Chapter 7 Consumers, Producers, and the Efficiency of Markets

MULTIPLE CHOICE 1. Welfare economics is the study of a. the well-being of less fortunate people. b. welfare programs in the United States. c. the effect of income redistribution on work effort. d. how the allocation of resources affects economic well-being. ANSWER: d. how the allocation of resources affects economic well-being. TYPE: M DIFFICULTY: 1 2. The study of how the allocation of resources affects economic well-being is called a. consumer economics. b. macroeconomics. c. welfare economics. d. supply-side economics. ANSWER: c. welfare economics. TYPE: M DIFFICULTY: 1 3. With respect to welfare economics, the equilibrium price of a product is considered to be the best price because it a. maximizes total revenue to firms and total utility to buyers. b. maximizes the total welfare of buyers and sellers. c. minimizes costs and maximizes profits of sellers. d. minimizes the level of welfare payments to those who no longer live below the poverty line. ANSWER: b. it maximizes the total welfare of buyers and sellers. TYPE: M DIFFICULTY: 2 4. Positive analysis refers to what a. is. b. should be. c. could be. d. is politically correct. ANSWER: a. is. TYPE: M DIFFICULTY: 1 5. Normative analysis refers to what a. is. b. should be. c. maximizes efficiency. d. is politically correct. ANSWER: b. should be. TYPE: M DIFFICULTY: 1 6. The equilibrium of supply and demand in a market a. maximizes the profits of producers. b. can only be achieved with government intervention. c. produces both an efficient and equitable market outcome. d. maximizes the total benefits received by buyers and sellers. ANSWER: d. maximizes the total benefits received by buyers and sellers. TYPE: M DIFFICULTY: 2

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7. The particular price that results in quantity supplied being equal to quantity demanded is the best price because it a. maximizes costs of the seller. b. maximizes the profit of buyers. c. maximizes the total welfare of buyers and sellers. d. minimizes the expenditure of buyers. ANSWER: c. maximizes the total welfare of buyers and sellers. TYPE: M DIFFICULTY: 2 Suppose that Larry, Moe and Curly are bidding in an auction for a mint-condition video of Charlie Chaplins first movie. Each has in mind a maximum amount that he will bid. This maximum is called a. a resistance price. b. willingness to pay. c. consumer surplus. d. producer surplus. ANSWER: b. willingness to pay. TYPE: M SECTION: 1 DIFFICULTY: 1 9. Willingness to pay measures the a. amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. b. amount a seller actually receives for a good minus the minimum amount the seller is willing to accept. c. maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept. d. maximum amount that a buyer will pay for a good. ANSWER: d. maximum amount that a buyer will pay for a good. TYPE: M SECTION: 1 DIFFICULTY: 2 10. Consumer surplus is a. a buyers willingness to pay minus the price. b. a buyers willingness to pay plus the price. c. the price of the product minus the buyers willingness to pay. d. when the buyers willingness to pay and the price of the product are equal. ANSWER: a. a buyers willingness to pay minus the price. TYPE: M SECTION: 1 DIFFICULTY: 2 11. Consumer surplus measures a. the amount of a product a consumer can buy at a price below equilibrium price. b. the difference between the amount a consumer has to pay and the amount the consumer was willing to pay. c. the number of consumers who are excluded from a market because of scarcity. d. how much a buyer values a good. ANSWER: b. the difference between the amount a consumer has to pay and the amount the consumer was willing to pay. TYPE: M SECTION: 1 DIFFICULTY: 2 12. A consumers willingness to pay measures a. the cost of a good to the buyer. b. how much a buyer values a good. c. how much a buyer has to pay to receive a good. d. how much a seller receives from the sale of a good. ANSWER: b. how much a buyer values a good. TYPE: M SECTION: 1 DIFFICULTY: 2 13. If a consumer is willing and able to pay $15.00 for a particular good but the price of the good is $17.00, then the a. consumer would have consumer surplus of $2.00. b. consumer would increase his/her willingness and ability to pay by earning more. c. consumer would not purchase the good and would not have any consumer surplus. d. market must not be a perfectly competitive market. ANSWER: c. consumer would not purchase the good and would not have any consumer surplus. TYPE: M SECTION: 1 DIFFICULTY: 2 8.

