80 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
104. The 2005 Boston Globe article discussing ticket scalping points out that the price people will pay for tickets
will rise when
a.
supply and demand are both limited.
b.
supply is limited and demand is not limited.
c.
supply is limited and demand is not limited.
d.
supply and demand are both not limited.
105. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price
for widgets to $6, producer surplus
a.
would necessarily increase even if the higher price resulted in a surplus of widgets.
b.
would necessarily decrease because the higher price would create a surplus of widgets.
c.
might increase or decrease.
d.
would be unaffected.
106. Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price
for widgets to $4,
a.
any possible increase in consumer surplus would be larger than the loss of producer surplus.
b.
any possible increase in consumer surplus would be smaller than the loss of producer surplus.
c.
the resulting increase in producer surplus would be larger than any possible loss of consumer
surplus.
d.
the resulting increase in producer surplus would be smaller than any possible loss of consumer
surplus.
107. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price
for widgets to $6,
a.
the resulting increase in consumer surplus would be larger than any possible loss of producer
surplus.
b.
the resulting increase in consumer surplus would be smaller than any possible loss of producer
surplus.
c.
any possible increase in producer surplus would be larger than the loss of consumer surplus.
d.
any possible increase in producer surplus would be smaller than the loss of consumer surplus.
108. Total surplus in a market will increase when the government
a.
imposes a binding price floor or a binding price ceiling on that market.
b.
imposes a tax on that market.
c.
Both a and b are correct.
d.
Neither a nor b is correct.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 81
109. Total surplus in a market will increase when the government
a.
imposes a tax on that market.
b.
imposes a binding price floor on that market.
c.
removes a binding price ceiling from that market.
d.
None of the above is correct.
110. If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will
a.
increase producer surplus.
b.
reduce producer surplus.
c.
not affect producer surplus.
d.
Any of the above are possible.
111. If a market is allowed to move freely to its equilibrium price and quantity, then an increase in supply will
a.
increase consumer surplus.
b.
reduce consumer surplus.
c.
not affect consumer surplus.
d.
Any of the above are possible.
112. A simultaneous increase 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.
113. Raisin bran and milk are complementary goods. A decrease in the price of raisins will
a.
increase consumer surplus in the market for raisin bran and decrease producer surplus in the market
for milk.
b.
increase consumer surplus in the market for raisin bran and increase producer surplus in the market
for milk.
c.
decrease consumer surplus in the market for raisin bran and increase producer surplus in the market
for milk.
d.
decrease consumer surplus in the market for raisin bran and decrease producer surplus in the market
for milk.
82 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
114. Raisin bran and milk are complements. An increase in the price of raisins will
a.
increase consumer surplus in the market for raisin bran and decrease producer surplus in the market
for milk.
b.
increase consumer surplus in the market for raisin bran and increase producer surplus in the market
for milk.
c.
decrease consumer surplus in the market for raisin bran and increase producer surplus in the market
for milk.
d.
decrease consumer surplus in the market for raisin bran and decrease producer surplus in the market
for milk.
115. Coffee and tea are substitutes. Bad weather that sharply reduces the coffee bean harvest would
a.
increase consumer surplus in the market for coffee and decrease producer surplus in the market for
tea.
b.
increase consumer surplus in the market for coffee and increase producer surplus in the market for
tea.
c.
decrease consumer surplus in the market for coffee and increase producer surplus in the market for
tea.
d.
decrease consumer surplus in the market for coffee and decrease producer surplus in the market for
tea.
116. Coffee and tea are substitutes. Good weather that sharply increases the coffee bean harvest would
a.
increase consumer surplus in the market for coffee and decrease producer surplus in the market for
tea.
b.
increase consumer surplus in the market for coffee and increase producer surplus in the market for
tea.
c.
decrease consumer surplus in the market for coffee and increase producer surplus in the market for
tea.
d.
decrease consumer surplus in the market for coffee and decrease producer surplus in the market for
tea.
117. 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.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 83
118. 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.
