978-0132479431 Chapter 6 Part 1

1

Foundations of Microeconomics, 5e (Bade/Parkin)

Chapter 6 Efficiency and Fairness of Markets

6.1 Allocation Methods and Efficiency

1) Walmart has a limited number of day-after Thanksgiving Day special items on sale at prices

well below their typical price. Walmart opens at 5 AM. Walmart is using a ________ allocation

method for these items.

A) first-come, first-served

B) market price

C) contest

D) majority rule

E) command

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

2) Often people trying to withdraw money from their bank must wait in line, which reflects a

________ allocation method.

A) first-come, first-served

B) market price

C) contest

D) majority rule

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

2

3) University of Colorado reserves 5,000 free tickets to each home football game for students.

Students must stand in line to receive their ticket. Football tickets are allocated through which

method?

A) Market price

B) Sharing equally

C) Personal characteristics

D) First-come, first-served

E) Force

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

4) Auditors working for a large accounting firm are often away from the office. When they are

in the office, they are allowed to use any desk that is available. Which method is used to allocate

desks?

A) Lottery

B) First-come, first-served

C) Command

D) Contest

E) Sharing equally

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

5) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy’s brother saw the

soda, he took four. Sodas were allocated between Mandy and her brother through

A) Force

B) Majority rule

C) First-come, first-served

D) Sharing equally

E) Personal characteristics

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

3

6) Which of the following situations describing a resource allocation method most resembles the

force method?

A) Seventy percent of Austin’s chess club wanted to purchase new chess sets and thirty percent

did not. The club purchased the sets.

B) Lattes are sold at Starbucks.

C) Food from the Weld County Food Bank is distributed to families in need.

D) Mandy saved her allowance to buy a 12 pack of cream soda. When Mandy’s brother saw the

soda, he took four.

E) Jose works at Intel. His manager tells him what work needs to be completed each month.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

7) Honda will sell its vehicles to anyone who wants to and can buy one. Honda is using a

________ allocation method.

A) first-come, first-served

B) market price

C) contest

D) majority rule

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

8) Lattes at Starbucks are allocated to individuals in society through what type of method?

A) Lottery

B) Contest

C) Sharing equally

D) Market price

E) Personal characteristics

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

4

9) Which of the following situations describing a resource allocation method most resembles the

market price method?

A) Food from the Weld County Food Bank is distributed to families in need.

B) Lattes are sold at Starbucks

C) Jose works at Intel. His manager tells him what work needs to be completed each month.

D) Matt’s mother had the rule that whoever cuts the cake chooses their slice last.

E) Seventy percent of Austin’s chess club wanted to purchase new chess sets and thirty percent

did not. The club purchased the sets.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

10) If a landlord will rent an apartment only to married couples, the landlord is using a ________

allocation method.

A) majority rule

B) market price

C) contest

D) personal characteristics

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

11) Canned milk was only rationed to babies and small children during World War 2. This

rationing was an example of allocation by

A) market price.

B) first-come, first-served.

C) sharing equally.

D) force.

E) personal characteristics .

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

5

12) Although Jack and Vanessa were equally qualified, Jack was promoted to manager instead of

Vanessa because the president of the company thought that the other employees would not

respect a female manager. The resource, the management position, was allocated in what

manner?

A) Sharing equally

B) Contest

C) Personal characteristics

D) Command

E) Lottery

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

13) Allocating resources by the order of someone in authority is a ________ allocation method.

A) first-come, first-served

B) market price

C) contest

D) majority rule

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

14) Jose works at Intel. His manager tells him what work needs to be completed each month.

Jose’s resource, labor, is allocated with which of the following methods?

A) Command

B) Majority rule

C) Force

D) Personal characteristics

E) Lottery

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

6

15) The chair of the Department of Economics at Colorado State University decided that office

space is for tenured faculty and that graduate students are required to share cubicles. What

method is used to allocate office space?

A) Lottery

B) Majority rule

C) Command

D) First-come, first-served

E) Sharing equally

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

16) If you split your dessert with your date, you are using a ________ allocation method.

A) first-come, first-served

B) sharing equally

C) contest

D) personal characteristics

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

17) When the city of Fresno holds a referendum to determine if taxes will be raised to pay for

road repairs, the city is using a ________ allocation method.

A) majority rule

B) market price

C) contest

D) personal characteristics

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Reflective thinking

7

18) Seventy percent of Austin’s chess club wanted to purchase new chess sets and thirty percent

did not. The club purchased the sets. Which method of allocation best describes the choice to

purchase the sets?

A) Force

B) Sharing equally

C) Command

D) Majority rule

E) Lottery

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

19) Which of the following situations describing a resource allocation method most resembles

the majority rule method?

A) Seventy percent of Austin’s chess club wanted to purchase new chess sets and thirty percent

did not. The club purchased the sets.

B) Lattes are sold at Starbucks.

C) Food from the Weld County Food Bank is distributed to families in need.

D) Jose works at Intel. His manager tells him what work needs to be completed each month.

E) Matt’s mother had the rule that whoever cuts the cake chooses their slice last.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

20) in 2009, tickets to a Presidential Town Hall meeting were distributed to individuals through a

random selection of those who registered on a website. The tickets were allocated by which

method?

A) Lottery

B) Majority rule

C) Contest

D) First-come, first-served

E) Personal characteristics

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: KG

AACSB: Reflective thinking

8

21) The table above shows the production possibilities for an economy. When the economy

produces a combination of 900 books and 50 loaves of bread,

A) production efficiency occurs because resources are not overused.

B) allocative efficiency is achieved because both goods are produced.

C) production efficiency is not achieved.

D) allocative and production efficiency are both achieved.

E) production efficiency is not achieved but allocative efficiency might be achieved.

Skill: Level 4: Applying models

Section: Checkpoint 6.1

Author: SB

AACSB: Analytical reasoning

22) Resource use is allocative efficient

A) when it is not possible to produce more of one good.

B) when we produce goods and services that we value most highly.

C) when most resources are fully employed.

D) at any point on the PPF.

E) at all points either on or within the PPF because all these production points are attainable.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: SA

AACSB: Reflective thinking

23) Allocative efficiency refers to

A) producing the goods and services most highly valued.

B) using the least amount of labor to produce output.

C) producing the maximum possible amount of output.

D) obtaining the least output with the most inputs.

E) producing at any point on the PPF.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

9

24) When allocative efficiency occurs,

A) an economy produces the goods and services most highly valued.

B) marginal benefit exceeds marginal cost by some amount.

C) technology must be increasing.

D) we can simultaneously produce more of all goods.

E) marginal benefit exceeds marginal cost by as much as possible.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: CD

AACSB: Reflective thinking

25) To achieve allocative efficiency, an economy

A) must produce on its PPF.

B) does not necessarily need to be production efficient.

C) must have increases in technology.

D) must leave some resources unemployed.

E) can produce either on or within its PPF.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CD

AACSB: Reflective thinking

26) If an economy is allocatively efficient, it must be producing

A) beyond its production possibilities frontier.

B) inside its production possibilities frontier.

C) on its production possibilities frontier.

D) the goods and services that are the most expensive.

E) the goods and services that are the least expensive to produce.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

10

27) When a society achieves allocative efficiency, it

A) is not achieving production efficiency.

B) is producing that combination of goods and services that society values most highly.

C) might or it might not be producing at a point on society's PPF.

D) is producing a combination of goods and services whose marginal cost exceeds their marginal

benefit.

E) is producing the combination of goods and services for which marginal benefit exceeds

marginal cost by as much as possible.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

28) Marginal benefit is the benefit that a person receives from consuming

A) a good or service until the person has grown tired of it.

B) only goods and services that are free.

C) one more unit of a good or service.

D) all of the possible units of a good or service that can be consumed.

E) one more unit of a good and is equal to the cost of producing the unit of the good.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: JC

AACSB: Reflective thinking

29) Marginal benefit is the

A) total benefit we receive from consuming a good or service.

B) additional benefit we receive from consuming one more unit of a good or service.

C) minimum amount of other goods or services we are willing to give up.

D) opportunities given up to get one more unit of a good or service.

E) the benefit we receive from consuming one more unit of a good or service minus the cost of

the producing one more unit of the good or service.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: WM

AACSB: Reflective thinking

11

30) The marginal benefit of a taco is measured by

A) the price of the taco.

B) the amount of another good a person is willing to give up to get one more taco.

C) the amount of another good a person must give up to get one more taco.

D) a point on the PPF.

E) the opportunity cost of producing another taco.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: CD

AACSB: Reflective thinking

31) Marginal benefit

A) increases as more of a good is consumed.

B) decreases as more of a good is consumed.

C) is the total benefit from all units consumed.

D) is constant as more of a good is consumed.

E) is the gain to the producer of producing and selling one more unit of a good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SB

AACSB: Reflective thinking

32) As more of a good is consumed, the marginal benefit of the good

A) increases.

B) decreases.

C) remains constant.

D) is unpredictable.

E) first decreases and then increases.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SB

AACSB: Reflective thinking

12

33) The principle of decreasing marginal benefit explains why the marginal benefit curve

A) is upward sloping.

B) has an infinite slope.

C) is vertical.

D) is downward sloping.

E) is horizontal.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

34) In general, the marginal benefit curve

A) has a positive slope.

B) has a negative slope.

C) is horizontal.

D) is vertical.

E) is concave.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Reflective thinking

35) The point that each glass of lemonade consumed on a hot day brings lower and lower levels

of satisfaction is known as the principle of

A) total benefits.

B) increasing marginal cost.

C) decreasing marginal benefit.

D) increasing opportunity cost.

E) decreasing marginal price.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Reflective thinking

13

36) The marginal benefit of the first hotdog consumed is ________ the marginal benefit of the

fifth hotdog consumed.

A) equal to

B) less than

C) greater than

D) the inverse of

E) equal to 5 times

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SB

AACSB: Analytical reasoning

37) Suppose Jennifer derives $100 in marginal benefits from her first skiing trip and $80 from

her third trip. Her marginal benefit from her second trip is likely to be

A) more than $100.

B) between $100 and $80.

C) between $79 and $51.

D) less than $51.

E) some amount that cannot be calculated without additional information.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: MR

AACSB: Analytical reasoning

38) Marginal benefit curves

A) have positive slopes.

B) have negative slopes.

C) are horizontal lines.

D) are vertical lines.

E) are upside-down U-shaped curves.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: SB

AACSB: Reflective thinking

14

39) Marginal cost equals

A) the profitability derived from producing another unit of output.

B) all the opportunity cost of producing the amount of output.

C) or exceeds the marginal benefit.

D) productive efficiency.

E) the opportunity cost of producing one more unit of output.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

40) Marginal cost is the opportunity cost of producing

A) every unit possible.

B) zero units.

C) the first unit and only the first unit.

D) one more unit of a good or service.

E) None of the above answers is correct.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: JC

AACSB: Reflective thinking

41) Moving ________ along the marginal cost curve, the ________.

A) upward; opportunity cost increases

B) upward; marginal cost decreases

C) downward; marginal cost increases

D) upward; opportunity cost does not change

E) downward; opportunity cost does not change

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CD

AACSB: Reflective thinking

15

42) The marginal cost of a good or service

A) can be calculated from the marginal benefit of that good or service.

B) decreases as more of the good or service is produced.

C) can be derived from the production possibilities frontier.

D) graphs as a positively sloped curve, so it cannot be derived from the production possibilities

frontier, which is downward sloping.

E) None of the above answers are correct.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: SA

AACSB: Reflective thinking

43) The marginal cost curves slope upward because of the principle of

A) decreasing marginal benefits.

B) increasing marginal cost.

C) increasing marginal benefits.

D) decreasing marginal cost.

E) decreasing total benefit.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

44) The marginal cost curve is

A) downward sloping to reflect the bowed out PPF.

B) downward sloping as marginal benefits increase.

C) upward sloping because marginal cost falls as more of a good or service is produced.

D) upward sloping to reflect increasing opportunity cost.

E) U-shaped to reflect the bowed out PPF.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CD

AACSB: Reflective thinking

16

45) As more of a good is consumed, marginal benefit ________ and as more of a good is

produced, marginal cost ________.

A) increases; increases

B) increases; decreases

C) decreases; increases

D) decreases; decreases

E) does not change; does not change

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: WM

AACSB: Reflective thinking

46) To achieve allocative efficiency, one must compare the

A) marginal cost of a good to its opportunity cost.

