True/False
Indicate whether the
sentence or statement is true or false.
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1.
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Consumer surplus is the buyer's willingness to
pay minus the seller's cost.
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2.
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If the demand curve in a market is stationary,
consumer surplus decreases when the price in that market increases.
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3.
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If your willingness to pay for a hamburger is
€3.00 and the price is €2.00, your consumer surplus is €5.00.
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4.
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Producer surplus is a measure of the unsold
inventories of suppliers in a market.
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5.
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Consumer surplus is a good measure of buyers'
benefits if buyers are rational.
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6.
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Cost to the seller includes the opportunity cost of
the seller's time.
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7.
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The height of the supply curve is the marginal
seller's cost.
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8.
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Total surplus is the seller's cost minus the
buyer's willingness to pay.
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9.
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Free markets are efficient because they allocate
output to buyers who have a willingness to pay that is below the price.
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10.
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Producer surplus is the area above the supply curve
and below the price.
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11.
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The major advantage of allowing free markets to
allocate resources is that the outcome of the allocation is efficient.
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12.
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Equilibrium in a competitive market maximizes total
surplus.
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13.
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The two main types of market failure are market
power and externalities.
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14.
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Externalities are side effects, such as pollution,
that are not taken into account by the buyers and sellers in a market.
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15.
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Producing more of a product always adds to total
surplus.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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Consumer surplus is the area
a. | below the demand curve and above the
price. | b. | above the supply curve and below the
price. | c. | above the demand curve and below the
price. | d. | below the supply curve and above the
price. | e. | below the demand curve and above the supply
curve. |
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17.
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A buyer's willingness to pay is that
buyer's
a. | minimum amount they are willing to pay for a
good. | b. | producer surplus. | c. | consumer surplus. | d. | maximum amount
they are willing to pay for a good. | e. | none of these
answers. |
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18.
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If a buyer's willingness to pay for a new
Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus
is
a. | €18,000. | b. | €20,000. | c. | €2,000. | d. | €0. | e. | €38,000. |
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19.
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An increase in the price of a good along a
stationary demand curve
a. | improves the material welfare of the
buyers. | b. | decreases consumer surplus. | c. | improves market efficiency. | d. | increases consumer surplus. |
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20.
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Suppose there are three identical vases available
to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for
one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will
be sold and what is the value of consumer surplus in this market?
a. | Three vases will be sold and consumer surplus is
€80. | b. | One vase will be
sold and consumer surplus is €5. | c. | One vase will be
sold and consumer surplus is €30. | d. | Three vases will
be sold and consumer surplus is €0. | e. | Two vases will be
sold and consumer surplus is €5. |
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21.
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Producer surplus is the area
a. | below the supply curve and above the
price. | b. | below the demand curve and above the supply
curve. | c. | below the demand curve and above the
price. | d. | above the demand curve and below the
price. | e. | above the supply curve and below the
price. |
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22.
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If a benevolent social planner chooses to produce
less than the equilibrium quantity of a good, then
a. | total surplus is maximized. | b. | the value placed on the last unit of production by buyers exceeds the cost of
production. | c. | producer surplus
is maximized. | d. | the cost of
production on the last unit produced exceeds the value placed on it by
buyers. | e. | consumer surplus is
maximized. |
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23.
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If a benevolent social planner chooses to produce
more than the equilibrium quantity of a good, then
a. | the value placed on the last unit of production by
buyers exceeds the cost of production. | b. | the cost of
production on the last unit produced exceeds the value placed on it by
buyers. | c. | consumer surplus is
maximized. | d. | total surplus is
maximized. | e. | producer surplus
is maximized. |
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24.
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The seller's cost of production
is
a. | none of these answers. | b. | the minimum amount the seller is willing to accept for a
good. | c. | the seller's producer
surplus. | d. | the maximum amount the seller is willing to accept for a
good. | e. | the seller's consumer
surplus. |
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25.
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Total surplus is the area
a. | above the supply curve and below the
price. | b. | below the demand curve and above the
price. | c. | below the demand curve and above the supply
curve. | d. | below the supply curve and above the
price. | e. | above the demand curve and below the
price. |
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26.
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An increase in the price of a good along a
stationary supply curve
a. | increases producer surplus. | b. | does all of the things described in these answers. | c. | decreases producer surplus. | d. | improves market equity. |
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27.
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Adam Smith's "invisible hand"
concept suggests that a competitive market outcome
a. | maximizes total surplus. | b. | generates equality among the members of society. | c. | minimizes total surplus. | d. | both maximizes
total surplus and generates equality among the members of
society. |
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28.
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In general, if a benevolent social planner wanted
to maximize the total benefits received by buyers and sellers in a market, the planner
should
a. | choose a price below the market equilibrium
price. | b. | allow the market to seek equilibrium on its
own. | c. | choose any price the planner wants because the losses to
the sellers (buyers) from any change in price are exactly offset by the gains to the buyers
(sellers). | d. | choose a price
above the market equilibrium price. |
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29.
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If buyers are rational and there is no market
failure,
a. | free market solutions are
efficient. | b. | free market
solutions maximize total surplus. | c. | all of these
answers. | d. | free market solutions are
equitable. | e. | free market
solutions are efficient and free market solutions maximize total
surplus. |
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30.
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If a producer has market power (can influence the
price of the product in the market) then free market solutions
a. | are equitable. | b. | are efficient. | c. | maximize consumer
surplus. | d. | are inefficient. |
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31.
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If a market is efficient, then
a. | the market allocates buyers to the sellers who can
produce the good at least cost. | b. | all of these
answers. | c. | none of these answers. | d. | the quantity produced in the market maximizes the sum of consumer and producer
surplus. | e. | the market allocates output to the buyers that value it
the most. |
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32.
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If a market generates a side effect or externality,
then free market solutions
a. | maximize producer surplus. | b. | are efficient. | c. | are
inefficient. | d. | are
equitable. |
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33.
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Medical care clearly enhances people’s lives.
Therefore, we should consume medical care until
a. | everyone has as much as they would
like. | b. | the benefit buyers place on medical care is equal to the
cost of producing it. | c. | buyers receive no
benefit from another unit of medical care. | d. | we must cut back
on the consumption of other goods. |
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34.
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Joe has ten pairs of football boots and Sue has
none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots
at €100 and Sue values a pair of boots at €40, then to maximize
a. | efficiency Sue should receive the
glove. | b. | efficiency Joe should receive the
glove. | c. | equity, Joe should receive the
glove. | d. | consumer surplus both should receive a
glove. |
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35.
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Suppose that the price of a new bicycle is
€300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce
the new bicycle. What is the value of total surplus if Natalie buys a new bike?
a. | €500 | b. | €300 | c. | €200 | d. | €400 | e. | €100 |
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