Microeconomics, 4e (Hubbard/O’Brien)
Chapter 4 Economic Efficiency, Government Price Setting, and Taxes
4.1 Consumer Surplus and Producer Surplus
1) The difference between the highest price a consumer is willing to pay for a good and the price
the consumer actually pays is called
A) producer surplus.
B) the substitution effect.
C) the income effect.
D) consumer surplus.
2) In New York City, about 1 million apartments are subject to rent control by the local
government. Rent control
A) puts a legal limit on the rent that landlords can charge for an apartment.
B) is a price floor which sets a minimum rent for apartments.
C) only applies to those apartments which are owned and rented out by the local government.
D) is a government policy which limits apartment rental to those people whose incomes are less
than $50,000 per year.
3) In a city with rent-controlled apartments, all of the following are true except
A) apartments usually rent for rates lower than the market rate.
B) apartments are often in shorter supply than they would be without rent control.
C) it usually takes more time to find an apartment than it would without rent control.
D) landlords have an incentive to rent more apartments than they would without rent control.
4) Paul goes to Sportsmart to buy a new tennis racquet. He is willing to pay $200 for a new
racquet, but buys one on sale for $125. Paul’s consumer surplus from the purchase is
A) $325
B) $200
C) $125
D) $75
5) Lucinda buys a new GPS system for $250. She receives consumer surplus of $75 from the
purchase. How much does Lucinda value her GPS system?
A) $75
B) $175
C) $250
D) $325
6) Willingness to pay measures
A) the maximum price a buyer is willing to pay for a product minus the amount the buyer
actually pays for it.
B) the amount a seller actually receives for a good minus the minimum amount the seller is
willing to accept for the good.
C) the maximum price that a buyer is willing to pay for a good.
D) the maximum price a buyer is willing to pay minus the minimum price a seller is willing to
accept.
7) Consumers are willing to purchase a product up to the point where
A) the marginal benefit of consuming the product is equal to the marginal cost of consuming it.
B) the consumer surplus is equal to the producer surplus.
C) the marginal benefit of consuming the product equals the area below the supply curve and
above the market price.
D) the marginal benefit of consuming a product is equal to its price.
8) Marginal benefit is equal to the ________ benefit to a consumer receives from consuming one
more unit of a good or service
A) total
B) unintended
C) additional
D) surplus
9) Which of the following statements best describes the concept of consumer surplus?
A) “Safeway was having a sale on Dreyer’s ice cream so I bought 3 quarts.”
B) “I was all ready to pay $300 for a new leather jacket that I had seen in Macy’s but I ended up
paying only $180 for the same jacket.”
C) “I paid $130 for a printer last week. This week the same store is selling the same printer for
$110.”
D) “I sold my Blu-ray copy of Ben-Hur for $18 at a garage sale even though I was willing to sell
it for $10.”
10) Each point on a ________ curve shows the willingness of consumers to purchase a product at
different prices.
A) demand
B) supply
C) production possibilities
D) marginal cost
Table 4-1
Consumer
Willingness to Pay
Tom
$40
Dick
30
Harriet
25
11) Refer to Table 4-1. The table above lists the highest prices three consumers, Tom, Dick and
Harriet, are willing to pay for a short-sleeved polo shirt. If the price of one of the shirts is $28
dollars
A) Tom will buy two shirts, Dick will buy one shirt and Harriet will buy no shirts.
B) Tom will receive $12 of consumer surplus from buying one shirt.
C) Tom and Dick receive a total of $70 of consumer surplus from buying one shirt each. Harriet
will buy no shirts.
D) Harriet will receive $25 of consumer surplus since she will buy no shirts.
12) Refer to Table 4-1. The table above lists the highest prices three consumers, Tom, Dick and
Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the shirts falls from $28
to $20
A) consumer surplus increases from $14 to $35.
B) Tom will buy two shirts; Dick and Harriet will each buy one shirt.
C) consumer surplus will increase from $70 to $95.
D) Harriet will receive more consumer surplus than Tom or Dick.
13) Marginal cost is
A) the total cost of producing one unit of a good or service.
B) the average cost of producing a good or service.
C) the difference between the lowest price a firm would have been willing to accept and the price
it actually receives.
D) the additional cost to a firm of producing one more unit of a good or service.
Table 4-2
The Waco
Kid’s
Cowboy Hats
Marginal
Cost
(dollars)
1st hat
$24
2nd hat
30
3rd hat
38
4th hat
46
14) Refer to Table 4-2. The table above lists the marginal cost of cowboy hats by The Waco
Kid, a firm that specializes in producing western wear. If the market price of The Waco Kid’s
cowboy hats is $40
A) The Waco Kid will produce four hats.