B) opportunity cost to the attainable point on the production possibilities frontier.

C) marginal benefit of a good to its marginal cost.

D) marginal cost to the production efficiency cost.

E) point of production efficiency to the point of allocative efficiency.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Reflective thinking

47) Any point on the production possibility frontier is

A) attainable and might be allocatively inefficient.

B) attainable and must be allocatively efficient.

C) less production efficient than a point in the interior of the PPF.

D) always allocatively efficient but might or might not be production efficient.

E) always production efficient and always allocatively efficient.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: SA

AACSB: Reflective thinking

17

48) Which of the following are the rules for finding the point of allocative efficiency?

A) Produce on the PPF and then produce where the marginal benefit and marginal cost are as

large as possible.

B) Produce on the PPF and then produce where marginal benefit equals marginal cost.

C) Produce on the PPF and then produce where marginal benefit and marginal cost are constant.

D) Produce on the PPF and then produce where the marginal benefit exceeds marginal cost by as

much as possible.

E) Produce anywhere on the PPF.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: TS

AACSB: Reflective thinking

49) Allocative efficiency occurs

A) anywhere inside or on the production possibilities frontier.

B) when the total cost of production is minimized.

C) at all points on the production possibilities frontier.

D) at only one point on the production possibilities frontier.

E) at the points where the production possibilities frontier crosses the horizontal or vertical axis.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: TS

AACSB: Reflective thinking

50) Which of the following is necessary for allocative efficiency to be achieved?

A) Marginal benefit must be maximized.

B) Marginal cost must be minimized.

C) Marginal benefit must equal marginal cost.

D) The difference between marginal benefit and marginal cost must be maximized.

E) Production must be at a point inside the production possibilities frontier.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: TS

AACSB: Reflective thinking

18

51) All points on the production possibilities frontier

A) are production inefficient.

B) achieve allocative efficiency.

C) are production efficient but only one point achieves allocative efficiency.

D) are allocatively efficient but only one point achieves production efficiency.

E) are allocatively inefficient.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Reflective thinking

52) To determine how much of a good to produce to achieve allocative efficiency, we

A) construct a production possibilities frontier and choose the midpoint.

B) construct a production possibilities frontier and choose any point on it.

C) must produce on the PPF and at the point where the marginal benefit and marginal cost of the

good are equal.

D) must produce on the PPF and at the point where the marginal benefit exceeds by any amount

the marginal cost of the good.

E) must produce on the PPF and at the point where the marginal benefit exceeds by as much as

possible the marginal cost of the good.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: SB

AACSB: Reflective thinking

53) When the marginal benefit and marginal cost of sodas are equal, then

A) the production of sodas might be allocatively efficient but it is definitely production

inefficient.

B) the allocatively inefficient amount of sodas is being produced.

C) more sodas should be produced to reach the allocatively efficient quantity.

D) fewer sodas should be produced to reach the allocatively efficient quantity.

E) the allocatively efficient amount of sodas is being produced.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Analytical reasoning

19

54) When the marginal cost of producing a bike is greater than the marginal benefit of the bike,

for resource use to be allocatively efficient

A) more bikes should be produced.

B) fewer bikes should be produced.

C) no more and no fewer bikes should be produced.

D) it must be determined if the production of bikes can be increased.

E) people must be educated to demand more bikes.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Analytical reasoning

55) For resource use to be efficient, when the marginal benefit of a slice of pizza exceeds the

marginal cost ________.

A) more slices of pizza should be produced

B) fewer slices of pizza should be produced

C) no more slices of pizza should be produced

D) allocative efficiency is reached only if the marginal benefit exceeds the marginal cost by as

much as possible

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Analytical reasoning

56) When society produces the combination of goods and services on the PPF that it values the

most highly, society has

A) achieved only production efficiency and definitely not allocative efficiency.

B) achieved only allocative efficiency definitely not production efficiency.

C) achieved both production efficiency and allocative efficiency.

D) achieved a free lunch.

E) perhaps achieved production efficiency and has perhaps achieved allocative efficiency.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Reflective thinking

20

57) In order to efficiently allocate goods and services, we have to compare

A) total cost to total benefit.

B) total cost to price.

C) marginal benefit to price.

D) marginal cost to marginal benefit.

E) price to marginal cost.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: WM

AACSB: Reflective thinking

58) We allocate resources efficiently when

A) marginal benefit is equal to marginal cost.

B) marginal benefit is greater than marginal cost by any amount.

C) marginal cost is greater than marginal benefit.

D) total benefit is greater than total cost.

E) marginal benefit is greater than marginal cost by as much as possible.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: WM

AACSB: Reflective thinking

59) If the difference between the marginal benefit and the marginal cost of a good is as large as

possible,

A) resources are being used with maximum efficiency.

B) resources would create more value producing other goods and hence the production of this

good should be decreased.

C) more of the good should be produced.

D) allocative efficiency has been attained.

E) Both answers A and D are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Analytical reasoning

21

60) Allocative efficiency is achieved when the marginal benefit of a good

A) exceeds the marginal cost regardless of how much the difference is.

B) is less than its marginal cost.

C) is equal to its marginal cost.

D) equals zero.

E) exceeds the marginal cost by as much as possible.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: PH

AACSB: Reflective thinking

61) Suppose the nation is producing at a point on its PPF. If the marginal cost of producing one

more computer is greater than the marginal benefit, the nation is producing

A) too few computers to be allocatively efficient.

B) too many computers to be allocatively efficient.

C) the correct number of computers to be allocatively efficient.

D) at the point of allocative efficiency.

E) More information is needed to determine if the nation is or is not producing at the allocatively

efficient point.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: SB

AACSB: Analytical reasoning

22

62) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's

marginal cost of providing manatee swimming tours. At 1 manatee swim per week, Kaley's

marginal benefit is ________ and Scott's marginal cost is ________.

A) $40; $10

B) $40; $40

C) $90; $50

D) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: JC

AACSB: Analytical reasoning

63) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's

marginal cost of providing manatee swimming tours. If Scott offers two swim tours per week, he

incurs a marginal cost of

A) more than $30.

B) $30.

C) $20.

D) $10.

E) $2

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: JC

AACSB: Analytical reasoning

23

64) The figure above shows Kaley's marginal benefit from swimming with manatees and Scott's

marginal cost of providing manatee swimming tours. For Kaley and Scott, allocative efficiency

is achieved at what point?

A) A

B) B

C) C

D) D

E) Either point A or point D

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: JC

AACSB: Analytical reasoning

24

65) The figure above shows a nation's production possibilities frontier. If the marginal cost

equals the marginal benefit at point A when 4 million pizzas are produced,

A) allocative efficiency is achieved but production efficiency is not achieved because there are

no tacos being produced.

B) both allocative and production efficiency are achieved.

C) production efficiency is achieved but allocative efficiency is not achieved because there are

no tacos being produced.

D) production efficiency is achieved but allocative efficiency is not achieved because the number

of tacos produced is at its absolute maximum.

E) neither allocative nor production efficiency has been achieved.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Analytical reasoning

25

66) If a landlord will rent an apartment only to married couples over 30 years old, the landlord is

allocating resources using a ________ allocation method.

A) majority rule

B) market price

C) contest

D) personal characteristics

E) command

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: STUDY GUIDE

AACSB: Reflective thinking

67) Allocative efficiency occurs when

A) the most highly valued goods and services are produced.

B) all citizens have equal access to goods and services.

C) the environment is protected at all cost.

D) goods and services are free.

E) production takes place at any point on the PPF.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: STUDY GUIDE

AACSB: Reflective thinking

68) Marginal benefit equals the

A) benefit that a person receives from consuming another unit of a good.

B) additional efficiency from producing another unit of a good.

C) increase in profit from producing another unit of a good.

D) cost of producing another unit of a good.

E) total benefit from consuming all the units of the good or service.

Skill: Level 1: Definition

Section: Checkpoint 6.1

Author: STUDY GUIDE

AACSB: Reflective thinking

26

69) In general, the marginal cost curve

A) has a positive slope.

B) has a negative slope.

C) is horizontal.

D) is vertical.

E) is U-shaped.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: STUDY GUIDE

AACSB: Reflective thinking

70) Allocative efficiency is achieved when the marginal benefit of a good

A) exceeds the marginal cost by as much as possible.

B) exceeds the marginal cost but not by as much as possible.

C) is less than the marginal cost.

D) equals the marginal cost.

E) equals zero.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: STUDY GUIDE

AACSB: Reflective thinking

6.2 Value, Price, and Consumer Surplus

1) Which describes the economic meanings of value and price?

A) Value is exchange worth minus marginal benefit and price is the dollars that must be paid.

B) Value is the marginal benefit obtained and price is the dollars that must be paid.

C) Value refers to the gain the producer gets from the good or service and price refers to the gain

the consumer gets from the good or service.

D) Value refers to the dollars that must be paid and price refers to the cost of producing the good.

E) They are the same and both mean the dollars that must be paid.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

27

2) The value of a slice of pizza to a consumer is equal to

A) its marginal benefit.

B) the maximum price the consumer is willing to pay.

C) the consumer surplus.

D) Both answers A and B are correct.

E) Both answers B and C are correct.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

3) To an economist, "value" is the same as

A) marginal cost.

B) consumer surplus.

C) the minimum price that people are willing to pay for another unit of the good.

D) marginal benefit.

E) total surplus.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: CD

AACSB: Reflective thinking

4) Which of the following statements is correct?

i. The demand curve shows the maximum price people are willing to pay for a given quantity

of the good.

ii. The maximum price a consumer is willing to pay for an additional unit is the marginal

benefit of that unit.

iii. Value is what a consumer receives and price is what a consumer pays.

A) i only.

B) ii only.

C) iii only.

D) i and iii.

E) i, ii, and iii.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

28

5) Value and price can be compared by noting that

A) they are the same thing.

B) value is always greater than price.

C) value is what we must pay while price is what we are willing to pay.

D) price is what we must pay and value is what we are willing to pay.

E) value is what the seller receives when we buy a good and price is what we must pay when we

buy a good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: WM

AACSB: Reflective thinking

6) The maximum amount of other goods and services that people are willing to give up in order

to get one more unit of a good is defined as the good's

A) marginal benefit.

B) total benefit.

C) marginal cost.

D) total cost.

E) price.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

7) The marginal benefit of each additional unit of a good consumed

A) increases as more is consumed.

B) is always equal to its marginal cost.

C) decreases as more is consumed.

D) will maximize consumer surplus.

E) is equal to the deadweight loss if the unit of the good is not produced.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

29

8) The phrase "decreasing marginal benefit" means that

A) the more you consume of the product, the less total benefit you derive.

B) the marginal cost will be increasing as you consume more of a good.

C) each additional unit of a good you consume gives you less additional benefit than the previous

unit.

D) Both answers A and B are correct.

E) Both answers A and C are correct.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

9) What must be true for a consumer to buy a good or service?

A) The price must be equal to or less than the marginal benefit.

B) The total benefit received must equal the total spent to buy the good or service.

C) The consumer must be able to obtain some consumer surplus.

D) The consumer must not be able to produce the product.

E) The price must be equal to or greater than the marginal benefit.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

10) Mark loves ice cream. At any point in time, he will buy an additional ice cream cone if

A) the marginal benefit from it exceeds the price.

B) the marginal benefit from it is zero.

C) his willingness to pay is less than the price.

D) there is no deadweight loss produced by his purchase of a cone.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

30

11) A point on the demand curve shows the

A) price and the corresponding quantity demanded.

B) marginal benefit from that unit.

C) marginal cost to the seller of producing the unit.

D) Both answers A and B are correct.

E) Both answers A and C are correct.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

12) A point on the demand curve shows the

A) minimum price that people are willing to pay for another unit of a good.

B) dollars' worth of other goods that people must sacrifice to consume another unit of the good.

C) maximum price that people are willing to pay for another unit of a good.

D) consumer surplus a person gains from consuming a unit of a good.

E) marginal benefit minus the consumer surplus from consuming another unit of a good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: CD

AACSB: Reflective thinking

13) The demand curve is also the

A) total cost curve.

B) total benefit curve.

C) marginal cost curve.

D) marginal benefit curve.

E) marginal deadweight cost curve.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: WM

AACSB: Reflective thinking

31

14) A demand curve can be interpreted as

A) a marginal benefit curve.

B) a total benefit curve.