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If a consumer is willing and able to pay $20.00 for a particular good but only has to pay $14.00, the consumer surplus is a. $6.00. b. $14.00. c. $20.00. d. $34.00. ANSWER: a. $6.00. TYPE: M SECTION: 1 DIFFICULTY: 2 15. Belva is willing to pay $65.00 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48.00. Belvas consumer surplus is a. $17. b. $31. c. $48. d. $65. ANSWER: a. $17. TYPE: M SECTION: 1 DIFFICULTY:1 16. If Brock is willing to pay $400 for a new suit, but is able to buy the suit for $350, his consumer surplus is a. $50. b. $150. c. $350. d. $400. ANSWER: a. $50. TYPE: M SECTION: 1 DIFFICULTY: 1 17. Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Laurens willingness to pay was $35, Leslies willingness to pay was $25, and Lydias willingness to pay was $30. Total consumer surplus for these three would be a. $15. b. $25. c. $35. d. $45. ANSWER: d. $45. TYPE: M SECTION: 1 DIFFICULTY: 2 18. Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Laurens willingness to pay was $35, Leslies willingness to pay was $25, and Lydias willingness to pay was $30. Which of the three receives the most consumer surplus from her purchase? a. Lauren b. Leslie c. Lydia d. They each received the same consumer surplus since they each paid the same for the bulletin board. ANSWER: a. Lauren TYPE: M SECTION: 1 DIFFICULTY: 2 Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase. Her willingness to pay is a. $25. b. $110. c. $135. d. $160. ANSWER: d. $160. TYPE: M SECTION: 1 DIFFICULTY: 2 19. 14.

192 Chapter 7/Consumers, Producers, and the Efficiency of Markets

BUYER MIKE SANDY JONATHAN HALEY 20.

WILLINGNESS TO PAY $50.00 $30.00 $20.00 $10.00

If the table represents the willingness to pay of 4 buyers and the price of the product is $15, then who would be willing to purchase the product? a. Mike b. Mike and Sandy c. Mike, Sandy, and Jonathan d. Mike, Sandy, Jonathan, and Haley ANSWER: c. Mike, Sandy, and Jonathan TYPE: M SECTION: 1 DIFFICULTY: 2 21. Janine would be willing to pay $50 to see Les Misrables, but buys a ticket for only $30. Janine values the performance at a. $20. b. $30. c. $50. d. $80. ANSWER: c. $50. TYPE: M SECTION: 1 DIFFICULTY: 1 22.

Chad is willing to pay $4.00 to get his second cup of morning latt. He finds a vendor selling latt for $3.75. Chads consumer surplus is a. $0.25. b. $0.50. c. $3.75. d. $4.00. ANSWER: a. $0.25. TYPE: M SECTION: 1 DIFFICULTY: 1 Denise values a stainless steel dishwasher for her new house at $500, but buys it for $350. Denises willingness to pay is a. $150. b. $350. c. $500. d. $850. ANSWER: c. $500. TYPE: M SECTION: 1 DIFFICULTY: 2 24. Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise a. buys the dishwasher and receives a consumer surplus of $150. b. buys the dishwasher and receives a consumer surplus of $500. c. does not buy the dishwasher because her willingness to pay is greater than the price. d. does not buy the dishwasher because her willingness to pay is less than the price. ANSWER: d. does not buy the dishwasher because her willingness to pay is less than the price. TYPE: M SECTION: 1 DIFFICULTY: 2 23.

