Chapter 4

If Sue is willing to pay $40 for a $50 sweater, how much consumer surplus will she get from buying it? $10 $0 $40 -$10

$0 Sue does not buy the sweater because her willingness to pay is less than market price. Therefore, she does not experience consumer surplus.

Suppose the price of a tablet is $279. Dana is willing to pay $200. What is Dana's consumer surplus? $179 $379 none $200

none Consumer Surplus = Willingness to Pay − Price. A consumer will not buy the product if price is greater than her willingness to pay.

Suppose the price of a table is $179. Kimdle Co. is willing to sell the table for $79. What is Kimdle Co.'s producer surplus? $100 $179 $21 $258

$100 Producer Surplus = Price − Willingness to Sell.

Price controls are sometimes used when the natural operation of free markets leads to: A. positive externalities. B. undesirable outcomes. C. an efficient distribution of goods. D. a trade deficit.

undesirable outcomes. Governments are motivated to intervene in markets through price controls because normal operation of free markets can produce undesirable problems.

How do you calculate the TOTAL consumer surplus for multiple consumers?

by adding all of the individual consumer surpluses.

price floor

A minimum price established by government for a product or service. When the price floor is set above equilibrium, a surplus results.

How do you calculate producer surplus?

Price - Willingness-to-sell = producer surplus

consumer surplus

The difference between what consumers (as individuals or the market) would be willing to pay and the market price. It is equal to the area above market price and below the demand curve.

market failure

When markets fail to provide a socially optimal level of output, and will provide output at too high or low a price.

The state of Florida caps the price of homeowners insurance. As a result, State Farm pulled out of the homeowners insurance market in Florida. What was the likely result of this binding price ceiling? a decrease in the quantity demanded of homeowners insurance coverage a shortage of homeowners insurance coverage a surplus of homeowners insurance coverage an increase in the quantity supplied of homeowners insurance coverage

a shortage of homeowners insurance coverage When a price ceiling is set below the equilibrium, more homeowners want insurance, but fewer insurance companies want to provide it, and shortages result.

Collectors and antiques dealers who shop yard sales and flea markets might have a better idea of the values of the items being sold than the sellers do. This is an example of: asymmetric information. producer surplus. an external cost. an external benefit.

asymmetric information. Asymmetric information occurs when one party to a transaction has more information than the other party.

Suppose the price of a tablet is $200 and there are three buyers in the market. Dana is willing to pay $190, Brit is willing to pay $195, and Jonah is willing to pay $197. How much consumer surplus is there in this market? $15 $200 none $18

none Consumer Surplus = Willingness to Pay − Price. Consumers will not buy the product if price is greater than their willingness to pay. In this case, no one buys the product because the price is greater than the willingness to pay.

The difference between what a producer is willing to sell a good or service for and the price a producer actually receives is called: external benefit. producer surplus. consumer surplus. external cost.

producer surplus. Producer surplus is the difference between market price and the price at which firms are willing to supply the product.

A price ceiling is a government-mandated maximum price at which a good can be sold. A. True B. False

True This form of price control is designed to insulate consumers from the price-increasing effects of market forces. These controls are rarely used and are normally reserved for external events that cause a dramatic disruption in the operation of a market, such as wars, natural disasters, or politically driven oil embargos.

Which of the following is an example of a price ceiling? a home in foreclosure that is auctioned by the bank a car that cannot be sold for less than $10,000 because the salesman would not make a profit on the sale a law stating that gasoline cannot be sold for less than $5 per gallon a rent-control law setting a maximum price for housing

a rent-control law setting a maximum price for housing A price ceiling is a government-set maximum price.

What are four major reasons why markets fail?

a lack of competition, a mismatch of information, external benefits or costs, and the existence of public goods

The expansion of the Internet and sites like Yelp has probably reduced: consumer surplus. the problem of asymmetric information. external costs. external benefits.

the problem of asymmetric information. Asymmetric information occurs when one party to a transaction has more information than the other party. The Internet and eBay have made information more readily available.