C) an average benefit curve.

D) a marginal cost curve.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

15) Which of the following is true regarding a demand curve?

i. The demand curve is also the marginal benefit curve.

ii. The demand curve shows the dollars' worth of other goods that people are willing to forgo to

consume another unit of the good.

iii. The demand curve shows the maximum price that people are willing to pay for another unit

of a good.

A) i and ii

B) i and iii

C) ii and iii

D) i, ii, and iii

E) i only

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: CD

AACSB: Reflective thinking

16) The total benefit from buying a particular unit of a good

A) is the amount paid for the unit plus the consumer surplus of the unit.

B) increases as market price increases.

C) is the difference between the amount paid for the unit and the market price of the unit.

D) is the difference between the marginal benefit of the unit and the marginal cost of producing

that unit.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

32

17) A consumer's total benefit from consuming a good is equal to the

A) total expenditure on the good.

B) consumer surplus on the quantity purchased.

C) consumer surplus plus the total expenditure.

D) consumer surplus minus the total expenditure.

E) total expenditure on the good divided by the number of units purchased.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SB

AACSB: Reflective thinking

18) Samantha was willing to pay $10 for a hamburger because she was hungry but she only paid

$2.50. What is the marginal benefit Samantha gained from the hamburger?

A) $2.50

B) $7.50

C) $10.00

D) $12.50

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: TS

AACSB: Analytical reasoning

19) Consumer surplus exists when a

A) person buys something with a marginal benefit less than what they paid.

B) person buys something with a marginal benefit exactly what they paid.

C) person buys something with a marginal benefit more than what they paid.

D) producer sells something for more than it is worth.

E) person buys something with a marginal cost less than what they paid.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: JC

AACSB: Reflective thinking

33

20) Shelby said to her friend, “I just bought a new pair of climbing shoes and I love them so

much that I totally would have paid more for them.” Shelby was describing the concept of

A) consumer surplus.

B) producer surplus.

C) equilibrium.

D) marginal cost.

E) total surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: KG

AACSB: Reflective thinking

21) Jake just bought a new hockey stick. When he was leaving the shop, he thought that he such

a great deal and would have paid $50 more dollars for the stick. Jake received

A) producer surplus.

B) equilibrium.

C) marginal cost.

D) total surplus.

E) consumer surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: KG

AACSB: Reflective thinking

22) Consumer surplus exists when

A) it costs less to produce goods than buyers must pay for them.

B) consumers value the good more highly than what they must pay to buy it.

C) taxes on goods are less than the appropriate amount.

D) the marginal benefit of the good is always equal to or less than the price of the good.

E) the price of the good is greater than the marginal cost of producing a unit of the good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

34

23) The consumer acquires a consumer surplus on a good if the marginal benefit is

A) equal to the price.

B) greater than the price.

C) less than the price.

D) zero.

E) less than the marginal cost.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SB

AACSB: Reflective thinking

24) Consumer surplus is equal to

A) marginal benefit minus price summed over the quantity consumed.

B) price minus marginal benefit summed over the quantity consumed.

C) marginal benefit summed over the quantity consumed.

D) price multiplied by the quantity consumed.

E) marginal benefit plus price summed over the quantity consumed.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SB

AACSB: Reflective thinking

25) Which of the following statements is correct?

A) Consumer surplus equals the price paid for a good.

B) The consumer surplus from a good is always larger than the total benefit from the good.

C) An increase in price decreases consumer surplus.

D) An increase in price has no effect on consumer surplus.

E) The consumer surplus from a good or service must always equal producer surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

35

26) In a figure, the consumer surplus is equal to the area ________ the ________ curve and

________ the price.

A) above; demand; above

B) below; supply; below

C) below; demand; below

D) below; demand; above

E) above; supply; below

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: KG

AACSB: Analytical reasoning

27) Consumer surplus is the area

A) below the demand curve and above the market price.

B) below the supply curve and above the market price.

C) above the demand curve and below the market price.

D) above the supply curve and below the market price.

E) below the demand curve and above the supply curve.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

28) When the market price rises, the consumers' consumer surplus ________. When the market

price falls, the consumers' consumer surplus ________.

A) decreases; increases

B) decreases; decreases

C) increases; increases

D) increases; decreases

E) does not change; increases

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: KG

AACSB: Analytical reasoning

36

29) In the summer of 2008, the price of gasoline increased greatly. If the demand curve for

gasoline did not shift, which of the following occurred?

A) Drivers received no consumer surplus after the price increase.

B) Consumer surplus increased if drivers drove less.

C) Consumer surplus decreased.

D) If consumers drove the same amount, they received less total benefit.

E) Both the marginal benefit from each gallon of gasoline and the consumer surplus from each

gallon of gasoline decreased.

Skill: Level 4: Applying models

Section: Checkpoint 6.2

Author: TS

AACSB: Analytical reasoning

30) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have

paid $25 for the lock. Katy’s consumer surplus equaled

A) $10.

B) $40.

C) $5.

D) $20.

E) $50.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: KG

AACSB: Analytical reasoning

31) Lauren and Katy each bought a new bike lock for $20. Both Lauren and Katy would have

paid $25 for the lock. The total consumer surplus for Lauren and Katy taken together equaled

A) $15.

B) $10.

C) $40.

D) $20.

E) $50.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: KG

AACSB: Analytical reasoning

37

32) Mary is willing to pay $50 for a Christmas tree, John is willing to pay $45 and Jeff is willing

to pay $40. The price of a tree is $40. The total consumer surplus for Mary, John and Jeff taken

together is

A) $15.

B) $135.

C) $40.

D) $95.

E) $120.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

33) Suppose Dan is willing to pay a maximum of $3,000 for a piano, but finds one he can buy for

$2,500. Dan's consumer surplus from this piano is

A) $5,500.

B) $3,000.

C) $2,500.

D) $500.

E) zero because he buys the piano.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SB

AACSB: Analytical reasoning

34) Which of the following is an example of consumer surplus?

A) Jose buys a hamburger for $2 and tells you he would not have paid a penny more.

B) John believes the price he paid for his computer was too high.

C) Mary buys a paper tablet for $2 and finds the same good at another store for $1.50.

D) Sue would have paid $15 for a new compact disc but paid only $10.

E) Anne finds a mountain bike for which she is willing to pay a maximum of $550 and the price

of the bike is $600.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

38

35) If you are willing to pay no more than $4 for a slice of pizza and the price of a slice of pizza

is $4, then

A) if you buy it, you would be cheated because you would realize no benefit from the purchase.

B) you buy it but you get no marginal benefit from the purchase.

C) you will not buy it.

D) you buy it but you get no consumer surplus from the purchase.

E) you might buy it depending on how the slice's marginal benefit compares to its price.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

36) If a seller charges a buyer the exact price the buyer is willing to pay, then the buyer would

A) not buy the good.

B) receive the maximum consumer surplus.

C) receive no benefit from the good.

D) receive no consumer surplus from that unit of the good.

E) suffer a deadweight loss from buying the good.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SA

AACSB: Reflective thinking

39

37) In the figure above, for the 3,000th unit, the maximum price a consumer is willing to pay is

A) $5.

B) $10.

C) $15.

D) $0.

E) $25.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: PH

AACSB: Analytical reasoning

38) In the figure above, at the market price of $15, the consumer surplus equals

A) $10,000.

B) $30,000.

C) $40,000.

D) 2,000 units

E) $20,000.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: PH

AACSB: Analytical reasoning

40

39) The figure above shows Lauren's demand curve for Barbie dolls and the market price for

Barbie dolls. Using the area of the consumer surplus triangle, Lauren's total consumer surplus

from purchasing 3 dolls is

A) $5.50.

B) $10.00.

C) $22.50.

D) $45.00.

E) 3 dolls.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: JC

AACSB: Analytical reasoning

41

40) The figure above shows Lauren's demand curve for Barbie dolls and the market price for

Barbie dolls. In order for Lauren to avoid paying more for dolls than they are worth to her, she

must not purchase any more than

A) 0 dolls.

B) 1 doll.

C) 3 dolls.

D) 5 dolls.

E) 4 dolls.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: JC

AACSB: Analytical reasoning

41) In the figure above, suppose that $20 is the market equilibrium price. Which area is the

consumer surplus?

A) A

B) B

C) A + B

D) B - A

E) B ÷ A

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

42

42) In the figure above, suppose that $20 is the market equilibrium price. What is the amount of

the consumer surplus?

A) $3,375

B) $3,000

C) $375

D) 150 units

E) $1,500

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

43) the figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's

consumer surplus from her 10th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) $1.50.

E) $2.50

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CD

AACSB: Analytical reasoning

43

44) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's

consumer surplus from her 15th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) $1.50.

E) $2.50.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CD

AACSB: Analytical reasoning

45) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's

consumer surplus from all 15 sodas is

A) $15.00.

B) $22.50.

C) $11.25.

D) $8.00.

E) $1.50.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CD

AACSB: Analytical reasoning

46) The figure above shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's

total benefit from consuming 15 sodas is

A) $15.00.

B) $26.25.

C) $11.25.

D) $0.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CD

AACSB: Analytical reasoning

44

47) Value is

A) the price we pay for a good.

B) the cost of resources used to produce a good.

C) objective so that it is determined by market forces, not preferences.

D) the marginal benefit we get from consuming another unit of a good or service.

E) the difference between the price paid for a good and the marginal cost of producing that unit

of the good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Reflective thinking

48) A marginal benefit curve

A) is the same as a demand curve.

B) is the same as a supply curve.

C) slopes upwards.

D) is a vertical line at the efficient quantity.

E) is U-shaped.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Reflective thinking

49) In general, as the consumption of a good or service increases, the marginal benefit from

consuming that good or service

A) increases.

B) decreases.

C) stays the same.

D) at first increases and then decreases.

E) at first decreases and then increases.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Reflective thinking

45

50) The difference between the marginal benefit from a new pair of shoes and the price of the

new pair of shoes is

A) the consumer surplus from that pair of shoes.

B) what we get.

C) what we have to pay.

D) the price when the marginal benefit is maximized.

E) the consumer's expenditure on the shoes.

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Reflective thinking

51) Suppose the price of a scooter is $200 and Cora Lee is willing to pay $250. Cora Lee's

A) consumer surplus from that scooter is $200.

B) consumer surplus from that scooter is $50.

C) marginal benefit from that scooter is $100.

D) consumer surplus from that scooter is $150.

E) consumer surplus from that scooter is $250.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

52) If the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed

________ the consumer surplus from the second pizza consumed.

A) is greater than

B) equals

C) is less than

D) cannot be compared to

E) None of the above answers is correct because more information is needed about the marginal

cost of producing the pizzas to answer the question.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

46

6.3 Cost, Price, and Producer Surplus

1) To a seller, the cost of a good or service is ________ and the price is ________.

A) what must be given up to produce the good or service; what is received for the good or

service

B) what is received for the good or service; what must be given up to produce the good or

service

C) the producer surplus the seller receives; the consumer surplus the buyer receives

D) the producer surplus the buyer receives; the consumer surplus the seller receives

E) None of the above answers is correct.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: JC

AACSB: Reflective thinking

2) Which of the following describes the economic meanings of cost and price?

A) Cost is exchange worth, and price is dollar worth.

B) Cost is what must be given up to produce a good, and price is what a seller receives when the

good is sold.

C) They are the same, and both mean what is received when a good is sold.

D) Cost refers to what the buyers pay for the good, and price refers to what sellers receive when

the good is sold.

E) Cost refers to the price that buyers must pay to buy the good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: TS

AACSB: Reflective thinking

3) The additional cost a producer incurs from producing one more unit of a product is referred to

as the

A) marginal benefit.

B) consumer surplus.

C) marginal utility.

D) marginal cost.

E) marginal profit.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: PH

AACSB: Reflective thinking

47

4) The opportunity cost of producing one more unit of a good or service is the

A) marginal cost.

B) marginal benefit.

C) efficient level of production.

D) market outcome.

E) price of the good or service.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: SB

AACSB: Reflective thinking

5) The cost of producing one more unit of a good or service is equal to its

A) marginal benefit.

B) producer surplus.

C) expenditures .

D) consumer surplus.

E) marginal cost.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: KG

AACSB: Reflective thinking

6) Ben's cost of making an additional rocking chair is $75.

A) If he sells it for a $100, his producer surplus is $25.