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25. Amy buys a new dog for $150. She receives consumer surplus of $100 on her purchase. Her willingness to pay is a. $50. b. $100. c. $150. d. $250. ANSWER: d. $250. TYPE: M SECTION: 1 DIFFICULTY: 2 Ray buys a new tractor for $118,000. He receives consumer surplus of $13,000 on his purchase. Rays willingness to pay is a. $13,000. b. $105,000. c. $118,000. d. $131,000. ANSWER: d. $131,000. TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y 27. 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. $700 b. $2,300 c. $3,000 d. $3,700 ANSWER: b. $2,300 TYPE: M SECTION: 1 DIFFICULTY: 2 Cameron visits a sporting goods store to buy a new set of golf clubs. He is willing to pay $750 for the clubs, but buys them on sale for $575. Camerons consumer surplus from the purchase is a. $175. b. $575. c. $750. d. $1,325. ANSWER: a. $175. TYPE: M SECTION: 1 DIFFICULTY: 1 Nathan buys a new sound system for his dorm room for $500. He receives consumer surplus of $400 from the purchase. How much does Nathan value his sound system? a. $100 b. $400 c. $500 d. $900 ANSWER: d. $900 TYPE: M SECTION: 1 DIFFICULTY: 2 30. Consumer surplus is the a. quantity of a good consumers get free. b. amount a consumer has to pay less the amount the consumer was willing to pay. c. amount a consumer is willing to pay less the amount the consumer actually pays. d. total value of a good to a consumer. ANSWER: c. amount a consumer is willing to pay less the amount the consumer actually pays. TYPE: M SECTION: 1 DIFFICULTY: 1 If the price a consumer pays for a product is equal to a consumers willingness to pay, then the consumer surplus of that purchase would be a. zero. b. negative and the consumer would not purchase the product. c. positive and therefore the consumer would purchase the product. d. There is not enough information given to answer this question. ANSWER: a. zero. TYPE: M SECTION: 1 DIFFICULTY: 2 31. 29. 28. 26.

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Suppose there is an early freeze in California that ruins the lemon crop. What happens to consumer surplus in the market for lemons? a. It increases. b. It decreases. c. It is not affected by this change in market forces. d. It increases very briefly then decreases. ANSWER: b. It decreases. TYPE: M SECTION: 1 DIFFICULTY: 3 33. If you pay a price exactly equal to your willingness to pay, then a. your consumer surplus is negative. b. your willingness to pay is less than your consumer surplus. c. your consumer surplus is zero. d. you place little value on the good. ANSWER: c. your consumer surplus is zero. TYPE: M SECTION: 1 DIFFICULTY: 2 A demand curve reflects each of the following EXCEPT the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. ability of buyers to obtain the quantity they desire. ANSWER: d. ability of buyers to obtain the quantity they desire. TYPE: M SECTION: 1 DIFFICULTY: 2 35. A demand curve measures a. a buyers willingness to pay. b. the actual price a buyer must pay to get the product. c. the difference between a buyers willingness to pay and the actual price of the product. d. All of the above are correct. ANSWER: a. a buyers willingness to pay. TYPE: M SECTION: 1 DIFFICULTY: 1 This table refers to five possible buyers willingness to pay for a case of Vanilla Coke. 34. 32.

BUYER DAVID LAURA MEGAN MALLORY AUDREY 36.

WILLINGNESS TO PAY $8.50 $7.00 $5.50 $4.00 $3.50

According to the table shown, if the market price is $5.50, the consumer surplus in the market will be a. $3.00. b. $4.50. c. $15.50. d. $21.00. ANSWER: b. $4.50. TYPE: M SECTION: 1 DIFFICULTY: 2

