Question 1

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.Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.

Accepted Answer

a. Producer surplus measures the benefit to sellers of participating in a market.It is measured as the amount a seller is paid minus the cost of production.For an individual sale,producer surplus is measured as the difference between the market price and the cost of production,as shown on the supply curve.For the market,total producer surplus is measured as the area above the supply curve and below the market price,between the origin and the quantity sold.
b. Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity,the supply curve represents the cost of the marginal seller.
c. When the price of a good rises,producer surplus increases for two reasons.First,those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A).Second,new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B);hence,there is additional producer surplus generated from their sales.The graph should show that as price rises from P₁ to P₂,producer surplus increases from area C to area A + B + C.

Question 2

Table 7-1
 
-Refer to Table 7-1.If the table represents the willingness to pay of four buyers and the price of the product is $30,then their total consumer surplus is

Accepted Answer

A)  $-10.
B)  $-6.
C)  $20.
D)  $30. C

Question 3

Jeff decides that he would pay as much as $3,000 for a new laptop computer.He buys the computer and realizes consumer surplus of $700.How much did Jeff pay for his computer?

Accepted Answer

A)  $700
B)  $2,300
C)  $3,000
D)  $3,700 B

Question 4

A seller is willing to sell a product only if the seller receives a price that is at least as great as

Accepted Answer

A)  the seller's producer surplus.
B)  the sellers's cost of production.
C)  the seller's profit.
D)  the average willingness to pay of buyers of the product.

Question 5

A supply curve can be used to measure producer surplus because it reflects

Accepted Answer

A)  the actions of sellers.
B)  quantity supplied.
C)  sellers' costs.
D)  the amount that will be purchased by consumers in the market.

Question 6

Market Supply and Demand for Pepperoni Pizza
Table 7-5
 
-Refer to Table 7-5.As the table suggests,the demand curve is a straight line and so is the supply curve.Taking this into account,when there is equilibrium,total surplus is

Accepted Answer

A)  $44.
B)  $48.
C)  $54.
D)  $68.

Question 7

Suppose that the equilibrium price in the market for widgets is $5.If a law reduced the maximum legal price for widgets to $4,

Accepted Answer

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.

Question 8

Figure 7-9
 
-Refer to Figure 7-9.Assume demand increases and as a result,equilibrium price increases to $22 and equilibrium quantity increases to 110.The increase in producer surplus due to new producers entering the market would be equal to

Accepted Answer

A)  $90.
B)  $210.
C)  $360.
D)  $480.

Question 9

Table 7-3
For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Alex, Barb, and Carlos are the only three buyers of oranges, and only three oranges can be supplied per day.
 
-Refer to Table 7-3.Who experiences the largest gain in consumer surplus when the price of an orange decreases from $1.05 to $0.75?

Accepted Answer

A)  Alex
B)  Barb
C)  Carlos
D)  Alex and Barb experience the same gain in consumer surplus, and Carlos's gain is zero.

Question 10

Chad is willing to pay $5.00 to get his first cup of morning latté;he is willing to pay $4.50 for a second cup.He buys his first cup from a vendor selling latté for $3.75 per cup.He returns to that vendor later in the morning to find that the vendor has increased her price to $3.90 per cup.Chad buys a second cup.Which of the following statements is correct?

Accepted Answer

A)  Chad's willingness to pay for his second cup of latté was smaller than his willingness to pay for his first cup of latté.
B)  Chad's consumer surplus on his second cup of latté was larger than his consumer surplus on his first cup of latté.
C)  Chad is irrational in that he is willing to pay a different price for his second cup of latté than what he is willing to pay for his first cup of latté.
D)  Chad places a higher value on his second cup of latté than on his first cup of latté.

Question 11

Consumer surplus

Accepted Answer

A)  is the amount of a good that a consumer can buy at a price below equilibrium price.
B)  is the difference between the amount that a consumer actually pays for a good and the amount that the consumer is willing to pay for the good.
C)  is the number of consumers who are excluded from a market because of scarcity.
D)  measures how much a buyer values a good.

Question 12

The "invisible hand" is

Accepted Answer

A)  used to describe the welfare system in the United States.
B)  a concept developed by Adam Smith to describe the virtues of free markets.
C)  a concept used by J.M.Keynes to describe the role of government in guiding the allocation of resources in the economy.
D)  a term used by some economists to characterize the role of government in an economy-- inevitable but invisible.

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

Figure 7-9
 
-Refer to Figure 7-9.At the equilibrium price,total surplus is

Accepted Answer

A)  $480.
B)  $640.
C)  $1,120.
D)  $1,280.

Question 16

Figure 7-8
 
-Refer to Figure 7-8.Buyers who value this good more than price are represented by which line segment?

Accepted Answer

A)  AC.
B)  CE.
C)  BC.
D)  CD.

Question 17

Noah drinks Dr.Pepper.He can buy as many cans of Dr.Pepper as he wishes at a price of $0.50 per can.On a particular day,he is willing to pay $0.95 for the first can,$0.80 for the second can,$0.60 for the third can,and $0.40 for the fourth can.Assume Noah is rational in deciding how many cans to buy.His consumer surplus is

Accepted Answer

A)  $0.50.
B)  $0.85.
C)  $1.05.
D)  $1.20.

Question 18

Figure 7-1
 
-Refer to Figure 7-1.When the price rises from P₁ to P₂,which of the following statements is not true?

Accepted Answer

A)  The buyers who still buy the good are worse off because they now pay more.
B)  Some buyers leave the market because they are not willing to buy the good at the higher price.
C)  Buyers place a higher value on the good after the price increase.
D)  Consumer surplus in the market falls.

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Consumer surplus

Accepted Answer

A)  is a concept that helps us make normative statements about the desirability of market outcomes.
B)  is represented on a graph by the area below the demand curve and above the price.
C)  is a good measure of economic welfare if buyers' preferences are the primary concern.
D)  All of the above are correct.

Exam 7: Consumers, producers, and the Efficiency of Markets

Table 7-1 -Refer to Table 7-1.If the table represents the willingness to pay of four buyers and the price of the product is $30,then their total consumer surplus is

Jeff decides that he would pay as much as $3,000 for a new laptop computer.He buys the computer and realizes consumer surplus of $700.How much did Jeff pay for his computer?

A seller is willing to sell a product only if the seller receives a price that is at least as great as

A supply curve can be used to measure producer surplus because it reflects

Market Supply and Demand for Pepperoni Pizza Table 7-5 -Refer to Table 7-5.As the table suggests,the demand curve is a straight line and so is the supply curve.Taking this into account,when there is equilibrium,total surplus is

Suppose that the equilibrium price in the market for widgets is $5.If a law reduced the maximum legal price for widgets to $4,

Figure 7-9 -Refer to Figure 7-9.Assume demand increases and as a result,equilibrium price increases to $22 and equilibrium quantity increases to 110.The increase in producer surplus due to new producers entering the market would be equal to

Consumer surplus

The "invisible hand" is

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.

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.

Figure 7-9 -Refer to Figure 7-9.At the equilibrium price,total surplus is

Figure 7-8 -Refer to Figure 7-8.Buyers who value this good more than price are represented by which line segment?

Figure 7-1 -Refer to Figure 7-1.When the price rises from P₁ to P₂,which of the following statements is not true?

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.

Consumer surplus