Chapter 7: Consumers, Producers, and Efficiency of Markets

21. If an allocation of resources is efficient, then A. consumer surplus is maximized. B. producer surplus is maximized. C. all potential gains from trade among buyers are sellers are being realized. D. the allocation achieves equality as well.

C. all potential gains from trade among buyers are sellers are being realized.

18. At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling ten danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for A. $5.00 each. B. $2.00 each. C. $0.50 each. D. $3.50 each.

D. $3.50 each.

20. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate A. increases, and producer surplus increases. B. increases, and producer surplus decreases. C. decreases, and producer surplus increases. D. decreases, and producer surplus decreases.

D. decreases, and producer surplus decreases.

Total surplus (TS)

Gain for trading in market CS+PS (Area above price and below demand) + (Area above supply and below price)

Producer surplus (PS)

Price-Cost Only supply is price>cost Area above supply and below price Price and PS move in same direction (P inc/PS inc or P dec/PS dec)

Consumer surplus (CS)

WTP-Price Area above price and below demand curve Price and CS move in opposite directions (P inc/CS dec or P dec/CS inc) Does not apply if price>WTP

An allocation of resources if efficient if...

it maximizes total surplus

Willingness to pay (WTP)

maximum amount a buyer is willing to pay for a good

Welfare economies

study of how the allocation of resources affects economic well being