B) His marginal cost is equal to $75.

C) The marginal benefit to the consumer from the chair will be $75.

D) Both answers A and B are correct.

E) Both answers B and C are correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

48

7) A supply curve is the same as a

A) total cost curve.

B) marginal cost curve.

C) total benefit curve.

D) marginal benefit curve.

E) deadweight loss curve.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: WM

AACSB: Reflective thinking

8) The supply curve of a good or service is the same as

A) the demand curve.

B) the marginal benefit curve.

C) the marginal cost curve.

D) the total surplus curve.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: TS

AACSB: Reflective thinking

9) A point on the supply curve can illustrate the

A) price and the corresponding quantity supplied.

B) marginal cost of that unit of the good.

C) price the consumer is willing to pay.

D) Both answers A and B are correct.

E) Both answers A and C are correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Reflective thinking

49

10) The supply curve shows the

A) marginal benefit of a firm producing another unit of a good.

B) dollars' worth of other goods and services we are willing to give up to get another unit of the

good.

C) minimum price that firms must receive to supply a certain quantity of a good.

D) the producer surplus of producing the good.

E) maximum price that firms will accept in order to supply a certain quantity of a good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: CD

AACSB: Reflective thinking

11) A supply curve shows quantities supplied at various prices. It also shows the

A) total profit the firm earns at a given level of output.

B) marginal benefit of the good.

C) total cost of production.

D) marginal cost of production.

E) producer surplus, which is equal to the slope of the supply curve.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: TS

AACSB: Reflective thinking

12) A supply curve shows the marginal

A) benefit consumers receive from consuming a good.

B) profit businesses earn from selling a good.

C) cost of producing the good.

D) price paid for a good.

E) benefit sellers receive from selling a good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: SB

AACSB: Reflective thinking

50

13) The supply curve is upward sloping because of

A) increasing marginal cost.

B) decreasing marginal benefit.

C) decreasing marginal cost.

D) increasing marginal benefit.

E) increasing total cost.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: PH

AACSB: Reflective thinking

14) Which of the following is a correct description of the supply curve?

i. The supply curve is also the marginal cost curve.

ii. The supply curve shows the dollars' worth of other goods that we must sacrifice to produce

another unit of a good.

iii. The supply curve shows the additional cost of producing another unit of a good.

A) i only

B) i and ii

C) ii and iii

D) i, ii, and iii

E) ii only

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: CD

AACSB: Reflective thinking

51

15) In the above figure, what is the marginal cost of the 4th pizza?

A) $0

B) $4

C) $9

D) $36

E) 4 pizzas

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: PH

AACSB: Analytical reasoning

16) In the above figure, what is the marginal cost of the 8th pizza?

A) $1.50

B) $12

C) $6

D) $96

E) 8 pizzas

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: PH

AACSB: Analytical reasoning

52

17) Producer surplus is the ________ summed over the quantity produced.

A) price of the good minus the marginal cost of producing it

B) marginal benefit of the good minus its marginal cost

C) marginal benefit of the good minus its price

D) marginal cost of the good minus the opportunity cost of producing it

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: SB

AACSB: Reflective thinking

18) Producer surplus definitely exists when the

A) price exceeds marginal benefit.

B) price exceeds marginal cost.

C) marginal cost exceeds the price.

D) marginal benefit exceeds the price.

E) marginal benefit exceeds the marginal cost.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: JC

AACSB: Reflective thinking

19) When the price of a product exceeds the marginal cost of producing it, producers have a

A) consumer surplus.

B) producer surplus.

C) consumer shortage.

D) producer shortage.

E) deadweight surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: PH

AACSB: Reflective thinking

53

20) If the price is greater than the marginal cost of producing a good, the seller has

A) no benefit from the sale.

B) a loss.

C) some producer surplus from the sale.

D) some negative consumer surplus from the sale.

E) None of the above answers is correct.

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: TS

AACSB: Reflective thinking

21) The producer surplus is found by subtracting the ________ and then adding the difference

for all units sold.

A) marginal cost from price

B) price from marginal cost

C) marginal benefit from total benefit

D) marginal cost from marginal benefit

E) deadweight loss from the price

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: WM

AACSB: Reflective thinking

22) When the price rises, the firms' producer surplus ________. When the price falls, the firms'

producer surplus ________.

A) increases; decreases

B) decreases; increases

C) decreases; decreases

D) increases; increases

E) does not change; does not change

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: KG

AACSB: Reflective thinking

54

23) The producer surplus of making and selling 10 chairs is found by

A) multiplying the selling price by 10.

B) subtracting the marginal cost from the selling price for each chair and summing the

differences for all 10 chairs.

C) subtracting from the total revenue the cost of producing one chair multiplied by 10.

D) adding the marginal cost and the price of all 10 chairs.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: TS

AACSB: Analytical reasoning

24) Producer surplus

A) increases if market price rises and the supply curve does not shift.

B) decreases if market price rises and the supply curve does not shift.

C) is equal to the maximum price consumers are willing to pay.

D) is the same as the marginal cost.

E) always must equal consumer surplus.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

25) Hester owns an ice cream shop. It costs her $2 per cone to make 10 ice cream cones. If she

sells 10 cones for $4 each, her producer surplus on the 10 cones is equal to

A) $2.

B) $20.

C) $10.

D) $40.

E) $4.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: KG

AACSB: Analytical reasoning

55

26) If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75,

respectively, and sells them for $80 each, what is the firm's total producer surplus?

A) $400

B) $225

C) $175

D) $150

E) $80

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: TS

AACSB: Analytical reasoning

27) Graphically, producer surplus is the area under the

A) demand curve and above the supply curve, up to the relevant quantity.

B) price and above the demand curve, up to the relevant quantity.

C) price and above the supply curve, up to the relevant quantity.

D) price and above the quantity axis, up to the relevant quantity.

E) demand curve and above the price, up to the relevant quantity.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SB

AACSB: Analytical reasoning

56

28) Bill and Krista sell potted plants from a roadside stand. The figure above shows Bill and

Krista's marginal cost curve and the market price. If Bill and Krista sell 60 plants per week, their

producer surplus from the 60th plant will equal

A) $8.

B) $480.

C) $0.

D) $20.

E) More information is needed to answer the question.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: JC

AACSB: Analytical reasoning

57

29) Bill and Krista sell potted plants from a roadside stand. The figure above shows their supply

curve and the market price. If Bill and Krista want to avoid selling plants for which the marginal

cost exceeds the price, they should sell no more than how many plants per week?

A) 0

B) 60

C) 90

D) 150

E) More information is needed to answer the question.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: JC

AACSB: Analytical reasoning

30) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The

marginal cost of the 10,000th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) more than $0.50 and less than $1.00.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CD

AACSB: Analytical reasoning

58

31) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The

marginal cost of the 20,000th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) more than $1.00.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CD

AACSB: Analytical reasoning

32) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The

________ price that must be offered so that the 10,000th soda is produced is ________.

A) minimum; $0.50

B) minimum; $1.00

C) maximum; $0.50

D) maximum; $1.00

E) minimum; more than $0.50 but less than $1.00

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CD

AACSB: Analytical reasoning

33) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The

producer surplus from the 10,000th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) more than $1.00.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CD

AACSB: Analytical reasoning

59

34) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The

producer surplus from the 20,000th soda is

A) $0.00.

B) $0.50.

C) $1.00.

D) more than $1.00.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CD

AACSB: Analytical reasoning

35) In the figure above, the equilibrium market price is $20. $20 is the

A) marginal cost of 150th unit.

B) willingness to pay for the 1st unit.

C) producer surplus.

D) consumer surplus.

E) deadweight loss.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

60

36) In the figure above, the equilibrium market price is $20. Area A is the

A) marginal cost of 150th unit.

B) willingness to pay for the 150th unit.

C) producer surplus.

D) consumer surplus.

E) marginal benefit of 150th unit.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

37) In the figure above, the equilibrium market price is $20. The producer surplus is shown by

the area

A) A.

B) B.

C) A + B.

D) A ÷ B.

E) A - B.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

38) In the figure above, the equilibrium market price is $20. The producer surplus equals

A) $20.

B) $1,500.

C) $3,000.

D) 150.

E) $4,500.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SA

AACSB: Analytical reasoning

61

39) Cost

A) is what the buyer pays to get the good.

B) is always equal to the marginal benefit for every unit of a good produced.

C) is what the seller must give up to produce the good.

D) is greater than market price, which results in a profit for firms.

E) means the same thing as price.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Reflective thinking

40) If a firm is willing to supply the 1,000th unit of a good at a price of $23 or more, we know

that $23 is the

A) highest price the seller hopes to realize for this output.

B) minimum price the seller must receive to produce this unit.

C) average price of all the prices the seller could charge.

D) price that sets the marginal benefit equal to the price.

E) only price for which the seller is willing to sell this unit of the good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Reflective thinking

41) A supply curve shows the ________ of producing one more unit of a good or service.

A) producer surplus

B) consumer surplus

C) total benefit

D) marginal cost

E) marginal benefit to the producer

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Reflective thinking

62

42) The producer surplus on a unit of a good is

A) equal to the marginal benefit from the good minus its price.

B) equal to the price of the good minus the marginal cost of producing it.

C) always equal to consumer surplus.

D) Both answers A and C are correct.

E) Both answers B and C are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Reflective thinking

43) Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour.

What is your producer surplus?

A) $5 an hour

B) $10 an hour

C) $15 an hour

D) $25 an hour

E) More than $25 an hour.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

44) In a figure that shows a supply curve and a demand curve, producer surplus is the area

A) below the demand curve and above the market price.

B) below the supply curve and above the market price.

C) above the demand curve and below the market price.

D) above the supply curve and below the market price.

E) between the demand curve and the supply curve.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

63

6.4 Are Markets Efficient?

1) In a competitive market with no externalities,

A) the consumer surplus is equal to zero because of competition.

B) buyers cannot control the price, so the consumer surplus is zero.

C) at the equilibrium price, marginal benefit exceeds marginal cost.

D) at the equilibrium price, marginal benefit equals marginal cost.

E) at the equilibrium price, the total amount of consumer surplus equals the total amount of

producer surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SA

AACSB: Reflective thinking

2) A competitive market with no externalities is efficient when it is in equilibrium because

A) total benefit equals total cost.

B) marginal benefit equals marginal cost.

C) consumer surplus equals producer surplus.

D) the sum of consumer surplus plus producer surplus is minimized.

E) the deadweight gain equals its maximum.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: WM

AACSB: Reflective thinking

3) If marginal benefit is equal to marginal cost, then the

A) producer surplus is equal to the consumer surplus.

B) sum of producer surplus and consumer surplus is as large as possible.

C) sum of producer surplus and consumer surplus equals zero.

D) market has squeezed out total surplus so that it equals zero.

E) deadweight loss is more than zero but less than its maximum.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SA

AACSB: Reflective thinking

64

4) Which of the following occurs when a market is efficient?

A) Consumer surplus equals producer surplus.

B) Consumer surplus is as large as possible.

C) Producer surplus is as large as possible.

D) The sum of consumer surplus and producer surplus is maximized.

E) The marginal benefit exceeds the marginal cost by as much as possible.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: TS

AACSB: Reflective thinking

5) Efficiency in a market occurs when the production of the good is such that

A) marginal benefit exceeds marginal cost.

B) marginal benefit equals marginal cost.

C) marginal benefit is lower than marginal cost.

D) the marginal cost stops increasing.

E) marginal benefit exceeds marginal cost by the maximum amount possible.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: MR

AACSB: Reflective thinking

6) At the market equilibrium, when efficiency is attained, the marginal benefit ________ the

marginal cost.

A) is equal to

B) is greater than

C) is less than

D) has no necessary relationship with

E) is equal to the marginal deadweight loss which is equal to

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

65

7) If the market for bicycles is efficient, then

A) no more bicycles can be produced.

B) marginal benefit exceeds marginal cost.

C) consumer surplus must be greater than producer surplus.

D) it is not possible to produce more bicycles without sacrificing another, more highly valued

good.

E) consumer surplus must equal producer surplus.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: CD

AACSB: Reflective thinking

8) When efficiency is attained, the sum of the total amount of consumer surplus and producer

surplus is

A) minimized.

B) maximized.

C) equal to the deadweight loss.

D) undefined.

E) equal to zero.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

9) If the marginal benefit of a hot dog is greater than its marginal cost, then to increase

efficiency,

A) more hot dogs should be produced.

