Download Chapter 3A Consumer Surplus, Producer Surplus and Market

Chapter 3A
Consumer Surplus, Producer Surplus and Market Efficiency
1. Consumer surplus measures the value between the price consumers are willing to pay
and the
a. producer surplus price.
b. deadweight gain price.
c. actual price paid.
d. preference price.
ANS
a. Incorrect. Consumer surplus is the value between the demand curve and the
equilibrium price actually paid.
b. Incorrect. This is a meaningless term.
c. Correct. Consumer surplus is the value between the demand curve and the equilibrium
price actually paid.
d. Incorrect. This is a meaningless term.
2. If Sam is willing to pay $50 for one good X, $30 for a second, $20 for a third, $8 for a
fourth, and the market price is $10, then Sam’s consumer surplus is
a. $10.
b. $40.
c. $70.
d. $100.
ANS
a. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10),
which equals $70. The fourth unit is ignored because the consumer benefits less than the
price and it will not be purchased.
b. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10),
which equals $70. The fourth unit is ignored because the consumer benefits less than the
price and it will not be purchased.
c. Correct. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10),
which equals $70. The fourth unit is ignored because the consumer benefits less than the
price and it will not be purchased.
d. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10),
which equals $70. The fourth unit is ignored because the consumer benefits less than the
price and it will not be purchased.
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3. Suppose Tucker Inc. is willing to sell one gizmo for $10, a second gizmo for $15, a
third for $20, and the market price is $25. What is Tucker Inc.’s producer surplus?
a. $10
b. $15
c. $30
d. $50
ANS
a. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20),
which equals $30.
b. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20),
which equals $30.
c. Correct. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20),
which equals $30.
d. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20),
which equals $30.
4. In an efficient market, deadweight loss is
a. maximum
b. minimum
c. constant
d. zero
ANS
a. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
b. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
c. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
d. Correct. In equilibrium, there is no net loss of either consumer or producer surplus.
5. Deadweight loss results from
a. equilibrium.
b. underproduction.
c. overproduction.
d. none of the above are correct.
e. either b or c.
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ANS
a. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there
is no deadweight loss.
b. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there
is no deadweight loss.
c. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there
is no deadweight loss.
d. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there
is no deadweight loss.
e. Correct. In equilibrium, the quantity demanded equals the quantity supplied and there
is no deadweight loss.
6. Deadweight loss is the net loss of
a. consumer surplus.
b. producer surplus.
c. disequilibrium surplus.
d. both a. and b.
ANS
a. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer
surplus.
b. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer
surplus.
c. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer
surplus.
d. Correct. Deadweight loss is the net loss of both consumer surplus and producer
surplus.
7. If the quantity supplied exceeds the quantity demanded in a market, then the result is
which of the following?
a. Deadweight loss
b. Inefficiency
c. Overproduction
d. Each of the answers is true.
ANS
a. Incorrect. Each answer is correct.
b. Incorrect. Each answer is correct.
c. Incorrect. Each answer is correct.
d. Correct. Each answer is correct.
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8. Suppose a consumer is willing to pay $20 for one good X, $10 for a second, and $5 for
a third, and the market price is $4.The consumer surplus is
a. $16.
b. $6.
c. $1.
d. $23.
ANS
a. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which
equals $23.
b. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which
equals $23.
c. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which
equals $23.
d. Correct. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which
equals $23.
9. Producer surplus measures the value between the actual selling price and the
a. price sellers are willing to sell the product.
b. deadweight loss price.
c. lowest price sellers are willing to sell the product.
d. profit-maximization price.
ANS
a. Correct. Consumer surplus is the total area under the market demand curve and about
the equilibrium price.
b. Incorrect. This is a meaningless term.
c. Incorrect. The supply curve represents the lowest price sellers are willing to sell
various quantities of a product.
d. Incorrect. Consumer surplus is a total area concept and not a given price.
10. Suppose seller X is willing to sell one good X for $5, a second good X for $10, a third
for $16, a fourth for $25, and the market price is $20. What is seller X’s producer
surplus?
a. $15
b. $20
c. $22
d. $29
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ANS
a. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16),
which equals $29. The fourth unit is ignored because the seller’s willingness to sell this
unit is above the market price.
b. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16),
which equals $29. The fourth unit is ignored because the seller’s willingness to sell this
unit is above the market price.
c. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16),
which equals $29. The fourth unit is ignored because the seller’s willingness to sell this
unit is above the market price.
d. Correct. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16),
which equals $29. The fourth unit is ignored because the seller’s willingness to sell this
unit is above the market price.