119. 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.
120. 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.
121. 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.
122. 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.
84 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
123. Which of the following is not equal to total surplus?
a.
consumer surplus – producer surplus
b.
buyers’ willingnesses 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
124. Total surplus measures the
a.
loss to buyers from paying higher prices plus the benefit to sellers from receiving lower prices.
b.
buyers’ willingnesses 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.
125. 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.
126. 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)
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 85
127. 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 out-
come 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)
CONCLUSION
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 most if not 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.
86 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
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.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 87
TRUE/FALSE
1. Welfare economics is the study of the welfare system.
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.
3. For any given quantity, the price on a demand curve represents the marginal buyer’s willingness to pay.
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.
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.
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.
7. Consumer surplus measures the benefit to buyers of participating in a market.
8. Consumer surplus can be measured as the area between the demand curve and the equilibrium price.
9. Consumer surplus can be measured as the area between the demand curve and the supply curve.
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.
88 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
11. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $10.
12. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90.
13. All else equal, an increase in supply will cause an increase in consumer surplus.
14. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1) con-
sumer surplus received by existing buyers increases and (2) new buyers enter the market.
15. If the government imposes a binding price floor in a market, then the consumer surplus in that market will
increase.
16. If the government imposes a binding price floor in a market, then the consumer surplus in that market will
decrease.
17. All else equal, an increase in demand will always increase consumer surplus.
18. If Rosa is willing to pay $450 for hockey tickets and has consumer surplus of $175, the price of the tickets is
$625.
19. Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70.
20. The lower the price, the lower the consumer surplus, all else equal.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 89
21. In order to calculate consumer surplus in a market, we need to know willingness to pay and price.
22. An increase in price increases consumer surplus.
23. Each seller of a product is willing to sell as long as the price he or she can receive is greater than the oppor-
tunity cost of producing the product.
24. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
25. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price.
26. Producer surplus is the amount a seller is paid minus the cost of production.
27. Producer surplus is the cost of production minus the amount a seller is paid.
28. All else equal, an increase in demand will cause an increase in producer surplus.
29. All else equal, a decrease in demand will cause an increase in producer surplus.
30. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $45.
31. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $35.
90 ❖ Chapter 7/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.
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.
34. The area below the price and above the supply curve measures the producer surplus in a market.
35. The area below the demand curve and above the supply curve measures the producer surplus in a market.
36. If the government imposes a binding price ceiling in a market, then the producer surplus in that market will
increase.
37. When demand increases so that market price increases, producer surplus increases because (1) producer sur-
plus received by existing sellers increases, and (2) new sellers enter the market.
38. The lower the price, the lower the producer surplus, all else equal.
39. Producer surplus measures the benefit to sellers from receiving a price above their costs.
40. If the government removes a binding price ceiling in a market, then the producer surplus in that market will
increase.
41. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply
curve is . If 80 units of the good are produced and sold, then producer surplus amounts to
$1,200.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 91
42. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply curve is
. If 90 units of the good are produced and sold, then producer surplus amounts to $1,350.
43. The cost of production plus producer surplus is the price a seller is paid.
44. Total surplus in a market is consumer surplus minus producer surplus.
45. Total surplus = Value to buyers – Costs to sellers.
46. Total surplus in a market can be measured as the area below the supply curve plus the area above the demand
curve, up to the point of equilibrium.
47. Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50. For
this transaction, the total surplus in the market is $40.
48. The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of partic-
ipating in that market.
49. Efficiency refers to whether a market outcome is fair, while equality refers to whether the maximum amount
of output was produced from a given number of inputs.
50. Efficiency is related to the size of the economic pie, whereas equality is related to how the pie gets sliced and
distributed.
51. Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand
for goods to the sellers who can produce them at least cost.
92 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
52. Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs
to society of this activity outweigh the benefits.
53. Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.
54. Ticket scalping can increase total surplus in the market for tickets to sporting events.
55. If the United States legally allowed for a market in transplant organs, it is estimated that one kidney would sell
for at least $100,000.