B) fewer hot dogs should be produced.

C) nothing should be done if the marginal benefit is greater than the marginal cost by the

maximum amount because in this case the efficient quantity of hot dogs is being produced.

D) production should be halted.

E) More information is needed about the price of a hot dog in order to determine if production

should be increased, decreased, or not changed.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SB

AACSB: Analytical reasoning

66

10) The figure above shows the competitive market for slices of key lime pie. If the production is

40 slices per day, someone is willing to buy another slice of pie for

A) more than it costs to produce the slice.

B) less than it costs to produce the slice.

C) an amount equal to the cost of producing the slice.

D) an amount equal to the cost of producing all 40 slices.

E) an amount that is not comparable to the cost of producing the slice.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: JC

AACSB: Analytical reasoning

11) The figure above represents the competitive market for slices of key lime pie. If the

production is 80 slices per day, the cost of the 80th slice is

A) less than anyone is willing to pay for it.

B) more than anyone is willing to pay for it.

C) equal to what someone is willing to pay for it.

D) indeterminant.

E) equal to the deadweight loss from the 80th slice.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: JC

AACSB: Analytical reasoning

67

12) The figure above represents the competitive market for slices of key lime pie. When 60 slices

are produced, the marginal cost

A) exceeds the marginal benefit.

B) is less than the marginal benefit.

C) equals the marginal benefit.

D) is not defined.

E) equals the deadweight loss on the 60th slice.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: JC

AACSB: Analytical reasoning

13) The figure above represents the competitive market for slices of key lime pie. When the price

equals $3

A) there is a shortage of slices of pie.

B) there is a surplus of slices of pie.

C) the efficient quantity of slices is being produced.

D) the quantity produced is inefficient.

E) the deadweight loss is maximized.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: JC

AACSB: Analytical reasoning

68

14) The figure above shows the marginal benefit and marginal cost curves for pizza. In the

figure, what is the efficient quantity of pizza?

A) 0 pizzas

B) 10,000 pizzas

C) 20,000 pizzas

D) 30,000 pizzas

E) The efficient quantity cannot be determine without more information.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SB

AACSB: Analytical reasoning

69

15) In the figure above, if the market price is $12, then the total consumer surplus is

A) $12.

B) $10.

C) minimized.

D) $240.

E) $480.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SA

AACSB: Analytical reasoning

16) In the figure above, if the market is at equilibrium, then the total consumer surplus equals the

area ________ and the total producer surplus equals the area ________.

A) A; B

B) B; C

C) C; B

D) A; C

E) A + B; C

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SA

AACSB: Analytical reasoning

70

17) In the figure above, if the market is at equilibrium, the sum of the total consumer surplus and

the total producer surplus is

A) $240.

B) $600.

C) $1,000.

D) $0.

E) $60.

Skill: Level 5: Critical thinking

Section: Checkpoint 6.4

Author: MR

AACSB: Analytical reasoning

18) In the figure above, suppose the market is at equilibrium. Then area A is the

A) marginal benefit.

B) marginal cost.

C) amount of the consumer surplus.

D) amount of the producer surplus.

E) deadweight loss.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: PH

AACSB: Analytical reasoning

71

19) In the figure above, suppose the market is at equilibrium. Then area B is the

A) marginal benefit.

B) marginal cost.

C) amount of the consumer surplus.

D) amount of the producer surplus.

E) deadweight loss.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: PH

AACSB: Analytical reasoning

20) In the above figure, the market is at its equilibrium. Area A is equal to

A) consumer surplus.

B) total revenue.

C) marginal benefit.

D) producer surplus.

E) total surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

72

21) In the above figure, the market is at its equilibrium. Area B is equal to

A) consumer surplus.

B) total revenue.

C) marginal benefit.

D) producer surplus.

E) total surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

22) In the above figure, the market is at its equilibrium. Area A + area B is equal to

A) consumer surplus.

B) total revenue.

C) total surplus.

D) marginal benefit.

E) producer surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

23) The concept of "the invisible hand" suggests that

A) products are produced out of a seller's sense of charity.

B) when the seller is better off, the buyer is worse off.

C) sellers exploit consumers with high prices.

D) buyers and sellers are self-interested.

E) the command system is the only way of efficiently allocating resources.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

73

24) Adam Smith's Wealth of Nations, written in 1776, describes the market's invisible hand

representing the

A) King of England's control over the colonies.

B) control all governments have in organizing the market.

C) efficiency the market achieves without the interference of governments.

D) inefficiency of markets when governments do not organize them.

E) invisible command system that efficiently allocates resources.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: WM

AACSB: Reflective thinking

25) What did Adam Smith identify as the source of the invisible hand in 1776?

A) a benevolent central government that decided was best for everyone

B) an individual's concern for fellow humans

C) an individual's own self-interest

D) the stock market

E) buyers' and suppliers' concerns to obtain and retain good reputations

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: TS

AACSB: Reflective thinking

26) The "invisible hand" refers to the notion that

A) competitive markets send resources to their highest valued uses.

B) government intervention is necessary to ensure efficiency.

C) marginal benefit decreases as more is consumed.

D) marginal cost increases as more is produced.

E) no matter what allocation method is used, the resulting production is efficient.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

74

27) The efficiency of competitive markets happens because

A) of the benevolence of the butcher, the brewer, and the baker.

B) people make environmentally aware purchasing decisions.

C) prices adjust to make buying plans and selling plans compatible.

D) government organizes and monitors production.

E) the U.S. economy uses a command system to allocate resources within the competitive

markets.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

28) The concept of "the invisible hand" suggests that to attain efficiency, the government should

A) guide economic activity.

B) set prices.

C) leave prices and output decisions to the competitive market.

D) regulate all production decisions, but not price decisions.

E) make sure that a command system is used to allocate resources.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

29) In a competitive market for a private good with no price or quantity regulations, no external

cost nor external benefit, low transactions costs, and no taxes or subsidies,

A) the allocation of resources is planned by the government.

B) production is organized by government organizations.

C) efficiency can be attained in the market with no government intervention.

D) efficiency is usually be achieved by majority rule.

E) efficiency is generally obtained by using a command system.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SA

AACSB: Reflective thinking

75

30) At a competitive equilibrium, if there are no taxes, subsidies, price regulations, quantity

regulations, or externalities

A) the marginal benefit is greater than the marginal cost.

B) resource use is efficient.

C) the marginal benefit is less than the marginal cost.

D) both the marginal benefit and the marginal cost of the last unit produced equal zero.

E) the marginal benefit is greater than the marginal cost by as much as possible.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

31) At a competitive market equilibrium, if there are no taxes, subsidies, price regulations,

quantity regulations, or externalities

i. consumer surplus is maximized.

ii. marginal cost equals marginal benefit.

iii. resources are efficiently used.

iv. producer surplus is maximized.

A) ii and iii

B) i and ii

C) i and iv

D) i, ii, iii, and iv

E) ii only

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: CD

AACSB: Reflective thinking

32) When technology increases the supply of a good and lower prices increase the quantity

demanded,

A) the economy is reallocating resources to achieve an efficient allocation.

B) consumer surplus falls.

C) the invisible hand is unnecessary.

D) the marginal benefit of the good increases with the quantity produced.

E) the economy is no longer efficient because the quantity changes.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

76

33) When output is less than the efficient level,

A) consumers are willing to pay more for another unit than it costs to produce the unit.

B) the amount consumers are willing to pay equals the cost of production.

C) the cost of production is greater than the price consumers are willing to pay.

D) the production costs can't be measured.

E) the marginal cost of producing the good must be greater than the marginal benefit from the

good.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

34) When there is underproduction, so that a market produces less than the efficient amount,

A) consumer surplus definitely is larger than when the efficient quantity is produced.

B) the sum of producer surplus and consumer surplus is larger than when the efficient quantity is

produced.

C) there is a deadweight loss.

D) consumers definitely lose and producers definitely gain.

E) consumers definitely gain and producers definitely lose.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: MR

AACSB: Reflective thinking

35) Overproduction results in

A) external costs.

B) external benefits.

C) deadweight loss.

D) super-efficiency.

E) the marginal benefit of the last unit produced being larger than the marginal cost.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

77

36) What do economists call the loss society experiences when the production of a good is less

than the efficient amount?

A) tax

B) subsidy

C) price floor

D) deadweight loss

E) quantity restriction.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

37) In the above figure, if the market is in equilibrium, area A + area B + area C equals

A) total surplus.

B) consumer surplus.

C) deadweight loss.

D) producer surplus.

E) total revenue.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

78

38) In the above figure, if the market quantity is restricted to 500,000 and the price is allowed to

rise to set the quantity demanded equal to the quantity supplied, then the producer surplus is

equal to

A) area D + area F.

B) area C + area E.

C) area A + area B + area C.

D) area A + area B.

E) area B + area D + area F.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

39) In the above figure, if the quantity is restricted to 500,000 and the price is allowed to rise to

set the quantity demanded equal to the quantity supplied, then area C + area E is equal to

A) deadweight loss.

B) consumer surplus.

C) total surplus.

D) producer surplus.

E) total revenue.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

79

40) In the above figure, if the quantity is equal to 500,000 units, the deadweight loss is equal to

A) area C.

B) area D + area I.

C) area B + area F.

D) area G + area H.

E) None of the above answers is correct because the deadweight loss is equal to zero.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

41) In the above figure, if the quantity is equal to 2,500,000 units, the deadweight loss is equal to

A) area B + area F.

B) area D + area I.

C) area C.

D) area G + area H.

E) None of the above answers is correct because the deadweight loss is equal to zero.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

80

42) In the above figure, if the quantity is equal to 1,500,000 units, the deadweight is equal to

A) area A + area B.

B) area C.

C) area B + area F.

D) area G + area H.

E) None of the above answers is correct because the deadweight loss is equal to zero.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: KG

AACSB: Analytical reasoning

43) Which of the following leads to a deadweight loss?

i. overproduction

ii. underproduction

iii. taxes

iv. monopoly

A) ii only

B) iii and iv

C) i and ii

D) i, ii, iii, and iv

E) i, ii, and iii

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: CD

AACSB: Reflective thinking

44) Which of the following government policies ensures market efficiency?

A) subsidy

B) tax

C) price regulations

D) quantity regulations

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

81

45) Obstacles in achieving efficiency in a market include

A) public goods.

B) the presence of an external cost or benefit.

C) competition.

D) Both answers A and C are correct.

E) Both answers A and B are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SA

AACSB: Reflective thinking

46) If the government imposes a tax on a competitive market with no externalities, then

i. resource use is not efficient.

ii. there is a deadweight loss.

iii. consumer surplus is at its maximum.

A) ii only

B) i and ii

C) iii only

D) i and iii

E) i, ii, and iii

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: CD

AACSB: Reflective thinking

47) What is the impact of a government subsidy to producers?

A) Less is produced relative to the efficient level, creating a deadweight loss.

B) More is produced relative to the efficient level, creating a deadweight loss.

C) Producer surplus is increased, which creates a larger consumer surplus.

D) Producers are able to sell the product at a higher price.

E) Consumers must pay a higher price for the good.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: TS

AACSB: Reflective thinking

82

48) Subsidies ________ the price paid by the buyer and ________ the price received by the

seller.

A) increase, increase

B) increase, decrease

C) decrease, increase

D) decrease, decrease

E) do not change; increase

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

49) When there is a cost or benefit that affects someone other than the seller and buyer, then

there is

A) a tax.

B) a subsidy.

C) a quantity regulation.

D) a price regulation.

E) an externality.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

50) When the cost of producing a product is paid, at least in part, by someone other than the

producer, the cost is referred to as

A) an external cost.

B) an external profit.

C) an external benefit.

D) an external/internal cost.

E) a public cost.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

83

51) A cost not borne by the producer but borne by other people is known as ________ cost.

A) a marginal

B) an internal

C) an external

D) a nonessential

E) a subsidized

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

52) Air pollution is an external cost because it

A) is a pollution of the external environment.

B) is a cost not borne by the producer of the good.

C) benefits no one.

D) is not associated with resource use.

E) is created only when production occurs.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

53) When a product benefits people other than the buyer of the product, the product is said to

have

A) an external cost.

B) an excludable cost.

C) an external benefit.

D) an excludable benefit.

E) a subsidized benefit.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

84

54) A benefit that accrues to people other than the buyer of a good is known as ________

benefit.

