chapter 7 economics

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if a buyer's willingness to pay for a new Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is

$2,000

Suppose that the price of a new bicycle is $300. Sue values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike?

$200

What does an economist mean by "efficiency"?

It is a resource allocation that maximizes the total surplus received by all members of society.

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.

Is a competitive market efficient? Why or why not?

Yes, because it maximizes the area below the demand curve and above the supply curve, or total surplus.

What is the value of consumer surplus for the marginal buyer? Why?

Zero, because 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.

producer surplus is the area

above the supply curve and below the price.

consumer surplus is the area

below the demand curve and above the price

true or false if your willingness to pay for a hamburger is $3 and the price is $2, your consumer surplus is $5.

false. $3-$2=$1

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. If the price is $25, how many vases will be sold and what is the value of consumer surplus in this market?

two vases will be sold, and consumer surplus is $5

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

if buyers are rational and there is no market failure,

- free market solution are efficient - free market solutions maximize total surplus

if a market is efficient, then

- the market allocates output to the buyers who value it the most - the market allocates buyers to the sellers who can produce the good at least cost - the quantity produced in the market maximizes the sum of consumer and producer surplus.

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.

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 the marginal producer exceeds the value to the buyers.

How does a competitive market choose which producers will produce 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 because existing sellers receive a greater surplus on the units they were already going to sell and new sellers enter the market because the price is now above their cost.

What is producer surplus and how is it 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 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.

In general, if a benevolent social planner wanted to maximize the total benefits received by buyer and sellers in a market, the planner should

allow the market to seek equilibrium on its own

if a market generates a side effect or externality, then free market solutions

are inefficient

if a producer has market power (can influence the price of the product in the market) then free market solutions

are inefficient

total surplus is the area

below the demand curve and above the supply curve

an increase in the price of a good along a stationary demand curve

decreases consumer surplus

Joe has ten baseball gloves, and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize

efficiency, joe should receive the glove

true or false consumer surplus is the amount a buyer is willing to pay for a good minus the seller's cost.

false. consumer plus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays.

true or false free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

false. free markets allocate output to buyers who have a willingness to pay that is above the price.

true or false producer surplus is a measure of the unsold inventories of suppliers in a market.

false. it is a measure of the benefits of market participation to the sellers in a market.

true or false producing more of a product always adds to total surplus

false. producing above the equilibrium quantity reduces total surplus because units are produced for which cost exceeds the value to buyers.

true or false total surplus is the cost to sellers minus the value to buyers.

false. total surplus is the value to buyers minus the cost to sellers

an increase in the price of a good along a stationary supply curve

increases producer surplus

Adam Smith's "invisible hand" concept suggests that a competitive market outcome

maximizes total surplus

a buyer's willingness to pay is

that buyer's maximum amount he is willing to pay for a good.

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it.

medical care clearly enhances people's lives. therefore, we should consume medical care until

the benefit buyers place on medical care is equal to the cost of producing it.

if a benevolent social planer chooses to produce more than the equilibrium quantity of a good, then

the cost of production on the last unit produced exceeds the value placed on it by buyers

market failure

the inability of some unregulated markets to allocate resources efficiently.

willingness to pay

the maximum amount that a buyer will pay for a good.

the seller's cost of production is

the minimum amount the seller is willing to accept for a good

efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society.

equality

the property of distributing prosperity uniformly among the members of society.

welfare economics

the study of how the allocation of resources affects economic well-being.

cost

the value of everything a seller must giver up to produce a good.

if a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then

the value placed on the last unit of production by buyers exceeds the cost of production

true or false consumer surplus is a good measure of buyers' benefits if buyers are rational.

true

true or false cost to the seller includes the opportunity cost of the seller's time.

true

true or false equilibrium in a competitive market maximizes total surplus

true

true or false externalities are side effects, such as pollution, that are not taken into account by the buyer and sellers in a market.

true

true or false if the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

true

true or false producer surplus is the area above the supply curve and below the price.

true

true or false the height of the supply curve is the marginal seller's cost.

true

true or false the two main types of market failure are market power and externalities.

true

true or false the major advantage of allowing free markets to allocated resources is that the outcome of the allocation is efficient.

true


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