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Consumers, Producers, and the Efficiency of Markets 1933
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.
1934 Consumers, Producers, and the Efficiency of Markets
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)
Consumers, Producers, and the Efficiency of Markets 1935
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.
1936 Consumers, Producers, and the Efficiency of Markets
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.
Consumers, Producers, and the Efficiency of Markets 1937
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.
1938 Consumers, Producers, and the Efficiency of Markets
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.
Consumers, Producers, and the Efficiency of Markets 1939
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
1940 Consumers, Producers, and the Efficiency of Markets
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
Consumers, Producers, and the Efficiency of Markets 1941
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
1942 Consumers, Producers, and the Efficiency of Markets
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
Consumers, Producers, and the Efficiency of Markets 1943
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
1944 Consumers, Producers, and the Efficiency of Markets
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
Consumers, Producers, and the Efficiency of Markets 1945
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
1946 Consumers, Producers, and the Efficiency of Markets
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
Consumers, Producers, and the Efficiency of Markets 1947
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
1948 Consumers, Producers, and the Efficiency of Markets
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
Consumers, Producers, and the Efficiency of Markets 1949
29. All else equal, a decrease in demand will cause an increase in producer surplus.
a. True
b. False
30. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $45.
a. True
b. False
31. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $35.
a. True
b. False
1950 Consumers, Producers, and the Efficiency of Markets
32. Connie can clean windows in large office buildings at a cost of $1 per window. The market price
for window- cleaning services is $3 per window. If Connie cleans 100 windows, her producer
surplus is $100.
a. True
b. False
33. Connie can clean windows in large office buildings at a cost of $1 per window. The market price
for window- cleaning services is $3 per window. If Connie cleans 100 windows, her producer
surplus is $200.
a. True
b. False
34. The area below the price and above the supply curve measures the producer surplus in a market.
a. True
b. False
Consumers, Producers, and the Efficiency of Markets 1951
35. The area below the demand curve and above the supply curve measures the producer surplus in a
market.
a. True
b. False
36. If the government imposes a binding price ceiling in a market, then the producer surplus in that
market will increase.
a. True
b. False
37. When demand increases so that market price increases, producer surplus increases because (1)
producer surplus received by existing sellers increases, and (2) new sellers enter the market.
a. True
b. False
1952 Consumers, Producers, and the Efficiency of Markets
38. The lower the price, the lower the producer surplus, all else equal.
a. True
b. False
39. Producer surplus measures the benefit to sellers from receiving a price above their costs.
a. True
b. False
40. If the government removes a binding price ceiling in a market, then the producer surplus in that
market will increase.
a. True
b. False
