CH 7: short answer questions
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 marginal producer exceeds the value to the buyers.
how does a competitive market choose which producers 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 seller's receive a greater surplus on the units they were already going to sell and new sellers entire the market b/c the price is now above their cost.
what is producer surplus, and how is measured?
producer surplus is the amount a seller is paid for a good minus the seller's cost of providing it. it is measured as the area below the price and above the supply curve.
what is the value of consumer surplus for the marginal buyer? and why?
zero, b/c the marginal buyer is the buyer who would leave the market if the price were any higher. therefore, they are paying their willingness to pay and are receiving no surplus.
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?
($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.
what does an economist mean by "efficiency"?
It is a resource allocation that maximizes the total surplus received by all members of society
is a competitive market efficient? why or why not?
Yes, b/c it maximizes the area below the demand curve and above the supply curve, or total. surplus
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 buyer's 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 seller's cost. therefore, a plot of the sellers' cost for each quantity is a plot of the supply curve.