A) an internal

B) an external

C) a marginal

D) a total

E) a subsidized

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

55) A public good

A) is a good that is usually consumed in public, such as a restaurant meal.

B) is a good people can consume even if they do not pay for it.

C) is a good produced by government.

D) results in an efficient allocation of resources.

E) is a good for which people are willing to pay a very high price.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: SB

AACSB: Reflective thinking

56) A good or service can be consumed by a person even if he or she didn't pay for it is called

________ good.

A) a private

B) a public

C) a normal

D) an inferior

E) an external

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

85

57) When people cannot be excluded from consuming a good, even if they have not paid for the

good, competitive markets would

A) produce more of the good than society needs.

B) allocate more resources than the efficient amount to the production of the good.

C) produce the good so that people could enjoy a "free ride."

D) produce less than the efficient quantity.

E) eliminate the deadweight loss.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

58) A monopoly is

A) the single buyer of some good or service.

B) a firm that has control of a market because it is the only seller.

C) a firm that creates enormous external costs.

D) a firm that faces intense competition.

E) a cost of producing a good or service.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

59) If one producer has control over an entire market and underproduces, the producer will

A) increase producer surplus by lowering pollution costs.

B) increase consumer surplus by lowering producer surplus.

C) increase both consumer and producer surplus.

D) create a deadweight loss.

E) decrease the deadweight loss that would exist if the market were efficient.

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: WM

AACSB: Reflective thinking

86

60) Deadweight loss is created when a market produces

A) either more or less than the efficient quantity.

B) more than the efficient quantity but not when less than the efficient quantity is produced.

C) less than the efficient quantity but not when more than the efficient quantity is produced.

D) the efficient quantity.

E) None of the above answers is correct because deadweight loss has nothing to do with the

efficient quantity.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: WM

AACSB: Reflective thinking

61) The figure above shows the market for pants. If the efficient quantity is produced

A) there will be no consumer surplus.

B) the sum of consumer and producer surplus will be maximized.

C) a small deadweight loss will result.

D) the sum of consumer and producer surplus will be minimized.

E) the consumer surplus on all the pants must equal the producer surplus on all the pants.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: WM

AACSB: Analytical reasoning

87

62) The figure above shows the market for pants. If 6 million pairs of pants are produced the

deadweight loss is

A) zero.

B) the triangle ABE.

C) the triangle BCE.

D) the triangle ACE.

E) the triangle BCE minus the triangle ABE.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: WM

AACSB: Analytical reasoning

63) The figure above shows the market for pants. If the production of the pants causes an

external cost from pollution that is the result of the dye used, then

A) 6 million pairs is the efficient quantity.

B) fewer than 6 million pairs is the efficient quantity.

C) more than 6 million pairs is the efficient quantity.

D) None of the above answers are necessarily correct because more information is needed about

the size of the external cost.

E) None of the above answers are correct because it is impossible to tell whether the external

cost results in underproduction or overproduction.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: WM

AACSB: Analytical reasoning

64) The figure above shows the market for pants. If the government subsidizes the production of

pants so that production expands from 6 million pairs to 7 million pairs,

A) there would be no deadweight loss.

B) the government's policy would have no effect on the sum of consumer surplus and producer

surplus.

C) a deadweight loss would result.

D) the government's policy would increase the sum of consumer surplus and producer surplus.

E) production would be even more efficient than if 6 million pairs of pants are produced because

more is always better than less.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: WM

AACSB: Analytical reasoning

88

65) When a market is efficient the

A) sum of consumer surplus and producer surplus is maximized.

B) deadweight gain is maximized.

C) quantity produced is maximized.

D) marginal benefit of the last unit produced exceeds the marginal cost by as much as possible.

E) total benefit equals the total cost.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

66) Which of the following occurs when a market is efficient?

A) Producers earn the highest income possible.

B) Production costs equal total benefit.

C) Consumer surplus equals producer surplus.

D) Scarce resources are used to produce the goods and services that people value most highly.

E) Every consumer has all of the good or service he or she wants.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

67) The concept of "the invisible hand" suggests that markets

A) do not produce the efficient quantity.

B) are always fair.

C) produce the efficient quantity.

D) are unfair.

E) allocate resources unfairly and inefficiently.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

89

68) When underproduction occurs,

A) producers gain more surplus at the expense of consumers.

B) marginal cost is greater than marginal benefit.

C) consumer surplus increases to a harmful amount.

D) there is a deadweight loss that is borne by the entire society.

E) the deadweight loss harms only consumers.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

69) When production moves from the efficient quantity to a point of overproduction,

A) consumer surplus definitely increases.

B) the sum of producer surplus and consumer surplus increases.

C) there is a deadweight loss.

D) consumers definitely lose and producers definitely gain.

E) consumers definitely gain and producers definitely lose.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

70) Which of the following can result in a market producing an inefficient quantity of a good?

i. competition

ii. an external cost or an external benefit

iii. a tax

A) i only

B) iii only

C) ii only

D) ii and iii

E) i and iii

Skill: Level 1: Definition

Section: Checkpoint 6.4

Author: STUDY GUIDE

AACSB: Reflective thinking

90

6.5 Are Markets Fair?

1) The "equality of opportunity" idea of fairness claims

A) a society should make the poorest as well off as possible.

B) the results and the rules should both be fair.

C) it's not fair if the rules aren't fair.

D) private property can be transferred under government order.

E) only a first-come, first-served system of allocating resources is fair.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: CD

AACSB: Ethical reasoning

2) Assume the Nozick rules are being followed in the economy so that the distribution of income

is fair. What must be true for this to create an efficient allocation of resources?

A) All people are earning equal incomes.

B) There are no public goods, monopolies, high transactions costs, or external costs and benefits.

C) The costs of administering redistribution equals the benefits the poor receive.

D) The government must redistribute income in a fashion that minimizes the "big tradeoff."

E) The government must allocate resources using a command mechanism.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: TS

AACSB: Ethical reasoning

3) An unequal distribution of income is considered fair according to Robert Nozick if

A) marginal cost equals marginal benefit.

B) the cost of administering a welfare system is minimized.

C) property rights are enforced and voluntary exchange occurs.

D) the economy is producing its maximum total output.

E) resources are allocated using the command method.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: MR

AACSB: Ethical reasoning

91

4) Which of the following is most closely related to the "fair results" approach to fairness?

A) efficient resource use

B) having an equal income distribution

C) voluntary exchange

D) the command system of allocating resources

E) price hikes in a natural disaster

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: MR

AACSB: Ethical reasoning

5) The "big tradeoff" refers to

A) producing capital goods instead of consumable goods.

B) marginal benefit versus marginal cost.

C) efficiency and fairness.

D) taking an economics course instead of some other course.

E) using market prices rather than a command system to allocate resources.

Skill: Level 1: Definition

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

6) The "big tradeoff" considers

A) the benefit of achieving "the greatest happiness for the greatest number."

B) whether the rules or the results are fair.

C) the cost of using market prices to allocate resources.

D) the cost of making income transfers when comparing efficiency to fairness.

E) the cost of using majority rule to allocate resources.

Skill: Level 1: Definition

Section: Checkpoint 6.5

Author: CD

AACSB: Reflective thinking

92

7) The idea of the "big tradeoff" points out the costs of

A) using a results approach to fairness when the rules approach is correct.

B) transferring income using taxes.

C) price hikes during natural disasters.

D) using a rules approach to fairness when the results approach is correct.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: WM

AACSB: Reflective thinking

8) When economists use the term "big tradeoff" when discussing efficiency they are referring to

the tradeoff between

A) external costs and external benefits.

B) marginal cost and marginal benefits.

C) producer surplus and consumer surplus.

D) efficiency and fairness.

E) deadweight loss and producer/consumer surplus.

Skill: Level 1: Definition

Section: Checkpoint 6.5

Author: PH

AACSB: Reflective thinking

9) Which of the following is part of the cost of income transfers?

A) Tax-collecting agencies cost money to administer.

B) Taxing incomes encourages people to work harder.

C) Income transfers make the results more unfair.

D) Income transfers increase the size of the economic pie.

E) Income transfers are a similar to allocating resources using a lottery.

Skill: Level 3: Using models

Section: Checkpoint 6.5

Author: SB

AACSB: Reflective thinking

93

10) As pointed out by the "big tradeoff," government action that redistributes incomes so that

everyone has the same income leads to

A) fairness according to the "fair rules" approach.

B) efficient markets.

C) resources being allocated according to a command system.

D) a smaller total output

E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to work.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

11) Redistributing income from the rich to the poor creates inefficiency because of

A) wasteful expenditures by people receiving welfare grants.

B) administrative costs to operate the government redistribution agencies.

C) the incentive to produce more output is decreased.

D) Both answers B and C are correct.

E) Both answers A and C are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

12) Why does redistribution, so that the distribution of income is equal, bring about less total

output?

A) Incentives to work are reduced.

B) No one can determine marginal benefit or marginal cost as a result.

C) Those in political power will likely receive a larger income.

D) Because the marginal benefit and marginal cost of work have been equally increased.

E) The premise of the question is incorrect because an equal distribution of income would

increase rather than decrease the total amount produced.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

94

13) In December 2007, Kansas had a severe ice storm that caused electrical blackouts. The

Fictitious Portable Generator firm of Lawrence had several portable generators that could be

used by homeowners to provide electricity. Which of the following would be the fair-rules way

to provide them?

A) The government confiscates the generators owned by Fictitious and distributes them.

B) Fictitious is forced by the state to rent the generators at half the normal rate.

C) The state sets up a lottery to determine who rents the available generators at the normal rate.

D) Fictitious rents generators at the equilibrium market price.

E) Fictitious follows government commands about who gets to use the generators.

Skill: Level 4: Applying models

Section: Checkpoint 6.5

Author: TS

AACSB: Ethical reasoning

14) Which of the following is true for taxes? They are

A) always administered fairly.

B) a necessary part of living in an economy with a fair distribution of income.

C) always administered without creating unfairness or inefficiency.

D) an involuntary transfer of private property.

E) do not create a big tradeoff problem.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

15) If the government takes over the distribution of some scarce good in a time of a natural

disaster and provides the good at no charge to users, what must also be done?

A) The government must produce the good itself.

B) Some rationing mechanism must be set up to determine who gets the good.

C) Everyone hurt in the natural disaster must get one of the goods.

D) nothing

E) Because we live in a democracy, the government must use majority rule as the rationing

mechanism.

Skill: Level 3: Using models

Section: Checkpoint 6.5

Author: TS

AACSB: Reflective thinking

95

16) The "fair rules" view of fairness is based on

A) income transfers from the rich to the poor.

B) property rights and voluntary exchange.

C) utilitarianism.

D) the big tradeoff.

E) allocating resources using majority rule.

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: STUDY GUIDE

AACSB: Ethical reasoning

17) The idea that unequal incomes is unfair generally uses the ________ principle of fairness.

A) big tradeoff

B) involuntary exchange

C) voluntary exchange

D) it's not fair if the result isn't fair

E) it's not fair if the rules aren't fair

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: STUDY GUIDE

AACSB: Ethical reasoning

18) Which of the following is an example in which "the big tradeoff" can occur?

A) the government redistributes income from the rich to the poor

B) Ford increases the price of a pickup truck

C) a basketball player signs a $5 million contract

D) a college lowers tuition

E) the price of personal computers falls year after year

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: STUDY GUIDE

AACSB: Reflective thinking

96

6.6 Chapter Figures

The figure above shows the PPF, marginal cost curve, and marginal benefit curve for pizza.

97

1) In the figure above, production efficiency occurs at ________, and allocative efficiency

occurs at ________.

A) all points on the PPF; only one point on the PPF

B) only one point on the PPF; all points on the PPF

C) only one point on the PPF; only one point on the PPF

D) all points on the PPF; all points on the PPF

E) all points on the PPF; all points above the PPF

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: CO

AACSB: Analytical reasoning

2) In the figure above, when 2,000 pizzas are produced, the marginal benefit of a pizza ________

its marginal cost, which means ________ pizza is being produced.

A) exceeds its marginal cost; too little

B) exceeds its marginal cost; too much

C) is below its marginal cost; too much

D) is below its marginal cost; too little

E) equals its marginal cost; the efficient quantity of

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CO

AACSB: Analytical reasoning

3) In the figure above, when 6,000 pizzas are produced, the marginal benefit of a pizza ________

its marginal cost, which means ________ pizza is being produced.

