Chapter 4

Dissolvable tobacco products contain less nicotine than cigarettes and can help people quit smoking. Suppose the figure illustrates five​ consumers' willingness to pay for tobacco lozenges. If the price of a pack of tobacco lozenges is $2.00, what is the consumer surplus for these consumers? Consumer surplys is $_________. (Enter your response rounded to two decimal places).

$16.00

Part Two Suppose the price of a bottle of orange juice rises to​ $1.50. Once the price of a bottle of orange juice rises to​ $1.50, the total consumer surplus received by these consumers is $__________. (Enter your response rounded to two decimal places).

$4.50

Part One Which of the following is the definition of consumer​ surplus? A. the additional benefit to a consumer from consuming one more unit of a good or service B. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays C. the difference between the lowest price a firm would have been willing to accept and the price it actually receives D. the additional cost to a firm of producing one more unit of a good or service

B. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays

In the diagram to the right, illustrating a binding price floor at P1, the amount of consumer surplus transferred to producers is represented by area _________ and the deadweight loss is equal to areas _______________.

B; C and E

Why is the supply curve referred to as a marginal cost​ curve?

It shows the willingness of firms to supply a product at different prices.

A) Consider the market demand and supply for eggs. Assume that the market for eggs is perfectly competitive. Suppose that egg producers organize themselves and establish a system of quotas. Each farmer's output is restricted by a specified amount of egg that he can produce. Compared with the market-clearing equilibrium, is the quota system efficient?

No

NOTE:

Producer surplus The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. Marginal cost The additional cost to a firm of producing one more unit of a good or service. The willingness to supply a product depends on the cost of producing it. Firms will supply an additional unit of a product only if they receive a price equal to the additional cost of producing that unit. The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price.

_________________ surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram by area _________.

Producer; B

Marginal benefit

The additional benefit to a consumer from consuming one more unit of a good or service.

Consumer surplus

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays.

Country Talmar produces​ 100,000 cars during a particular year. The market price of cars in Talmar is​ $5,000. In a recent meeting of the Economic​ Council, an​ economist, Carl Anderson claimed the​ nation's production of cars was inefficiently high because the industry seemed to have positive inventory every year. Another​ economist, Tara​ Henderson, felt that the production was inefficiently low because there is a huge segment of the population that does not own cars. Which of the​ following, if​ true, would support​ Carl's view?

The market segment that does not own cars has excellent access to the mass transit system.

Country Talmar produces​ 100,000 cars during a particular year. The market price of cars in Talmar is​ $5,000. In a recent meeting of the Economic​ Council, an​ economist, Carl Anderson claimed the​ nation's production of cars was inefficiently high because the industry seemed to have positive inventory every year. Another​ economist, Tara​ Henderson, felt that the production was inefficiently low because there is a huge segment of the population that does not own cars. Which of the following statements are Tara and Carl likely to agree​ with?

There is a deadweight loss at the given production level.

NOTE:

We can use the demand curve to measure the total consumer surplus in a market. Demand curves show the willingness of consumers to purchase a product at different prices. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to its price. The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price.

Economic efficiency is...

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

Producer surplus is equal to the area...

above the supply curve and below the price for the units produced and sold.

On a shopping​ trip, Sofia decided to buy a light blue coat that had a price tag of​ $79.95. When she brought the coat to the​ store's sales​ clerk, Sofia was told that the coat was on​ sale, and she would pay 20 percent less than the price on the tag. After the discount was​ applied, Sofia paid​ $63.96, $15.99 less than the original price. The value of​ Sofia's consumer surplus from this purchase is...

at least​ $15.99 since this is the difference between the price Sofia is willing to pay for the coat and the actual price she​ pays, but she could have be willing to pay more than​ $79.95 for the coat.

Suppose that a frost in Florida reduces the size of the orange​ crop, which causes the supply curve to shift to the left (from Supply1 to Supply2). As a result, consumer surplus... Producer surplus.....

decreases by areas B, C, and D. increases by area B and decreases by areas F and G.

Because economic surplus is the __________ of the benefit to firms and the benefit to​ consumers, it is the best measure we have of the benefit to society from the production of a particular good or service. For this​ reason, it is appropriate to label economic surplus as _________________ surplus.

sum; social

Part One In​ 2018, according to the U.S. Department of​ Agriculture, Arizona,​ Colorado, New​ Mexico, and Utah were suffering from extreme drought. The lack of rainfall greatly reduced the grass that ranchers use to feed cattle. The result was a reduction in the number of cattle raised in these states. Use a demand and supply graph of the cattle market to illustrate the effect of the drought. ​1.) Using the line drawing​ tool, show the effect of the drought on the market for cattle. Properly label your line. ​2.) Using the point drawing​ tool, plot the new equilbrium point. Label this point ​'E2​'.

supply is shifted left with a higher equilibrium point now

Deadweight loss is...

