Download Appendex to Chapter 3

Appendix to Chapter 3
Practice Quiz
Consumer Surplus, Producer Surplus, and Market Efficiency
1. If Bill is willing to pay $10 for one good X, $8 for a second, and $6 for a third, and
the market price is a $5, then Bill’s consumer surplus is
a. $24
b. $18
c. $9
d. $6
ANS:
c. Consumer surplus is the difference between the price consumers are willing to pay and
the cost. For one unit of good X the surplus is $5, $3 for the second unit, and $1 for the
third. Therefore, the total consumer surplus is $9.
2. Suppose Gizmo Inc. is willing to sell one gizmo for $10, a second gizmo for $12, a
third for $14, and a fourth for $20, and the market price is $20. What is Gizmo Inc.’s
producer surplus?
a. $56
b. $24
c. $20
d. $10
ANS:
b. Producer surplus is the difference between the selling price and price producers are
willing to sell a gizmo. For one gizmo the producer surplus is $10, $8 for the second
gizmo, and $6 for the third gizmo. Therefore, the total producer surplus is $24.
3. In an efficient market, deadweight loss is
a. maximum
b. minimum
c. constant
d. zero
ANS:
d. In equilibrium, there is no net loss of either consumer or producer surplus.
4. Deadweight loss results from
a. equilibrium.
b. underproduction.
c. overproduction.
d. none of the above are correct.
e. either b or c.
ANS:
e. In equilibrium, the quantity demanded equals the quantity supplied and there is no
deadweight loss.
5. Total surplus equals
a. consumer surplus + producer surplus – deadweight loss.
b. consumer surplus – producer surplus – deadweight loss.
c. consumer surplus – producer surplus + deadweight loss.
d. consumer surplus + producer surplus.
ANS:
d. Deadweight loss is the value of potential benefits loss, which is not subtracted from or
added to total surplus (consumer + producer surplus).
6. Which of the following statements is correct?
a. Total surplus is the sum of consumer and producer surplus.
b. Deadweight loss is the net loss of both consumer and producer surplus.
c. Deadweight loss is a measure of market inefficiency.
d. All of the above.
ANS:
d. See Exhibit A-3 in the text.
Exhibit A-7 Demand and Supply Curves for Good X
.
.
Price
per
unit
H
16 A
14
12
10
8
6
4
2B
.
0
.
S
.
F
C
.
E
.
.
G
D
.
I D
2
4
6
8 10 12 14 16
8
Quantity of good X
7. In Exhibit A-7, suppose firms devote resources sufficient to produce 4,000 units of
good X per month. The result is a deadweight loss of triangle
a. ABE.
b. CDE.
c. EGE.
d. EDE.
ANS:
b. Only at point C are 4,000 units sold and triangle CDE is the deadweight loss of
potential value resulting from underproduction of good X.
8. Suppose in Exhibit A-7 that exchange in the market for good X yields triangle ABE.
This means that which of the following conditions exists in the market?
a. Only consumer surplus
b. Only producer surplus
c. Deadweight loss
d. Maximum consumer plus producer surplus
ANS:
d. Only at the equilibrium point E do both consumers and producers receive maximum
surplus value.
9. As shown in Exhibit A-7, assume that the quantity of good X changed results in
triangle EIH. This would be caused by __________ resources used by producers to
produce good X.
a. too many
b. too few
c. an optimal amount of
d. asymmetric
ANS:
a. See Exhibit A-3 (c) in the text.
10. As shown in Exhibit A-7, assume that the quantity of good X exchanged results in
triangle CDE. This would be caused by__________ resources being used by producers to
produce good X.
a. too many
b. too few
c. an optimal amount of
d. asymmetric
ANS:
b. See Exhibit A-3 (b) in the text.