Econ-200 Chapter 7

Total Surplus

(value to buyers) - (cost to sellers) CS + PS

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.

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

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 give up to produce a good.

Producer surplus is the area a. above the supply curve and below the price. b. below the supply curve and above the price. c. above the demand curve and below the price. d. below the demand curve and above the price. e. below the demand curve and above the supply curve.

a. above the supply curve and below the price

If a buyers 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 a. $0 b. $2,000 c. $18,000 d. $20,000 e. $38,000

b. $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? a. $100 b. $200 c. $300 d. $400 e. $500

b. $200

If a market is efficient, then a. the market allocates output to the buyers who value it the most b. the market allocates buyers to the sellers who can produce the good at least cost. c. the quantity produced in the market maximizes the sum of consumer and producer surplus d. all of the above are true e. none of the above are true

d. all of the above are true

Consumer surplus is the area a. above the supply curve and below the price b. below the supply curve and above the price c. above the demand curve and below the price d. below the demand curve and above the price e. below the demand curve and above the supply curve

d. below the demand curve and above the price.

The seller's cost of production is a. the sellers consumer surplus b. the sellers producer surplus c. the maximum amount the seller is willing to accept for a good. d. the minimum amount the seller is willing to accept for a good e. none of the above

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

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then a. producer surplus is maximized. b. consumer surplus is maximized. c. total surplus is maximized. d. the value placed on the last unit of production by buyers exceeds the cost of production e. the cost of production on the last unit produced exceeds the value placed on it by the buyers.

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

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then a. producer surplus is maximized. b. consumer surplus is maximized. c. total surplus is maximized. d. the value placed on the last unit of production by buyers exceeds the cost of production e. the cost of production on the last unit produced exceeds the value placed on it by buyers.

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

Laissez faire

the notion that govt should not interfere with the market

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 a. efficiency, Joe should receive the glove b. efficiency, Sue should receive the glove c. consumer surplus, both should receive a glove d. equity, Joe should receive the glove

a. efficiency, Joe should receive the glove

An increase in the price of a good along a stationary supply curve a. increases producer surplus b. decreases producer surplus c. improves market equity d. does all of the above

a. increases producer surples

An increase in the price of a good along a stationary demand curve a. increases consumer surplus b. decreases consumer surplus c. improves the material welfare of the buyers d. improves market efficiency

b. decreases consumer surplus

Adam Smith's "invisible hand" concept suggests that a competitive market outcome a. minimizes total surplus b. maximizes total surplus c. generates equality among the members of society d. both b and c

b. maximizes total surplus

Medical care clearly enhances people's lives. Therefore, we should consume medical care until a. everyone has as much as they would like b. the benefit buyers place on medical care is equal to the cost of producing it. c. buyers receive no benefit from another unit of medical care d. we must cut back on the consumption of other goods.

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

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? a. One vase will be sold, and consumer surplus is $30 b. One vase will be sold, and consumer surplus is $5 c. Two vases will be sold, and consumer surplus is $5 d. Three vases will be sold, and consumer surplus is $0 e. Three vases will be sold, and consumer surplus is $80

c. Two vases will be sold, and consumer surplus is $5

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should a. choose a price above the market equilibrium price b. choose a price below the market equilibrium price c. allow the market to seek equilibrium on its own d. choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers).

c. allow the market to seek equilibrium on its own

If a market generates a side effect or externality, then free market solutions a. generate equality b. are efficient c. are inefficient d. maximize producer surplus

c. are inefficient

If a producer has market power (can influence the price of the product in the market) then free market solutions a. generate equality b. are efficient c. are inefficient d. maximize consumer surplus

c. are inefficient

A buyers willingness to pay is a. that buyers consumer surplus b. that buyers producer surplus c. that buyers maximum amount he is willing to pay for a good d. that buyers minimum amount he is willing to pay for a good e. none of the above

c. that buyers maximum amount he is willing to pay for a good

If buyers are rational and there is no market failure, a. free market solutions are efficient b. free market solutions generate equality c. free market solutions maximize total surplus d. all of the above are true e. a and c are correct.

e. a and c are correct

Total surplus is the area a. above the supply curve and below the price. b. below the supply curve and above the price. c. above the demand curve and below the price. d. below the demand curve and above the price. e. below the demand curve and above the supply curve.

e. below the demand curve and above the supply curve.