Markets work most efficiently when: buyers and sellers have different information. there are many public goods. there are many buyers and sellers. there are many external costs and benefits.

there are many buyers and sellers. Competitive markets, with many buyers and sellers, are more likely to be efficient than noncompetitive markets

Which of the following occurs when a transaction between two parties has a negative impact on a third party not involved with the transaction? lack of competition free trade external cost external benefit

external cost Pollution and congestion are two examples of external costs.

When price ceiling for a good is set below the free market equilibrium the result is a(n): A. supply. B. equilibrium. C. surplus. D. shortage.

shortage. If the price ceiling is set below the free market equilibrium price, the quantity demanded exceeds the quantity supplied. This causes a shortage, also called excess demand.

Miguel sells double-scoop ice cream cones at the market equilibrium price of $4. Assume the government intervenes and sets the price at $6. Benny buys double-scoop ice cream from Miguel at the higher price. April no longer buys double-scoop ice cream cones because the price is too high. What has happened to total surplus in this market? Consumer surplus increases and producer surplus decreases. Total surplus decreases. Total surplus increases. Total surplus is unchanged.

Total surplus decreases. Deadweight loss occurs when prices are set above equilibrium, so total surplus decreases.

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. Madison buys new tires at the higher price, as she would have been willing to pay $75. Marcus no longer buys new tires because the price is too high. What has happened to consumer surplus in this market? Consumer surplus increases. Consumer surplus decreases. Consumer surplus falls to zero. Consumer surplus is unchanged.

Consumer surplus decreases. Madison's consumer surplus falls when she pays a higher price. Marcus exits the market and no longer has any consumer surplus. Therefore, total consumer surplus falls.

Airline ticket prices typically increase during the holidays. Madeline paid $800 for a ticket to San Francisco over the holiday break. Four months ago, she paid $450 to fly to San Francisco. Who benefits from this price increase? Consumers who no longer purchase the airline ticket benefit. Both Madeline and the airline benefit. Madeline benefits because her consumer surplus increased when she paid a higher price for the ticket. The airlines still able to sell tickets during the holiday season benefit.

The airlines still able to sell tickets during the holiday season benefit. Producer surplus rises for suppliers who are able to sell the product at a higher price.

An effective (or binding) price ceiling is a situation in which: A. the government sets the maximum price for a good above its free market equilibrium price. B. government sets the maximum price for a good below its free market equilibrium price. C. competing firms collude to set the price of a good above its free market equilibrium price. D. consumer unions bargain to set the price of a good below its free market equilibrium price.

government sets the maximum price for a good below its free market equilibrium price. A price ceiling is effective only if it is set below the free market equilibrium price. An effective ceiling prevents the price from rising to market equilibrium levels.

Suppose the price of a tablet is $99. Kimdle Co. is willing to sell the tablet for $79; Maxis Tech is willing to sell the tablet for $100; Dexus Co. is willing to sell the tablet for $115. How much producer surplus do the three sellers receive? $23 $3 $19 $20

$20 Producer Surplus = Price − Willingness to Sell. A producer will not sell the product if price is less than its willingness to sell. In this case, only Kimdle Co. will provide the product to the market because price is greater than willingness to sell. Kimdle Co. has $20 worth of producer surplus.

deadweight loss

The reduction in total surplus that results from the inefficiency of a market not in equilibrium.

Madeline normally flies to San Francisco to visit family over the holidays, but airline ticket prices have increased by $400. Madeline no longer can afford this ticket, so she decides to stay home for the holidays. Who benefits from this price increase? the airlines still able to sell tickets during the holiday season other consumers who still purchase the airline ticket both Madeline and the airline Madeline, because her consumer surplus increased when she decided not to purchase the ticket

the airlines still able to sell tickets during the holiday season Producer surplus rises for suppliers that can sell the product at a higher price.

asymmetric information

Occurs when one party to a transaction has significantly better information than another party.

What might be done with the surplus caused by a government agricultural price support program? A. Some of the surplus might be used for school lunches and in other government institutions; other parts of the surplus might be destroyed. B. The farmers producing the surplus might be asked to sell the excess above the market price. C. The surplus could be used as seed for the next year's crop. D. The surplus might be sold to other countries above the world market price.