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37. According to the table shown, if the price of Vanilla Coke is $6.90, who will purchase the good? a. All five would purchase Vanilla Coke, just in different amounts. b. Megan, Mallory and Audrey c. David, Laura and Megan d. David and Laura ANSWER: d. David and Laura TYPE: M SECTION: 1 DIFFICULTY: 2 38. According to the table shown, which of the following is NOT true? a. At a price of $9.00, no buyer is willing to purchase Vanilla Coke. b. The table shows the willingness to pay of the marginal buyer. c. When the price is $3.50, each person would receive consumer surplus. d. At a price of $4.00, total consumer surplus in the market will be $9.00. ANSWER: c. When the price is $3.50, each person would receive consumer surplus. TYPE: M SECTION: 1 DIFFICULTY: 2 39. Consumer surplus equals the a. Value to buyers Amount paid by buyers. b. Amount received by sellers Costs of sellers. c. Value to buyers Costs of sellers. d. Value to buyers Amount paid by buyers + Amount received by sellers Costs of sellers. ANSWER: a. Value to buyers Amount paid by buyers. TYPE: M SECTION: 1 DIFFICULTY: 2 40. The area below a demand curve and above the price measures a. producer surplus. b. total surplus. c. consumer surplus. d. willingness to pay. ANSWER: c. consumer surplus. TYPE: M SECTION: 1 DIFFICULTY: 1 41. On a graph, consumer surplus would be the area a. between the demand and supply curves. b. below the demand curve and above price. c. below the price and above the supply curve. d. below the demand curve to the right of equilibrium price. ANSWER: b. below the demand curve and above price. TYPE: M SECTION: 1 DIFFICULTY: 2 42. Consumer surplus in a market is the a. area below the demand curve and above the price. b. distance from the demand curve to the horizontal axis. c. distance from the demand curve to the vertical axis. d. area below the demand curve and above the horizontal axis. ANSWER: a. area below the demand curve and above the price. TYPE: M SECTION: 1 DIFFICULTY: 2 43. If the cost of producing sofas decreases, consumer surplus will a. increase, then decrease. b. decrease. c. remain constant. d. increase. ANSWER: d. increase. TYPE: M SECTION: 1 DIFFICULTY: 3

196 Chapter 7/Consumers, Producers, and the Efficiency of Markets

44. What happens to consumer surplus if the price of a good increases? a. It increases. b. It decreases. c. It is unchanged. d. It may increase, decrease, or remain unchanged. ANSWER: b. It decreases. TYPE: M SECTION: 1 DIFFICULTY: 2 45. When technology improves in the ice cream industry, consumer surplus will a. increase. b. decrease. c. not change, since technology affects suppliers and not consumers.. d. increase, then decrease. ANSWER: a. increase. TYPE: M SECTION: 1 DIFFICULTY: 3

If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets? a. It increases. b. It decreases. c. It will not change consumer surplus, but it will change producer surplus. d. It will increase, then decrease. ANSWER: b. It decreases. TYPE: M SECTION: 1 DIFFICULTY: 3 47. If the cost of producing chocolate decreases, consumer surplus a. decreases. b. increases. c. remains constant. d. decreases, then increases. ANSWER: b. increases. TYPE: M SECTION: 1 DIFFICULTY: 3 48. Other things equal, if the price of a good falls, the consumer surplus a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged. ANSWER: c. increases. TYPE: M SECTION: 1 DIFFICULTY: 2 49. The height of a demand curve measures a. the value buyers place on a good. b. a buyers willingness to pay. c. the price buyers must pay for the good. d. Both a and b are correct. e. All of the above are correct. Both a and b are correct. ANSWER: d.

46.

According to the graph shown, when the price is P1, consumer surplus is a. A. b. A + B. c. A + B + C. d. A + B + D. ANSWER: c. A + B + C. TYPE: M SECTION: 1 DIFFICULTY: 2 50.

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51. According to the graph shown, at the price of P2, consumer surplus is a. A. b. B. c. A + B. d. A + B + C. ANSWER: a. A. TYPE: M SECTION: 1 DIFFICULTY: 2 52.

According to the graph shown, when the price rises from P1 to P2, consumer surplus a. increases by an amount equal to A. b. decreases by an amount equal to B + C. c. increases by an amount equal to B + C. d. decreases by an amount equal to C. ANSWER: b. decreases by an amount equal to B + C. TYPE: M SECTION: 1 DIFFICULTY: 3 According to the graph shown, area C represents a. the decrease in consumer surplus that results from a downward-sloping demand curve. b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1 . c. an increase in producer surplus when quantity sold increases from Q2 to Q1 . d. a decrease in consumer surplus to each consumer in the market. ANSWER: b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1 . TYPE: M SECTION: 1 DIFFICULTY: 3 54. According to the graph shown, when the price rises from P1 to P2, which would NOT be true? 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. The total value of what is now purchased by buyers is actually higher. d. Consumer surplus in the market falls. ANSWER: c. The total value of what is now purchased to buyers is actually higher. TYPE: M SECTION: 1 DIFFICULTY: 3 55. Which of the following is NOT true when the price of a good or service falls? a. Buyers who were already buying the good or service are better off. b. Some new buyers, who are now willing to buy, enter the market. c. The total consumer surplus in the market increases. d. The total value of what is purchased remains unchanged. ANSWER: d. The total value of what is purchased remains unchanged. TYPE: M SECTION: 1 DIFFICULTY: 2 56. Given the graph, which area represents consumer surplus at a price of P1? a. ABD b. ACF c. BCDE d. DEF 53.