B) producer surplus from the first hat is $40.
C) producer surplus will equal $28.
D) there will be a surplus; as a result, the price will fall to $24.
15) Refer to Table 4-2. The table above lists the marginal cost of cowboy hats by The Waco Kid,
a firm that specializes in producing western wear.. If the price of cowboy hats increases from
$38 to $46
A) consumers will buy no cowboy hats.
B) the marginal cost of producing the third cowboy hat will increase to $46.
C) producer surplus will rise from $22 to $46.
D) there will be a surplus of cowboy hats.
16) The area ________ the market supply curve and ________ the market price is equal to the
total amount of producer surplus in a market.
A) above; above
B) above; below
C) below; above
D) below; below
17) The total amount of producer surplus in a market is equal to
A) the difference between quantity supplied and quantity demanded.
B) the area above the market supply curve and below the market price.
C) the area above the market supply curve.
D) the area between the demand curve and the supply curve below the market price.
18) Consumer surplus in a market for a product would be equal to ________ if the market price
was zero.
A) zero
B) the area between the supply curve and the demand curve
C) the area above the supply curve
D) the area under the demand curve
19) Which of the following statements is true?
A) Consumer surplus measures the total benefit from participating in a market.
B) When a market is in equilibrium consumer surplus equals producer surplus.
C) Consumer surplus measures the net benefit from participating in a market.
D) Producer surplus measures the total benefit received by producers from participating in a
market.
20) A ________ curve shows the marginal cost of producing one more unit of a good or service.
A) demand
B) supply
C) production possibilities
D) marginal benefit
21) A demand curve shows
A) the willingness of consumers to buy a product at different prices.
B) the willingness of consumers to substitute one product for another product.
C) the relationship between the price of a product and the demand for the product.
D) the relationship between the price of a product and the total benefit consumers receive from
the product.
Figure 4-1
Figure 4-1 shows Arnold’s demand curve for burritos.
22) Refer to Figure 4-1. Arnold’s marginal benefit from consuming the third burrito is
A) $1.25.
B) $1.50.
C) $2.50.
D) $6.00.
23) Refer to Figure 4-1. If the market price is $1.00, what is the consumer surplus on the third
burrito?
A) $0.50
B) $1.00
C) $1.50
D) $7.50
24) Refer to Figure 4-1. If the market price is $1.00, what is Arnold’s consumer surplus?
A) $1.00
B) $2.00
C) $6.00
D) $7.00
25) Refer to Figure 4-1. What is the total amount that Arnold is willing to pay for 4 burritos?
A) $1.00
B) $4.00
C) $7.00
D) $10.00
26) Refer to Figure 4-1. If the market price is $1.00, what is the maximum number of burritos
that Arnold will buy?
A) 1
B) 2
C) 3
D) 4
27) Suppliers will be willing to supply a product only if
A) the price received is less than the additional cost of producing the product.
B) the price received is at least equal to the additional cost of producing the product.
C) the price is higher than the average cost of producing the product.
D) the price received is at least double the additional cost of producing the product.
28) The difference between the ________ and the ________ from the sale of a product is called
producer surplus.
A) lowest price a firm would have been willing to accept; price it actually receives
B) highest price a firm wold have been willing to accept; lowest price it was willing to accept
C) cost to produce a product; price a firm actually receives
D) cost to produce a product; profit received
Figure 4-2
29) Refer to Figure 4-2. What area represents producer surplus at a price of P2?
A) A + B
B) B + D
C) A + B + C
D) A + B + C + D + E
30) Refer to Figure 4-2. What area represents the increase in producer surplus when the market
price rises from P1 to P2?
A) B + D
B) A + C + E
C) C + E
D) A + B
31) Two economists from Northwestern University estimated the benefit households received
from subscribing to broadband Internet service. The economists found that
A) the consumer surplus from dial-up Internet service exceeded the consumer surplus from
broadband Internet service.
B) the average consumer of broadband Internet service received a marginal benefit equal to $36.
C) most consumers of broadband Internet service were not willing to pay more than $36 per
month.
D) one month’s benefit to consumers who subscribe to broadband Internet service is about $890
million.
32) Consumer surplus is the difference between the highest price someone is willing to pay for a
product and the price he actually pays for the product.
33) The total amount of consumer surplus in a market is equal to the area below the demand
curve.
34) Marginal cost is the additional cost to a firm of producing one more unit of a good or service.
35) What is producer surplus? What does producer surplus measure?