A) exceeds its marginal cost; too little

B) exceeds its marginal cost; too much

C) is below its marginal cost; too much

D) is below its marginal cost; too little

E) equals its marginal cost; the efficient quantity of

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CO

AACSB: Analytical reasoning

98

4) In the figure above, when 4,000 pizzas are produced, the marginal benefit of a pizza ________

its marginal cost, which means ________ pizza is being produced.

A) exceeds its marginal cost; too little

B) exceeds its marginal cost; too much

C) is below its marginal cost; too much

D) is below its marginal cost; too little

E) equals its marginal cost; the efficient quantity of

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: CO

AACSB: Analytical reasoning

The figure above shows the demand curve for pizza and the market price of pizza.

5) In the figure above, how much is the consumer who buys the 5,000th pizza willing to pay for

that pizza?

A) $15

B) $10

C) $12

D) $22.50

E) $5

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: CO

AACSB: Analytical reasoning

99

6) In the figure above, how much do the consumers pay in total for the quantity of pizza they buy

per day?

A) $100,000

B) $150,000

C) $125,000

D) $50,000

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: CO

AACSB: Analytical reasoning

7) In the figure above, what is the consumer surplus per day?

A) $100,000

B) $50,000

C) $125,000

D) $150,000

E) zero

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CO

AACSB: Analytical reasoning

8) In the figure above, the total benefit from pizza is ________ per day.

A) $100,000

B) $50,000

C) $125,000

D) $150,000

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: CO

AACSB: Analytical reasoning

100

The figure above shows the supply curve for pizza and the market price of pizza.

9) In the figure above, the minimum price that must be offered for the 5,000th pizza a day to be

produced is

A) $6.

B) $10.

C) $8.

D) $2.

E) $4.

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: CO

AACSB: Analytical reasoning

10) In the figure above, the cost of producing 10,000 pizzas a day is

A) $60,000.

B) $100,000.

C) $40,000.

D) $80,000.

E) $50,000.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CO

AACSB: Analytical reasoning

101

11) In the figure above, the total revenue from pizza per day is

A) $60,000.

B) $100,000.

C) $40,000.

D) $80,000.

E) $50,000.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CO

AACSB: Analytical reasoning

12) In the figure above, the producer surplus is

A) $60,000.

B) $100,000.

C) $40,000.

D) $80,000.

E) $50,000.

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: CO

AACSB: Analytical reasoning

102

The figure above shows the market for pizza.

13) In the figure above, when the market is in equilibrium, marginal benefit ________ marginal

cost, so the quantity of pizza produced is ________.

A) equals; efficient

B) exceeds; efficient

C) is below; efficient

D) is below; not efficient

E) exceeds; not efficient

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: CO

AACSB: Analytical reasoning

103

14) In the figure above, if pizza production is restricted to 5,000 pizzas a day, then marginal

benefit ________ marginal cost, and ________ occurs.

A) exceeds; overproduction

B) exceeds; underproduction

C) is below; overproduction

D) is below; underproduction

E) exceeds; efficient production

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: CO

AACSB: Analytical reasoning

15) In the figure above, if pizza production increases to 15,000 pizzas a day, then marginal

benefit ________ marginal cost, and ________ occurs.

A) exceeds; overproduction

B) exceeds; underproduction

C) is below; overproduction

D) is below; underproduction

E) exceeds; efficient production

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: CO

AACSB: Analytical reasoning

16) In the figure above, if pizza production is restricted to 5,000 pizzas a day, the deadweight

loss is

A) $45,000 per day.

B) $12,500 per day.

C) $22,500 per day.

D) $90,000 per day.

E) zero.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: CO

AACSB: Analytical reasoning

104

17) In the figure above, if pizza production increases to 15,000 pizzas a day, the deadweight loss

is

A) $45,000 per day.

B) $12,500 per day.

C) $22,500 per day.

D) $90,000 per day.

E) zero.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: CO

AACSB: Analytical reasoning

6.7 Integrative Questions

1) The figure above shows the market for brooms. If the market is efficient,

A) 0 brooms are produced.

B) 600 brooms are produced.

C) more than 1000 brooms are produced.

D) between 0 and 600 brooms are produced.

E) between 600 and 1000 brooms are produced.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

105

2) The figure above shows the market for brooms. If 800 brooms are produced,

A) consumer surplus is maximized.

B) producer surplus is maximized.

C) a deadweight loss occurs.

D) marginal cost is less than marginal benefit.

E) there is no deadweight loss.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

3) The figure above shows the market for brooms. If 800 brooms are produced,

A) marginal cost exceeds marginal benefit.

B) a deadweight loss does not occur because everyone who wants to buy a broom can.

C) the "big tradeoff" occurs.

D) value exceeds price.

E) the "fair results" approach to fairness is definitely not violated.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

4) The figure above shows the market for brooms. If 400 brooms are produced,

A) consumer surplus is maximized.

B) producer surplus is maximized.

C) a deadweight loss occurs.

D) marginal cost is greater than marginal benefit.

E) consumer surplus equals zero.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

106

5) The figure above shows the market for brooms. Which of the following could lead to the

production of fewer than 600 brooms?

A) a monopoly

B) a deadweight loss

C) subsidies

D) an external cost

E) a big tradeoff

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

6) When society must decrease the production of something in order to produce more of another

good or service, society has necessarily achieved

A) only production efficiency.

B) only allocative efficiency.

C) both production efficiency and allocative efficiency.

D) a free lunch.

E) the maximum opportunity cost..

Skill: Level 1: Definition

Section: Integrative

Author: JC

AACSB: Reflective thinking

7) When a society achieves production efficiency, it is

A) definitely producing at a point on its PPF.

B) perhaps producing at a point on its PPF and perhaps producing at a point inside its PPF.

C) definitely producing that combination of goods and services that society values most highly.

D) not fully employing all of its available resources to produce goods and services.

E) enjoying a free lunch.

Skill: Level 1: Definition

Section: Integrative

Author: PH

AACSB: Reflective thinking

107

8) Production efficiency requires that

A) the economy be producing on the PPF but the marginal cost of a good does not need to equal

its marginal benefit.

B) the economy be producing on the PPF and that the marginal cost of a good equals its

marginal benefit.

C) the marginal cost of a good equals its marginal benefit but the economy does not need to be

producing on its PPF.

D) the society be producing at the point of allocative efficiency.

E) opportunity costs be minimized.

Skill: Level 2: Using definitions

Section: Integrative

Author: MR

AACSB: Reflective thinking

9) If an economy is producing on its PPF, then it is definitely achieving

A) both production and allocative efficiency.

B) only production efficiency but it definitely is not achieving allocative efficiency.

C) only allocative efficiency but it is definitely not achieving production efficiency.

D) neither production nor allocative efficiency.

E) only production efficiency.

Skill: Level 1: Definition

Section: Integrative

Author: PH

AACSB: Reflective thinking

10) If society can produce more of one good but must forgo some of another good to do so, it is

definitely achieving

A) both production and allocative efficiency.

B) only production efficiency.

C) only allocative efficiency.

D) neither production nor allocative efficiency.

E) None of the above answers is correct because when society must forgo another good to

produce more of one good, then society might be production efficient or it might be allocatively

efficient.

Skill: Level 2: Using definitions

Section: Integrative

Author: PH

AACSB: Reflective thinking

108

11) Which of the following is true?

i. Production efficiency occurs only when resources are used to produce the combination of

goods that has the greatest value.

ii. Allocative efficiency occurs when marginal benefit equals marginal cost.

iii. A demand curve is a marginal cost curve.

A) Only ii

B) Only i

C) Only iii

D) i and ii

E) ii and iii

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

12) Which of the following is true?

i. Marginal cost is measured by the maximum price that consumers are willing to pay for

another unit of a good or service.

ii. Producer surplus equals marginal benefit minus price, summed over the quantity produced.

iii. A supply curve is a marginal cost curve.

A) Only iii

B) Only i

C) Only ii

D) i and ii

E) i and iii

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

109

13) Which of the following is true? When there are no externalities, public goods, or common

resources, then

i. allocative efficiency occurs when marginal benefit exceeds marginal cost by as much as

possible.

ii. an a competitive equilibrium, resource allocation is efficient.

iii. fair rules require income transfers from the rich to the poor.

A) Only ii

B) Only i

C) Only iii

D) i and ii

E) i and iii

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

14) To achieve ________, marginal cost ________ marginal benefit.

A) production efficiency; must equal

B) production efficiency; must be greater than

C) allocative efficiency; must be greater than

D) allocation efficiency; must be less than

E) allocative efficiency; must equal

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

15) When marginal benefit exceeds marginal cost in a market,

A) only consumer surplus is reduced.

B) only producer surplus is reduced.

C) consumer surplus and producer surplus are not affected compared to when production is such

that marginal cost equals marginal benefit.

D) the deadweight loss is negative.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

110

16) At a competitive equilibrium with no externalities, which of the following occurs?

i) an efficient outcome

ii) definitely a fair outcome when judged by the fair-results approach

iii) marginal cost equals marginal benefit

iv) producer surplus equals consumer surplus

A) i and iii

B) i, ii and iii

C) ii and iii

D) i, ii, iii and iv

E) only i

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

17) The fair results approach to fairness

A) requires property rights and voluntary exchange.

B) supports transferring income from the rich and giving it to the poor.

C) requires efficient market outcomes.

D) ensures that marginal cost equals marginal benefit.

E) never creates a big tradeoff.

Skill: Level 2: Using definitions

Section: Integrative

Author: CD

AACSB: Ethical reasoning

18) The fair rules approach to fairness requires

A) consumer surplus equals producer surplus.

B) income transfers from rich to poor.

C) property rights and voluntary exchange.

D) that marginal cost equal marginal benefit.

E) consumer surplus exceed producer surplus because there are more consumers than producers.

Skill: Level 2: Using definitions

Section: Integrative

Author: CD

AACSB: Ethical reasoning

111

19) Consumer surplus equals

A) producer surplus at a market equilibrium.

B) marginal benefit minus price, summed over the quantity consumed.

C) price minus marginal cost.

D) the deadweight loss if there is underproduction.

E) the deadweight loss plus the producer surplus.

Skill: Level 2: Using definitions

Section: Integrative

Author: CD

AACSB: Reflective thinking

20) Suppose a market produces 5,000 tons of wheat. At this quantity, the marginal cost exceeds

the marginal benefit. This outcome could be the result of

A) a quantity regulation limiting the amount that can be produced.

B) a monopoly.

C) a subsidy.

D) an external benefit.

E) producing a public good.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

6.8 Essay: Allocation Methods and Efficiency

1) What allocation method is the primary method used in the United States?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: MR

AACSB: Communication

112

2) "Allocative efficiency in the production of cherries means that consumers can eat all of the

cherries they desire." Is this statement true or false?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Communication

3) "Allocative efficiency requires that the maximum number of people have access to all of the

goods and services that our economy produces." Is this statement true or false? Explain your

answer.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Communication

4) When less than the efficient amount of a good is produced, how does the marginal benefit of

the last unit produced compare to its marginal cost?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Communication

113

5) Why does the marginal benefit curve have a negative slope?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: JC

AACSB: Communication

6) The table above shows the production possibilities frontier for the nation of Isolanda.

a. Find the marginal cost of a pound of fish using the above PPF.

b. How does the marginal cost of a pound of fish change as more fish are caught?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: SA

AACSB: Analytical reasoning

114

7) Draw and describe a marginal benefit curve for slices of pizza where the opportunity cost of

consuming a slice of pizza is a taco.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: CD

AACSB: Analytical reasoning

115

8) Draw and describe a marginal cost curve for slices of pizza where the opportunity cost of

producing a slice of pizza is a taco.

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: CD

AACSB: Analytical reasoning

9) At the current production point on a nation's production possibilities frontier, the marginal

benefit of a slice of pizza is 500 tacos while the marginal cost of producing a slice of pizza is 750

tacos. For the nation to produce at the point of allocative efficiency, what should be done?

Skill: Level 2: Using definitions

Section: Checkpoint 6.1

Author: TS

AACSB: Analytical reasoning

116

10) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in

the table above, what is the allocatively efficient quantity of apples? Suppose 10 million bushels

of apples are produced. Should the quantity be increased or decreased? What if 20 million

bushels are produced; should the quantity be increased or decreased?