Some of the surplus might be used for school lunches and in other government institutions; other parts of the surplus might be destroyed. When a government price support (price floor) is set above the equilibrium price for the commodity, it causes a surplus. The surplus is frequently purchased by the government so that the excess does not enter the market depressing market prices below the desired level.

If a price floor is effective, all suppliers benefit from equilibrium prices below the free market prices. A. True B. False

False To be effective a price floor must be placed above the free market equilibrium price and not below.

Price controls provide only benefits but no costs to society. A. True B. False

False While often price controls benefit a segment of society; this type of government intervention has a tradeoff involving costs. For example, anti-price gouging laws keep prices under control; however, supply is insufficient to meet the needs of all consumers.

One of the costs associated with a minimum wage is that it creates a: A. shortage of workers. B. shortage of employers. C. surplus of workers. D. surplus of employers.

surplus of workers A minimum wage has the same effect as other price floors. It causes excess supply. In this case, the minimum wage is enticing a greater number of workers into the job market than employers are willing to hire at that price; this causes a surplus of workers, also known as unemployment.

Which of the following is an example of a price ceiling? a home in foreclosure that is auctioned by the bank a movie ticket sold at a student discount price a law limiting the maximum amount that can be charged for necessities after a hurricane a federal law stating that farmers must be paid at least a minimum amount for their crops

a law limiting the maximum amount that can be charged for necessities after a hurricane A price ceiling is a government-set maximum price.

Jerry and Anat each own a bicycle tire shop and sell bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $37. Neither is able to earn a profit at the lower price, and both go out of business. If there are no other sellers in this market, what effect does this have on producer surplus? Producer surplus decreases, but not to zero. There is no effect on producer surplus. Producer surplus increases. Producer surplus decreases to zero.

Producer surplus decreases to zero. Producers who exit the market no longer have any producer surplus.

A shortage exists when _____ is set below the equilibrium price for a good. a price floor a price ceiling a fair price either a price ceiling or a price floor

a price ceiling A binding price ceiling is a maximum set below the equilibrium price for a good; it causes a shortage.

Beth listens to National Public Radio (NPR) without paying. NPR is an example of: a public good. a private good. an external cost. asymmetric information.

a public good. NPR is a public good that is nonexcludable and nonrival.

laissez-faire

A market that is allowed to function without any government intervention.

Fact

In order for a price ceiling to be effective it must be set below the equilibrium.

total surplus

The sum of consumer surplus and producer surplus, and a measure of the overall net benefit gained from a market transaction.

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. Madison pays the higher price and buys new tires. Marcus no longer buys new tires because the price is too high. What has happened to total surplus in this market? Consumer surplus increases, but producer surplus decreases. Total surplus is unchanged. Total surplus increases. Total surplus decreases.

Total surplus decreases. Deadweight loss occurs when prices are set above equilibrium, so total surplus decreases.

Consumers and producers attempt to maximize their well-being by achieving the greatest gains in their market transactions. True or False

True

Markets are efficient when all buyers and all sellers willing to buy and sell at the market price are able to do so. T or F

True

How do you calculate consumer surplus?

Willingness-to-pay - Price = consumer surplus

Fact

a government-mandated price minimum (price floor) set above the free market equilibrium results in the quantity supplied of the good exceeding the quantity demanded. This is a surplus, also called excess supply.

A surplus exists when _____ is set above the equilibrium price for a good. either a price ceiling or a price floor a price floor a price ceiling a fair price

a price floor A binding price floor is a minimum price for a good that is set above the equilibrium price; it causes a surplus.

Which of the following would cause an increase in producer surplus? a decrease in price due to a decrease in the number of buyers an increase in sales tax an increase in price due to rising consumer income a decrease in consumer income

an increase in price due to rising consumer income An increase in price would generally increase producer surplus.

fact

setting a price below equilibrium alters consumer and producer surplus and results in a deadweight loss

Jerry sells bicycle tires at the market equilibrium price of $42. Assume the government intervenes and sets the price of bicycle tires at $67. Madison buys new tires at the higher price. Marcus no longer buys new tires because the price is too high. Which individual has been priced out of the market? No one is priced out of the market. Jerry Marcus Madison

Marcus Marcus no longer buys the product because the price is too high.

misallocation of resources

Occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market.

producer surplus

The difference between the market price and the price at which firms are willing to supply the product. It is equal to the area below market price and above the supply curve.