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

Economic surplus is...

the sum of consumer surplus and producer surplus.

B) Explain the loss of efficiency that results from the quota system. With the​ quota, consumer surplus is equal to the area...

under the demand curve and above the price for the units consumed.

Consider the market for Blackberry cell phones. Assume the market is perfectly competitive and at a​ market-clearing equilibrium. What area represents consumer​ surplus? What area represents producer​ surplus? Consumer surplus is equal to the area...

under the demand curve and above the price for the units consumed.

D) With the​ quota, the deadweight loss is equal to the area...

under the demand curve and above the supply curve for units between the quota and market equilibrium quantity.

Part One Consider the information given in the table on four consumers in the market for orange juice. If the price of a bottle of orange juice is​ $0.75, the total consumer surplus received by these consumers is $_____________. (Enter your response rounded to two decimal places).

$7.00

Suppose five construction companies have the ability to build a factory overseas to produce a manufactured good. The marginal cost of building a factory for each construction company is shown in the table​ below: If the market price of an overseas factory is $1,425,000​, what is the surplus for these five​ companies? Producer surplus is ​$___________. (Enter your response as a whole number).

$800,000

Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the​ diagram, deadweight loss is equal to the​ area(s): ___________

C and E

Part Two Refer to the graph. The graph shows the market demand for satellite television service. If the market price is​ $81, which consumers receive consumer surplus in this​ market? A. those willing to pay exactly​ $81 B. those willing to pay less than​ $81 C. those willing to pay more than​ $81 D. All of the above.

C. those willing to pay more than​ $81

Part Two How are producer surplus and consumer surplus​ affected?

Consumer surplus​ decreases, but the overall effect on producer surplus depends on the size of the shift of the supply curve.

In the diagram to the right, illustrating a per-unit tax equal to P2 minus P3, tax revenue is represented by the areas __________ and the excess burden of the tax is represented by areas ________________.

D and F; E and G

C) With the​ quota, producer surplus is equal to the area...

above the supply curve and below the price for the units produced and sold.

Part Two Economic surplus at Q3 would be smaller than at Q2 because if Q3 units were produced, then some units for which marginal cost is ___________ marginal benefit would ___________ produced.

greater than; be

Consumer and producer surplus measure the​ _____ benefit rather than the​ _____ benefit.

net; total

Marginal cost is...

the additional cost of producing one more unit.

Consumer surplus is...

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

A student​ argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is​ largest." This statement is false because...

the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

Part Four If the price of a bottle of orange juice is​ $1.50, then consumer surplus is an amount equal to the area...

under the demand curve and above the​ $1.50 price for each individual who buys and consumes orange juice.

Economic surplus in a market is the sum of​ _____ surplus and​ _____ surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a​ _____ when the market is in​ _____.

​consumer; producer;​ maximum; equilibrium

____________ surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram by area ________________.

Consumer; A

How does consumer surplus change as the equilibrium price of a good rises or​ falls? As the price of a good rises, consumer surplus ________________, and as the price of a good falls, consumer surplus ________________.

decreases; increases

Part One Using the graph to the​ right, explain why economic surplus would be smaller if Q1 or Q3 were the quantity produced than if Q2 is the quantity produced. Economic surplus at Q1 would be smaller than at Q2 because if Q1 units of output were produced, then some units for which marginal benefit is __________ marginal cost would _______________ produced.

greater than; not be

Part Two of last slide Consumer surplus, after the shift caused by all supermarkets switching to cashierless technology, ___________. Can we be certain what impact these falling costs will have on producer surplus?

increases No, we​ can't be certain because some producer surplus is lost to consumer surplus and other producer surplus is gained due to the decrease in​ costs; the relative size of these areas determines whether producer surplus increases or decreases.

In the diagram, marginal benefit ____________ marginal cost at output level Q2. This output level is considered economically ______________________.

is equal to; efficient

In the diagram, marginal benefit ________________ marginal cost at output level Q3. This output level is considered economically _______________.

is less than; inefficient

A price ceiling is a legally determined ___________________ price that sellers may charge. A price floor is a legally determined _______________ price that sellers may recieve.

maximum; minimum

Part Three If the price of a bottle of orange juice is​ $0.75, then consumer surplus is an amount equal to the area...

under the demand curve and above the​ $0.75 price for each individual who buys and consumes orange juice.