36) Assume the market price for lemon grass is $4.00 per pound, but most buyers are willing to
pay more than the market price. At the market price of $4.00, the quantity of lemon grass
demanded is 1,500 pounds per month, and quantity demanded does not reach zero until the price
reaches $30.00 per pound. Construct a graph showing this data, calculate the total consumer
surplus in the market for lemon grass, and show the consumer surplus on the graph.
37) The marginal cost for Java Joe’s to produce its first cup of coffee is $0.75. Its marginal cost
to produce its second cup of coffee is $1.25. Its marginal cost increases by $0.50 for each
additional cup of coffee it produces. Suppose the market price for coffee is $2.25. Construct a
graph showing the producer surplus for each cup of coffee Java Joe’s will sell. How many cups
of coffee will Java Joe’s sell? What is the value of the producer surplus Java Joe’s receives for
each cup of coffee it sells?
4.2 The Efficiency of Competitive Markets
1) In a competitive market equilibrium
A) total consumer surplus equals total producer surplus.
B) marginal benefit and marginal cost are maximized.
C) consumers and producers benefit equally.
D) the marginal benefit equals the marginal cost of the last unit sold.
2) Economic efficiency in a competitive market is achieved when
A) economic surplus is equal to consumer surplus.
B) consumers and producers are satisfied.
C) the marginal benefit equals the marginal cost from the last unit sold.
D) producer surplus equals the total amount firms receive from consumers minus the cost of
production.
Figure 4-3
Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of
$15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the
price to $18.
3) Refer to Figure 4-3. What is the value of consumer surplus at a price of $18??
A) $60
B) $120
C) $180
D) $240
4) Refer to Figure 4-3. What is the value of producer surplus at a price of $18??
A) $240
B) $300
C) $340
D) $720
5) Refer to Figure 4-3. What is the value of the deadweight loss at a price of $18?
A) $100
B) $180
C) $660
D) $1,040
6) Refer to Figure 4-3. At a price of $18 consumers are willing to buy 40 pounds of tiger
shrimp. Is this an economically efficient quantity?
A) No, the marginal benefit of the 40th unit exceeds the marginal cost of that 80th unit.
B) Yes, otherwise consumers would not buy 40 units.
C) Yes, because $18 shows what consumers are willing to pay for the product.
D) No, the marginal cost of the 40th unit exceeds the marginal benefit of the 40th unit.
7) ________ refers to the reduction in economic surplus resulting from not being in competitive
equilibrium.
A) Marginal cost
B) Producer atrophy
C) Deadweight loss
D) Economic shortage
8) Economic surplus
A) does not exist when a competitive market is in equilibrium.
B) is equal to the sum of consumer surplus and producer surplus.
C) is the difference between quantity demanded and quantity supplied when the market price for
a product is greater than the equilibrium price.
D) is equal to the difference between consumer surplus and producer surplus.
9) ________ is maximized in a competitive market when marginal benefit equals marginal cost.
A) Deadweight loss
B) Marginal profit
C) Economic surplus
D) Selling price
10) Economic efficiency is defined as a market outcome in which the marginal benefit to
consumers of the last unit produced is equal to the marginal cost of production, and in which
A) the sum of consumer surplus and producer surplus is at a maximum.
B) economic surplus is minimized.
C) the sum of the benefits to firms is equal to the sum of the benefits to consumers.
D) the sum of consumer surplus and producer surplus is minimized.
11) If, in a competitive market, marginal benefit is less than marginal cost,
A) the net benefit to consumers from participating in the market is less than the net benefit to
producers.
B) the government must force producers to raise prices in order to achieve economic efficiency.
C) the quantity sold is greater than the equilibrium quantity.
D) the quantity sold is less than the equilibrium quantity.
12) In a competitive market the demand curve shows the ________ received by consumers and
the supply curve shows the ________.
A) utility; average cost.
B) marginal benefit; marginal cost
C) economic surplus; opportunity cost
D) net benefit; net cost
Figure 4-4
13) Refer to Figure 4-4. The figure above represents the market for pecans. Assume that this is
a competitive market. At a price of $9
A) the marginal cost of pecans is greater than the marginal benefit; therefore, output is
inefficiently low.
B) producers should lower the price to $3 in order to sell the quantity demanded of 4,000.
C) the marginal benefit of pecans is greater than the marginal cost; therefore, output is
inefficiently high.
D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is
inefficiently low.
14) Refer to Figure 4-4. The figure above represents the market for pecans. Assume that this is
a competitive market. If the price of pecans is $3
A) economic surplus is maximized.
B) not enough consumers want to buy pecans.
C) the quantity supplied is less than the economically efficient quantity.
D) the quantity supplied is economically efficient but the quantity demanded is economically
inefficient.