56. Even though participants in the economy are motivated by self-interest, the “invisible hand” of the market-
place guides this self-interest into promoting general economic well-being.
57. The current policy on kidney donation effectively sets a price ceiling of zero.
58. Wendy is willing to pay $50 for a concert ticket and Bruce would like to receive $25. If the market price is
$40 for this transaction, then the total surplus would be $15.
59. Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay
$650. The total surplus is $200.
60. If a market is in equilibrium, then it is impossible for a social planner to raise economic welfare by increasing
or decreasing the quantity of the good.
61. Unless markets are perfectly competitive, they may fail to maximize the total benefits to buyers and sellers.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 93
62. In order to conclude that markets are efficient, we assume that they are perfectly competitive.
63. Markets will always allocate resources efficiently.
64. When markets fail, public policy can potentially remedy the problem and increase economic efficiency.
65. Market power and externalities are examples of market failures.
SHORT ANSWER
1. Answer each of the following questions about demand and consumer surplus.
a.
What is consumer surplus, and how is it measured?
b.
What is the relationship between the demand curve and the willingness to pay?
c.
Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate
using a demand curve.
d.
In what way does the demand curve represent the benefit consumers receive from participating in a
market? In addition to the demand curve, what else must be considered to determine consumer
surplus?
generated from their purchases. The graph should show that as price falls from P2 to P1,
consumer surplus increases from area A to area A+B+C.
to “pay for.”
94 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
2. Tammy loves donuts. The table shown reflects the value Tammy places on each donut she eats:
Value of first donut
$0.60
Value of second donut
$0.50
Value of third donut
$0.40
Value of fourth donut
$0.30
Value of fifth donut
$0.20
Value of sixth donut
$0.10
a.
Use this information to construct Tammy‘s demand curve for donuts.
b.
If the price of donuts is $0.20, how many donuts will Tammy buy?
c.
Show Tammy‘s consumer surplus on your graph. How much consumer surplus would she have
at a price of $0.20?
d.
If the price of donuts rose to $0.40, how many donuts would she purchase now? What would
happen to Tammy’s consumer surplus? Show this change on your graph.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 95
96 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
3. Answer each of the following questions about supply and producer surplus.
a.
What is producer surplus, and how is it measured?
b.
What is the relationship between the cost to sellers and the supply curve?
c.
Because the supply curve shows the minimum amount sellers are willing to accept for a given
surplus increases from area C to area A+B+C.
Other things equal, what happens to producer surplus when the price of a good rises? Illustrate
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 97
4. Given the following two equations:
1)
Total Surplus = Consumer Surplus + Producer Surplus
2)
Total Surplus = Value to Buyers – Cost to Sellers
Show how equation (1) can be used to derive equation (2).
98 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
5. Answer the following questions based on the graph that represents J.R.’s demand for ribs per week at Judy’s
Rib Shack.
a.
At the equilibrium price, how many ribs would J.R. be willing to purchase?
b.
How much is J.R. willing to pay for 20 ribs?
c.
What is the magnitude of J.R.’s consumer surplus at the equilibrium price?
d.
At the equilibrium price, how many ribs would Judy be willing to sell?
e.
How high must the price of ribs be for Judy to supply 20 ribs to the market?
f.
At the equilibrium price, what is the magnitude of total surplus in the market?
g.
If the price of ribs rose to $10, what would happen to J.R.’s consumer surplus?
h.
If the price of ribs fell to $5, what would happen to Judy’s producer surplus?
i.
Explain why the graph that is shown verifies the fact that the market equilibrium (quantity)
maximizes the sum of producer and consumer surplus.
5Demand
Supply
10 20 30 40 50 60 70 80 Quantity
2
4
6
8
10
12
14
16
18
20 Price
b.
$10.00
c.
$80.00.
d.
40
e.
$5
f.
$200
g.
It would fall from $80 to only $20.
h.
It would fall from $120 to only $30.