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: TS

AACSB: Analytical reasoning

117

11) Suppose a factory can be designed to produce either trucks or cars. The figure above shows

the marginal cost and marginal benefit of producing trucks in terms of the forgone cars.

a. What is the marginal benefit of the 25th truck?

b. What is the marginal cost of the 25th truck?

c. Should the 25th truck be produced? Why or why not.

d. What is the marginal benefit of the 75th truck?

e. What is the marginal cost of the 75th truck?

f. Should the 75th truck be produced? Why or why not?

g. What is the allocatively efficient quantity of trucks?

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: SB

AACSB: Analytical reasoning

118

12) Compare and contrast production efficiency and allocative efficiency.

Skill: Level 3: Using models

Section: Checkpoint 6.1

Author: PH

AACSB: Communication

6.9 Essay: Value, Price, and Consumer Surplus

1) Is the marginal benefit someone places on a good or service the same as the price he or she

pays? Explain your answer.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: WM

AACSB: Communication

119

2) Why is the demand curve the same as the marginal benefit curve?

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: JC

AACSB: Communication

3) The demand curve is the same as another curve. Which curve is the same as the demand

curve? Why are the curves the same?

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SA

AACSB: Communication

4) What are the two ways demand curves can be interpreted?

1) the quantity demanded at a given price. In this view, the curve is a demand curve;

2) the maximum price people are willing to pay for a given quantity. In this view the curve is a

marginal benefit curve.

Topic: Demand curve and marginal benefit curve

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: SB

AACSB: Reflective thinking

120

5) "A demand curve is the same as a marginal cost curve." Is this statement correct or incorrect?

Explain your answer.

Skill: Level 2: Using definitions

Section: Checkpoint 6.2

Author: MR

AACSB: Reflective thinking

6) What is consumer surplus?

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: MR

AACSB: Reflective thinking

7) What must be true for a consumer to enjoy a consumer surplus from a unit of a good?

Skill: Level 1: Definition

Section: Checkpoint 6.2

Author: TS

AACSB: Reflective thinking

8) If the demand for a good does not change, how will an increase in the price of that good affect

the consumer surplus from it?

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: SA

AACSB: Communication

121

9) The figure shows the demand curve for hotel rooms at a local resort.

a. If the hotel charges $120 per night, how many rooms will they rent?

b. If there are only 40 rooms available, how much are customers willing to pay for a room?

c. If 60 rooms are available, how much are customers willing to pay?

d. What do the dollars in your answer to part (c) represent?

Skill: Level 4: Applying models

Section: Checkpoint 6.2

Author: SB

AACSB: Analytical reasoning

10) Jenn is willing to pay $75 for a purse and the purse's price is $60. What is Jenn's consumer

surplus on this purse?

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: JC

AACSB: Analytical reasoning

122

11) Jason needs help getting ready for the next test in his economics course and would like to

hire Maria, an economics tutor to help him. Jason is willing to pay $30 for the first hour of

tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. The

equilibrium price for tutoring is $15 per hour. For how many hours of tutoring will Jason hire

Maria? Why this amount of hours? What is Jason's consumer surplus, if any, from the tutoring?

What is Maria's consumer surplus from the tutoring?

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: TS

AACSB: Analytical reasoning

123

12) The figure above shows the demand curve for pizza.

a. What is the marginal benefit of the 20th pizza?

b. What is the maximum price the consumer is willing to pay for the 20th pizza?

c. If the price of a pizza is $6, what is the consumer surplus of the 20th pizza?

d. If the price of a pizza is $10, what is the consumer surplus on all the pizzas consumed?

e. If the price of a pizza is $6, what is the consumer surplus on all the pizzas consumed?

Skill: Level 4: Applying models

Section: Checkpoint 6.2

Author: SB

AACSB: Analytical reasoning

124

13) The figure above shows Cindy's demand for CDs per year.

a. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $12?

b. What is Cindy's consumer surplus on all the CDs consumed if the price of a CD is $9?

c. What happens to Cindy's consumer surplus when the price of a CD falls?

Skill: Level 4: Applying models

Section: Checkpoint 6.2

Author: SA

AACSB: Analytical reasoning

125

14) The diagram above depicts the demand for, and market price of, buckets of raw oysters in

Orlando.

a. What is the consumer surplus of the person who buys the 100th bucket of oysters?

b. What is the consumer surplus of the person who buys the 200th bucket of oysters?

c. What is the consumer surplus of the person who buys the 300th bucket of oysters?

d. What is the total consumer surplus from all the oysters consumed in the market?

Skill: Level 3: Using models

Section: Checkpoint 6.2

Author: JC

AACSB: Analytical reasoning

126

6.10 Essay: Cost, Price, and Producer Surplus

1) Explain the difference between the words "value," "price," and "cost."

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: SB

AACSB: Communication

2) The supply curve is the same as another curve. What other curve is the same as the supply

curve? Why are the curves the same?

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: MR

AACSB: Communication

3) What is producer surplus?

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: MR

AACSB: Reflective thinking

127

4) What must be true for a producer to obtain a producer surplus from the sale of a unit of a

good?

Skill: Level 1: Definition

Section: Checkpoint 6.3

Author: TS

AACSB: Reflective thinking

5) If the price of a visit to Sea World exceeds the marginal cost of the visit by $13, a producer

surplus exists for Sea World." Is this statement true or false?

Skill: Level 2: Using definitions

Section: Checkpoint 6.3

Author: JC

AACSB: Analytical reasoning

6) Maria helps tutor students taking economics. The equilibrium price for tutoring is $15 per

hour. Maria has determined her opportunity cost per hour to be $6 for the first, $9 for the second,

$12 for the third, $15 for the fourth, and $18 for the fifth. How many hours will Maria tutor?

Why this amount of hours? What, if any, is Maria's producer surplus?

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: TS

AACSB: Analytical reasoning

128

7) The figure above shows the supply curve for pizzas.

a. What is the marginal cost of the 20th pizza?

b. What is the minimum supply price of the 20th pizza?

c. If the price is $6 per pizza, what is the producer surplus on the 20th pizza?

d. If the price is $6 per pizza, what is the producer surplus for the total quantity of pizzas

produced?

e. If the price is $8 per pizza, what is the producer surplus for the total quantity of pizzas

produced?

f. If the price is $10 per pizza, what is the producer surplus for the total quantity of pizzas

produced?

Skill: Level 3: Using models

Section: Checkpoint 6.3

Author: SB

AACSB: Analytical reasoning

129

6.11 Essay: Are Markets Efficient?

1) Why is a competitive market efficient?

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: SA

AACSB: Analytical reasoning

2) Briefly describe the concept of the "invisible hand."

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: PH

AACSB: Reflective thinking

3) Explain how the invisible hand delivers an efficient market outcome.

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: CD

AACSB: Communication

4) What is the "invisible hand"?

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: JC

AACSB: Communication

130

5) When economists refer to "the invisible hand," what do they mean?

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: JC

AACSB: Communication

6) "If there is an inefficient level of nursing care in South America, a deadweight loss exists." Is

this statement true or false?

Skill: Level 2: Using definitions

Section: Checkpoint 6.4

Author: JC

AACSB: Reflective thinking

131

7) What are some of the potential obstacles that can prevent a market from reaching the efficient

outcome? Briefly define each obstacle.

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: WM

AACSB: Communication

132

8) Jason hires Maria to tutor him in economics. Jason is willing to pay $30 for the first hour of

tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth. Maria has

an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third, $15 for the

fourth, and $18 for the fifth. What will be the equilibrium quantity of hours tutored and the

equilibrium price? Explain why this quantity and price is the equilibrium. What is Jason's

consumer surplus and what is Maria's producer surplus?

Skill: Level 3: Using models

Section: Checkpoint 6.4

Author: TS

AACSB: Analytical reasoning

133

9) The figure above shows the market for pizza.

a. If the price of a slice of pizza is $3, what is the consumer surplus of the 50th slice?

b. If the price of a slice of pizza is $3, what is the producer surplus of the 50th slice

c. What is the efficient quantity? What is the equilibrium quantity? What is the deadweight loss

when the equilibrium quantity is produced?

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: CD

AACSB: Analytical reasoning

134

10) Jason wants to hire Maria to tutor him in economics. Jason is willing to pay $30 for the first

hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth.

Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for the third,

$15 for the fourth, and $18 for the fifth. The initial equilibrium price for tutoring is $15 an hour

and hence Maria tutors Jason for 4 hours. Now, Maria realizes that she is the only economics

tutor because all the other tutors have graduated. Because she is the only tutor, she has a

monopoly and, as a monopolist, Maria decides to charge a price of $25 instead of $15 an hour.

a. At the price of $25 an hour, how many hours will Maria tutor Jason?

b. At the initial equilibrium price of $15 an hour, what was Jason's total consumer surplus and

Maria's total producer surplus?

c. At the price of $25 an hour, how many hours will Jason hire Maria to tutor him? What is

Jason's total consumer surplus and Maria's total producer surplus?

d. How does the sum of Jason's consumer surplus plus Maria's producer surplus compare at the

initial equilibrium price of $15 an hour (part b) and at the new price of $25 an hour (part c)?

Comment on any difference.

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: TS

AACSB: Analytical reasoning

135

11) The figure above shows the market for hot dogs.

a. What is the maximum price consumers are willing to pay for the 25th hot dog?

b. What is the efficient quantity?

c. Suppose that the production was limited to 25 hot dogs. In the figure, indicate the amount of

the deadweight loss.

136

Topic: Deadweight loss

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: WM

AACSB: Analytical reasoning

12) The figure above shows the supply and demand curves for pizza. If the market is at its

competitive equilibrium, what area in the graph above represents:

a. consumer surplus?

b. producer surplus?

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SB

AACSB: Analytical reasoning

137

13) The figure above shows the supply and demand for pizza.

a. What is the efficient level of output?

b. If 70,000 pizzas are produced, what area represents the deadweight loss?

c. Why does the deadweight loss in part (b) occur?

d. If 20,000 pizzas are produced, what area represents the deadweight loss?

e. Why does the deadweight loss in part (d) occur?

Skill: Level 4: Applying models

Section: Checkpoint 6.4

Author: SB

AACSB: Analytical reasoning

138

6.12 Essay: Are Markets Fair?

1) What are the two views of fairness? How does each view redistribution of income from the

rich to the poor?

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: CD

AACSB: Ethical reasoning

2) How can a person argue that health care services in America are provided efficiently, but not

fairly?

Skill: Level 4: Applying models

Section: Checkpoint 6.5

Author: JC

AACSB: Communication

3) Often politicians assert that a price, such as the price of gasoline or the rent for an apartment,

is too high and that it is unfair for these prices to be so high. If these products are traded in

competitive markets, what fairness rule are politicians using? Why?

Skill: Level 4: Applying models

Section: Checkpoint 6.5

Author: JC

AACSB: Ethical reasoning

139

4) What approach to fairness argues in favor of government policies that redistribute income so

that there is more equality of income?

Skill: Level 2: Using definitions

Section: Checkpoint 6.5

Author: MR

AACSB: Ethical reasoning

5) What is the "big tradeoff"?

Skill: Level 1: Definition

Section: Checkpoint 6.5

Author: MR

AACSB: Communication

6) Why do societies face a tradeoff between the size of the economic pie and the degree of

equality with which it is shared?

Skill: Level 4: Applying models

Section: Checkpoint 6.5

Author: SB

AACSB: Communication

140

7) Why does the problem of the big tradeoff arise when the government engages in the process

of redistributing income using taxes and transfers?

Skill: Level 3: Using models

Section: Checkpoint 6.5

Author: PH

AACSB: Communication

8) Bill Gates is a founder of Microsoft and the world's richest individual. Suppose Microsoft

sells more software and Mr. Gates acquires another billion dollars in wealth. Simultaneously,

suppose a burglar whose income is well below average broke into Bill Gates' house and stole a

million dollars worth of antiques. Using the "it's not fair if the rules aren't fair" approach to

fairness, is Mr. Gates' acquisition of additional wealth fair? Is the (poor) thief's acquisition fair?

Skill: Level 4: Applying models

Section: Checkpoint 6.5

Author: JC

AACSB: Communication

9) According to the "fair rules" view of fairness, are taxes fair? Explain.

Skill: Level 3: Using models

Section: Checkpoint 6.5

Author: PH

AACSB: Ethical reasoning

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