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Consumers, Producers, and the Efficiency of Markets 1933
125.
Steak and chicken are substitutes. A sharp reduction in the supply of steak would
a.
increase consumer surplus in the market for steak and decrease producer surplus in the
market for chicken.
b.
increase consumer surplus in the market for steak and increase producer surplus in the market
for chicken.
c.
decrease consumer surplus in the market for steak and increase producer surplus in the
market for chicken.
d.
decrease consumer surplus in the market for steak and decrease producer surplus in the
market for chicken.
126.
Corn chips and potato chips are substitutes. Good weather that sharply increases the corn
harvest would
a.
increase consumer surplus in the market for corn chips and decrease producer surplus in the
market for
potato chips.
b.
increase consumer surplus in the market for corn chips and increase producer surplus in the
market for
potato chips.
c.
decrease consumer surplus in the market for corn chips and increase producer surplus in the
market for
potato chips.
d.
decrease consumer surplus in the market for corn chips and decrease producer surplus in the
market for
potato chips.
127.
PlayStations and PlayStation games are complementary goods. A technological advance in the
production of
PlayStations will
a.
increase consumer surplus in the market for PlayStations and decrease producer surplus in
the market for
PlayStation games.
b.
increase consumer surplus in the market for PlayStations and increase producer surplus in the
market for
PlayStation games.
c.
decrease consumer surplus in the market for PlayStations and increase producer surplus in
the market for
PlayStation games.
d.
decrease consumer surplus in the market for PlayStations and decrease producer surplus in
the market for
PlayStation games.
128.
If the current allocation of resources in the market for hammers is inefficient, then it must be
the case that
a.
producer surplus exceeds consumer surplus in the market for hammers.
b.
consumer surplus exceeds producer surplus in the market for hammers.
c.
the sum of consumer surplus and producer surplus could be increased by moving to a different
allocation of
resources.
d.
the costs that sellers of hammers are incurring could be reduced by moving to a different
allocation of
resources.
129.
If the current allocation of resources in the market for wallpaper is efficient, then it must be the
case that
a.
producer surplus equals consumer surplus in the market for wallpaper.
b.
the market for wallpaper is in equilibrium.
c.
on the last unit of wallpaper that was produced and sold, the value to buyers exceeded the
cost to sellers.
d.
All of the above are correct.
130.
Five hundred units of good x are currently bought and sold. The marginal buyer is willing to pay
$40 for the 500th unit, and the cost to the marginal seller is $35 for the 500th unit
. We know that
a.
the equilibrium price of good x is somewhere between $35 and $40.
b.
the equilibrium quantity of good x exceeds 500 units.
c.
500 units is not an efficient quantity of good x.
d.
All of the above are correct.
131.
A simultaneous decrease in both the demand for MP3 players and the supply of MP3 players
would imply that
a.
both the value of MP3 players to consumers and the cost of producing MP3 players has
increased.
b.
both the value of MP3 players to consumers and the cost of producing MP3 players has
decreased.
c.
the value of MP3 players to consumers has decreased, and the cost of producing MP3 players
has
increased.
d.
the value of MP3 players to consumers has increased, and the cost of producing MP3 players
has
decreased.
132.
Economists say that a market where goods are not consumed by those valuing the goods most
highly is
a.
laissez-faire..
b.
unequal.
c.
inefficient.
d.
rational.
133.
Which of the following is not equal to total surplus?
a.
consumer surplus - producer surplus
b.
buyers’ willingness to pay - sellers’ costs
c.
value to buyers - amount paid by buyers + amount received by sellers - cost to sellers
d.
value to buyers - cost to sellers
134.
Total surplus measures the
a.
loss to buyers from paying higher prices plus the benefit to sellers from receiving lower prices.
b.
buyers’ willingness to pay less the sellers’ costs.
c.
fairness of the distribution of resources in society.
d.
value to the government of goods and services sold in society.
135.
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do
so at a lower cost.
Cassie and David each want to purchase a high-resolution computer monitor, but David is willing
to pay more than
Cassie. Which of the following market outcomes is efficient?
a.
Firm A produces a monitor that Cassie buys. David does not purchase a monitor.
b.
Firm A produces a monitor that David buys.
c.
Firm B produces a monitor that Cassie buys. David does not purchase a monitor.
d.
Firm B produces a monitor that David buys.
136.
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do
so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor,
but David is willing to pay more than
Cassie. If Firm B produces a monitor that David buys, then
the market outcome illustrates which of the following
principles?
(i) Free markets allocate the supply of goods to the buyers who value them most highly, as
measured by their willingness to pay.
(ii) Free markets allocate the demand for goods to the sellers who can produce them at the
least cost.
a.
(i) only
b.
(ii) only
c.
both (i) and (ii)
d.
neither (i) nor (ii)
137.
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do
so at a lower cost.
Cassie and David each want to purchase a high-resolution computer monitor, but David is willing
to pay more than
Cassie. If Firm A produces a monitor that Cassie buys but David does not, then
the market outcome illustrates
which of the following principles?
(i) Free markets allocate the supply of goods to the buyers who value them most
highly, as
measured by their willingness to pay.
(ii) Free markets allocate the demand for goods to the sellers who can produce them at
the
least cost.
a.
