chapter 7 MICRO

Consumer surplus is the area

below the demand curve and above the price

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

decreases consumer surplus

Joe has ten pairs of football boots and Sue has none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots at €100 and Sue values a pair of boots at €40, then to maximize

efficiency Joe should receive the glove

Consumer surplus is the buyer's willingness to pay minus the seller's cost.

false

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price

false

If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00.

false

Producer surplus is a measure of the unsold inventories of suppliers in a market.

false

Producing more of a product always adds to total surplus

false

Total surplus is the seller's cost minus the buyer's willingness to pay.

false

If buyers are rational and there is no market failure

free market solutions are efficient and free market solutions maximize total surplus.

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

increases producer surplus

The seller's cost of production is

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

If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

true

Producer surplus is the area above the supply curve and below the price.

true

If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is

€2,000

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

Producer surplus is the area

above the supply curve and below the price

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers 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

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 they are willing to pay for a good

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 planner 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

If a market is efficient, then

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 , the market allocates output to the buyers that value it the most.

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

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

true

Cost to the seller includes the opportunity cost of the seller's time.

true

Equilibrium in a competitive market maximizes total surplus

true

Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market

true

The height of the supply curve is the marginal seller's cost.

true

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient.

true

The two main types of market failure are market power and externalities

true

Suppose that the price of a new bicycle is €300. Natalie 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 Natalie buys a new bike?

€200