e. BCFD ANSWER: a. ABD TYPE: M SECTION: 1 DIFFICULTY: 2 57. Given the graph, which area represents consumer surplus at a price of P2? a. ABD b. ACF c. BCDE d. DEF e. BCFD ANSWER: b. ACF TYPE: M SECTION: 1 DIFFICULTY: 2

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58. Given the graph, which area represents the increase in consumer surplus when the price falls from P1 to P2? a. ABD b. ACF c. BCDE d. DEF e. BCFD ANSWER: e. BCFD TYPE: M SECTION: 1 DIFFICULTY: 3 59. Given the graph, when the price falls from P1 to P2, which area represents the increase in consumer surplus to existing buyers? a. ABD b. ACF c. BCED d. DEF e. BCFD ANSWER: c. BCED TYPE: M SECTION: 1 DIFFICULTY: 3 60. Given the graph, when the price falls from P1 to P2, which area represents the increase in consumer surplus to new buyers entering the market? a. ABD b. ACF c. BCDE d. DEF e. BCFD ANSWER: d. DEF TYPE: M SECTION: 1 DIFFICULTY: 3 61. Dallas buys strawberries, and would be willing to pay more than he now has to pay. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then a. Dallass consumer surplus would be unaffected. b. Dallass consumer surplus would increase. c. Dallass consumer surplus would decrease. d. Dallas would be wise to buy fewer strawberries than before. ANSWER: b. Dallass consumer surplus would increase. TYPE: M SECTION: 1 DIFFICULTY: 3 62. In most markets, consumer surplus a. reflects economic well-being. b. reflects the total value that buyers place on goods or services. c. reflects the benefit to buyers mandated by government. d. All of the above are correct. ANSWER: a. reflects economic well-being. TYPE: M SECTION: 1 DIFFICULTY: 2 63. Out-of-pocket expenses plus the value of the sellers own resources used in production are considered to be a. the sellers total revenue. b. the sellers consumer surplus. c. producer surplus. d. the cost of production. ANSWER: d. the cost of production. TYPE: M SECTION: 2 DIFFICULTY: 2 64. Cost is a measure of the a. sellers willingness to sell. b. sellers producer surplus. c. producer shortage. d. sellers willingness to buy. ANSWER: a. sellers willingness to sell. TYPE: M SECTION: 2 DIFFICULTY: 1

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65. Cost refers to a sellers a. producer surplus. b. opportunity cost. c. consumer surplus. d. willingness to buy. ANSWER: b. opportunity cost. TYPE: M SECTION: 2 DIFFICULTY: 2 66. A supply curve can be used to measure producer surplus because it reflects a. the actions of sellers. b. quantity supplied. c. sellers costs. d. the amount that will be purchased by consumers in the market. ANSWER: c. sellers costs. TYPE: M SECTION: 2 DIFFICULTY: 2 67. A seller would be willing to sell a product ONLY IF the price received is a. less than the cost of production. b. at least as great as the cost of production. c. equal to the cost of production. d. at least double the cost of production. ANSWER: b. at least as great as the cost of production. TYPE: M SECTION: 2 DIFFICULTY: 2 68. According to the graph, which area represents producer surplus at a price of P1? a. BCE b. ACF c. ABED d. DEF

e. AFEB ANSWER: a. BCE TYPE: M SECTION: 2 DIFFICULTY: 2 69. According to the graph, which area represents producer surplus at a price of P2? a. BCE b. ACF c. ABED d. DEF e. AFEB ANSWER: b. ACF TYPE: M SECTION: 2 DIFFICULTY: 2 70. According to the graph, which area represents the increase in producer surplus when the price rises from P1 to P2? a. BCE b. ACF c. ABED d. DEF e. AFEB ANSWER: e. AFEB TYPE: M SECTION: 2 DIFFICULTY: 2