(i) only
b.
(ii) only
c.
both (i) and (ii)
d.
neither (i) nor (ii)
Multiple Choice – Section 04: Conclusion: Market Efficiency and Market Failure
1.
Which of the following statements is not correct?
a.
An invisible hand leads buyers and sellers to an equilibrium that maximizes total surplus.
b.
Market power can cause markets to be inefficient.
c.
Externalities can cause markets to be inefficient.
d.
The invisible hand can remedy all types of market failures.
2.
Inefficiency can be caused in a market by the presence of
a.
market power.
b.
externalities.
c.
imperfectly competitive markets.
d.
All of the above are correct.
3.
Market power refers to the
a.
side effects that may occur in a market.
b.
government regulations imposed on the sellers in a market.
c.
ability of market participants to influence price.
d.
forces of supply and demand in determining equilibrium price.
4.
Externalities are
a.
side effects passed on to a party other than the buyers and sellers in the market.
b.
side effects of government intervention in markets.
c.
external forces that cause the price of a good to be higher than it otherwise would be.
d.
external forces that help establish equilibrium price.
5.
The decisions of buyers and sellers that affect people who are not participants in the market create
a.
market power.
b.
externalities.
c.
profiteering.
d.
market equilibrium.
6.
Market failure is the inability of
a.
buyers to interact harmoniously with sellers in the market.
b.
a market to establish an equilibrium price.
c.
buyers to place a value on the good or service.
d.
some unregulated markets to allocate resources efficiently.
7.
When markets fail, public policy can
a.
do nothing to improve the situation.
b.
potentially remedy the problem and increase economic efficiency.
c.
always remedy the problem and increase economic efficiency.
d.
in theory, remedy the problem, but in practice, public policy has proven to be ineffective.
8.
The consumption of water by local residents that may include pesticide runoff from local farmers’
fields is an
example of
a.
market equilibrium.
b.
market power.
c.
externalities.
d.
laissez-faire.
9.
Market power and externalities are examples of
a.
laissez-faire economics.
b.
public policy.
c.
market failure.
d.
welfare economics.
10.
Which of the following is not correct?
a.
Market power can cause markets to be inefficient.
b.
When the decisions of buyers and sellers affect nonparticipants, markets may be inefficient.
c.
The tools of welfare economics cannot help economists when markets are inefficient.
d.
Externalities can cause markets to be inefficient.
True/False and Short Answer
1.
Welfare economics is the study of the welfare system.
a.
True
b.
False
2.
The willingness to pay is the maximum amount that a buyer will pay for a good and measures how
much the buyer
values the good.
a.
True
b.
False
3.
For any given quantity, the price on a demand curve represents the marginal buyer's willingness to
pay.
a.
True
b.
False
4.
A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but
would refuse to buy a
product at a price less than his willingness to pay.
a.
True
b.
False
5.
Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer
is willing to pay
for it.
a.
True
b.
False
6.
Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer
actually has to pay
for it.
a.
True
b.
False
7.
Consumer surplus measures the benefit to buyers of participating in a market.
a.
True
b.
False
8.
Consumer surplus can be measured as the area between the demand curve and the equilibrium
price.
a.
True
b.
False
9.
Consumer surplus can be measured as the area between the demand curve and the supply curve.
a.
True
b.
False
10.
Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she
paid $8,000 for the
car but would have been willing to pay $11,000 for the car. Susie's consumer
surplus is $2,000.
a.
True
b.
False
11.
If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $10.
a.
True
b.
False
12.
If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90.
a.
True
b.
False
13.
All else equal, an increase in supply will cause an increase in consumer surplus.
a.
True
b.
False
14.
Suppose there is an increase in supply that reduces market price. Consumer surplus increases
because (1) consumer
surplus received by existing buyers increases and (2) new buyers enter the
market.
a.
True
b.
False
15.
If the government imposes a binding price floor in a market, then the consumer surplus in that
market will increase.
a.
True
b.
False
16.
If the government imposes a binding price floor in a market, then the consumer surplus in that
market will decrease.
a.
True
b.
False
17.
All else equal, an increase in demand will always increase consumer surplus.
a.
True
b.
False
18.
If Rosa is willing to pay $450 for hockey tickets and has consumer surplus of $175, the price of
the tickets is $625.
a.
True
b.
False
19.
Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70.
a.
True
b.
False
20.
The lower the price, the lower the consumer surplus, all else equal.
a.
True
b.
False
21.
In order to calculate consumer surplus in a market, we need to know willingness to pay and price.
a.
True
b.
False
22.
An increase in price increases consumer surplus.
a.
True
b.
False
23.
Each seller of a product is willing to sell as long as the price he or she can receive is greater than
the opportunity
cost of producing the product.
a.
True
b.
False
24.
At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
a.
True
b.
False
25.
In a competitive market, sales go to those producers who are willing to supply the product at the
lowest price.
a.
True
b.
False
26.
Producer surplus is the amount a seller is paid minus the cost of production.
a.
True
b.
False
27.
Producer surplus is the cost of production minus the amount a seller is paid.
a.
True
b.
False
28.
All else equal, an increase in demand will cause an increase in producer surplus.
a.
True
b.
False
