.decreases by $1.50. b.decreases by $2.50. c.decreases by $2.00. d.increases by $0.50.

a.decreases by $1.50. Correct. If the market price of a cookie is $2.00, then Regina buys one cookie and has no consumer surplus ($2.00 - $2.00), Sarah buys one cookie and has $0.50 in consumer surplus ($2.50 - $2.00), and Tarek buys three cookies and has $1.50 in consumer surplus [($3.00 - $2.00) + ($2.50 - $2.00) + ($2.00 - $2.00)]. Summing the consumer surplus of all three buyers gives total consumer surplus of $2.00. When the market price rises to $2.50, Regina does not buy any cookies and has no consumer surplus, Sarah buys one cookie and has no consumer surplus ($2.50 - $2.50), and Tarek buys two cookies and has $0.50 in consumer surplus [($3.00 - $2.50) + ($2.50 - $2.50)]. Summing the consumer surplus of all three buyers gives total consumer surplus of $0.50. When the price increases from $2.00 to $2.50, consumer surplus decreases by $1.50.

Refer to the Table. If the market price of a cookie is $2.35, then the market quantity of cookies demanded per day is a.1. b.3. c.2. d.4.

b.3. Correct. When the market price of a cookie is $2.35, Tarek buys two cookies and Sarah buys one cookie for a total of three cookies demanded. Regina does not buy any cookies because the price exceeds her willingness to pay for the first cookie.

Refer to the figure. When the price falls from $45 to $35, consumer surplus a.decreases by $300 from consumers who were already buying the good now paying a lower price. b.increases by $300 from consumers who were already buying the good now paying a lower price. c.increases by $400 in total. d.increases by $100 from new consumers entering the market.

b.increases by $300 from consumers who were already buying the good now paying a lower price. Correct. When the price falls from $45 to $35, buyers who were buying 30 units of the good at a price of $45 are better off because they now pay the lower price, $35. The increase in consumer surplus from those buyers is the area ($10 × 30 units =) $300.

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? a.UXZ b.WYZ c.VXYW d.UVW

c.VXYW Correct. When the price falls from P1 to P2, buyers who were already buying Q1 of the good at a price of P1 are better off because they now pay the lower price, P2. The increase in consumer surplus from those buyers is the area VXYW.

Suppose policymakers are considering a particular action in the market for heroin that would reduce consumer surplus. They may choose not to care about consumer surplus because a.they do not respect consumers' preferences in any market. b.willingness to pay does not ever reflect economic well-being. c.they do not respect the preferences that drive buyer behavior for that good. d.consumers are not the best judges of how much benefit they receive from the goods they buy.

c.they do not respect the preferences that drive buyer behavior for that good. Correct. In the case of heroin, policymakers do not respect the preferences that drive buyer behavior because heroin addicts do not get a large benefit from being able to buy heroin at a low price. From the standpoint of society, addicts are not looking after their own best interests.

Refer to the Table. Who experiences the largest loss of consumer surplus when the price of the good increases from $35 to $38? a.Alfredo b.Marisol c.Padraig d.Alfredo, Padraig, and Marisol experience the same loss.

d.Alfredo, Padraig, and Marisol experience the same loss. Correct. When the price changes, all three buyers who would be willing to purchase the good lose the same amount of consumer surplus because the price changes by the same amount for all three buyers.

Refer to the Figure. Which area represents the increase in consumer surplus when the price falls from P1 to P2? a.UXZ b.VXYW c.UVW d.UXYW

d.UXYW Correct. Consumer surplus when the price is P1 is area WYZ and consumer surplus when the price is P2 is area UXZ, so the increase in consumer surplus when the price falls from P1 to P2 is UXYW.

Consumer surplus is a good measure of economic welfare a.because it accounts for the effects of price changes on buyers and sellers. b.if policymakers are concerned about equity, but not efficiency. c.for those who only enter the market when the price of a substitute increases. d.if policymakers want to respect the preferences of buyers.

d.if policymakers want to respect the preferences of buyers. Correct. Consumer surplus is a good measure of economic welfare if policymakers want to respect the preferences of buyers.