The equilibrium price of portable DVD players is $40. Assume the government sets a price floor at $25. The Price floor will: increase quantity supplied. cause a surplus. cause a shortage. have no effect.

have no effect. A price floor set below the equilibrium price is nonbinding and the market stays in equilibrium.

A regulation forcing a chemical plant to reduce the amount of pollution it creates will likely: lessen producer surplus and increase external costs. lessen producer surplus and lessen external costs. increase producer surplus and lessen external costs. increase producer surplus and increase external costs.

lessen producer surplus and lessen external costs. Stricter regulations increase input costs, which causes the supply curve to shift to the left. This results in a greater market price but lower quantity produced. Because production has decreased, the amount of pollution emitted falls, as does external costs. The area of producer surplus also decreases because less product is being supplied to the market.

The equilibrium price for a bushel of wheat is $6.50. The government has put a price floor of $5 on a bushel of wheat. What will be the result of this price floor? a surplus of wheat no effect a shortage of wheat a decrease in the quantity demanded for wheat

no effect

If an effective price ceiling is raised: A. shortage increases. B. shortage decreases. C. surplus increases. D. surplus decreases.

shortage decreases. An increase in a price ceiling helps reduce the gap between quantity demanded and quantity supplied. Since an effective price ceiling creates a shortage, an increase in the price ceiling helps reduce the shortage.

ElectriCo sells 5,000 light switches a month for $1 apiece. It would be willing to sell them for as little as 75 cents. Suppose the price of light switches increases to $1.10. Assuming that ElectriCo is still selling the same quantity, by how much has their producer surplus per month increased? $1,250 $500 $1,750 $5,000

$500 Producer surplus is the difference between the market price a firm's willingness-to-sell. Find the difference between the producer surplus before and after the price change. Producer surplus before the price change is $1,250 (found by: ($1.00 − $0.75) × 5,000). Producer surplus after the price change is $1,750 (found by: ($1.10 − $0.75) × 5,000). The difference is $500 (found by: $1,750 − $1,250).

price ceiling

A maximum price established by government for a product or service. When the price ceiling is set below equilibrium, a shortage results.

Which of the following is an example of a price floor? a maximum wage limit on corporate executives a legally mandated minimum wage for food-service workers a job that does not get filled because the wage offered is too low a job that pays below the average wage for jobs in a specific area

a legally mandated minimum wage for food-service workers A price floor is a government-set minimum price that can be charged for a product or service.

The equilibrium price for a gallon of milk is $3, but the government has put a price ceiling of $4 on all gallon bottles of milk. What will be the result of this price ceiling? a surplus of milk a shortage of milk a decrease in the quantity demanded for milk no effect

no effect There is no effect when a price ceiling is set above the equilibrium price. A maximum set higher than the market price does not change anything in the market.

If Jessica buys a cardigan for $200 and she was willing to pay $250, what is her consumer surplus? $250 −$50 $50 $200

$50 Consumer Surplus = Willingness to Pay − Price. Her consumer surplus is $50, found by: $250 − $200 = $50.

Miguel sells double-scoop ice cream cones at the market equilibrium price of $4. Assume the government intervenes and sets the price at $6. None of Miguel's customers are willing to buy ice cream at the higher price. What has happened to Miguel's producer surplus? Miguel's producer surplus decreases, but not to zero. Miguel's producer surplus increases. Miguel's producer surplus is unchanged. Miguel's producer surplus decreases to zero.

Miguel's producer surplus decreases to zero. Miguel's producer surplus falls to zero because he is not able to sell ice cream at the higher price.

Suppose the equilibrium price of a product is $500 but the product currently sells for $200 above this equilibrium price. Who benefits from the price being set above the equilibrium price? Both producers and consumers benefit. Producers who can sell the product benefit. Consumers who are still able to purchase the product benefit. Consumers who are no longer able to purchase the product benefit.

Producers who can sell the product benefit. A higher price benefits producers who can still sell the product.