11. Deadweight loss is the result of
a. disequilibrium.
b. underproduction.
c. overproduction.
d. all of the above are correct.
ANS
a. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor
overproduction exists.
b. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor
overproduction exists.
c. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor
overproduction exists.
d. Correct. Each of the answers is correct.
12. Deadweight loss is computed as the net of
a. consumer surplus minus producer surplus.
b. disequilibrium surplus plus consumer surplus.
c. producer surplus minus disequilibrium surplus.
d. consumer surplus plus producer surplus.
ANS
a. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an
inefficient market.
b. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an
inefficient market.
c. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an
inefficient market.
d. Correct. Deadweight loss is the net loss of both consumer and producer surplus for an
inefficient market.
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13. Deadweight loss is not the result of
a. an efficient market.
b. an inefficient market.
c. zero consumer surplus.
d. zero producer surplus.
ANS
a. Correct. Deadweight loss results from an inefficient market in which underproduction
or overproduction occurs.
b. Incorrect. Deadweight loss results from an inefficient market in which underproduction
or overproduction occurs.
c. Incorrect. At equilibrium, deadweight loss is zero and not consumer or producer
surplus.
d. Incorrect. At equilibrium, deadweight loss is zero and not consumer or producer
surplus.
14. At the equilibrium price, deadweight loss is
a. minimized.
b. zero.
c. maximized.
d. equal to the equilibrium price multiplied by the quantity exchanged.
ANS
a. Incorrect. In equilibrium, deadweight loss does not exist and the total of consumer and
producer surplus is maximum.
b. Correct. In equilibrium, deadweight loss does not exist and the total of consumer and
producer surplus is maximum.
c. Incorrect. In equilibrium, deadweight loss does not exist and the total of consumer and
producer surplus is maximum.
d. Incorrect. The price times quantity demanded equals total revenue and not the loss of
consumer and producer surplus.
15. If the quantity supplied exceeds the quantity demanded in a market, then the result is
which of the following?
a. Deadweight loss
b. Inefficiency
c. Overproduction
d. None of the above answers are correct.
ANS
a. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
b. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
c. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
d. Correct. Only at equilibrium does efficiency and no deadweight loss occur.
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Price per pound
Exhibit A.7 Comparison of Market Efficiency and Deadweight Loss
4.00
3.50
3.00
2.50
2.00
1.50
1.00
A
B
S
H
E
C
G
F
0.50 D
0
1
2
D
3
4
5
6
7
Quantity of Ground Beef
(millions of pounds per year)
16. As shown in Exhibit A.7, if the market is in equilibrium, then __________ represents
consumer surplus.
a. ABEC
b. AED
c. EGH
d. BEF
ANS
a. Correct. Consumers pay $2.00 per pound, but they would be willing to pay higher
prices along the demand curve to point E.
b. Incorrect. This is total surplus.
c. Incorrect. This is deadweight loss.
d. Incorrect. This is deadweight loss.
17. As shown in Exhibit A.7, if the market is in equilibrium, then __________ represents
producer surplus.
a. ADFB
b. CEFD
c. EGH
d. BEF
ANS
a. Incorrect. This is meaningless.
b. Correct. Producers sell for $2.00 per pound, but they would be willing to sell for lower
prices along the supply curve to point E.
c. Incorrect. This is deadweight loss.
d. Incorrect. This is deadweight loss.
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18. As shown in Exhibit A.7, if the quantity supplied is 2 million pounds of ground beef
per year, the result is
a. deadweight loss.
b. inefficiency.
c. underproduction.
d. all of the above are true.
e. none of the above are true.
ANS
a. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
b. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
c. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
d. Correct. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
e. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
19. As shown in Exhibit A.7, if the quantity supplied is 6 million pounds of ground beef
per year, the result is
a. deadweight loss.
b. inefficiency.
c. overproduction.
d. all of the above are true.
e. none of the above are true.
ANS
a. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
b. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
c. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
d. Correct. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
e. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss
or inefficiency.
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20. As shown in Exhibit A.7, if the quantity supplied is 2 million pounds of ground beef
per year, the result is a deadweight loss represented by area
a. ABEC.
b. CEFD.
c. EGH.
d. BEF.
ANS
a. Incorrect. This is consumer surplus.
b. Incorrect. This is producer surplus.
c. Incorrect. This is deadweight loss caused by overproduction.
d. Correct. This is deadweight loss caused by underproduction.
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