Multiple Choice Questions for Self study Chapter 7 (Mankiw & Taylor) Consumers, Producers, and the Efficiency

of Markets
1)MisterJoneswassellinghishouse.Theaskingpricewas$220,000,andJonesdecidedhewould takenolessthan$200,000.Aftersomenegotiation,MisterSmithpurchasedthehousefor$205,000. Smithsconsumersurplusis (a)$5,000. (b)$15,000. (c)$20,000. (d)notabletobecalculatedfromtheinformationgiven. Answer:D 2)Marypurchasedastuffedanimaltoyfor$5.Afterafewweeks,someoneofferedher$100forthe toy.Maryrefused.OnecanconcludethatMarysconsumersurplusfromthetoyis (a)lessthan$5. (b)atleast$95. (c)atleast$100. (d)$105. Answer:B 3)Joesdemandforspringwatercanberepresentedasp=10Q(wherepismeasuredin$/gallon andQismeasuredingallons).Herecentlydiscoveredaspringwherewatercanbeobtainedfreeof charge.Hisconsumersurplusfromthiswateris (a)$0. (b)$50. (c)$100. (d)unknownbasedupontheinformationprovided. Answer:B

4)Figure9.1showsthemarketdemandcurvefortelecommunicationwhiledrivingonescar(time spentonthecarphone).Thecurrentpriceis$0.35perminute.Ifthepriceweretoincreaseby tencentsperminute,consumersurpluswill (a)fallto$820. (b)fallby$84. (c)fallby$58. (d)fallto$369. Answer:B 5)Figure9.1showsthemarketdemandcurvefortelecommunicationwhiledrivingonescar(time spentonthecarphone).Atthecurrentpriceof$0.35perminute,consumersurplusequals (a)$301.00. (b)$924.50. (c)$1,225.50. (d)$1,250.00. Answer:B 6)Asthepriceofagoodincreases,thelossinconsumersurplusislarger, (a)themoreelasticdemandis. (b)themoremoneypreviouslyspentonthegood. (c)thelessmoneypreviouslyspentonthegood. (d)thesmallerthepriceincrease. Answer:B 7)Iflowerincomehouseholdsspendagreatershareoftheirincomeoncigarettesthando higherincome households,thenataxthatraisesthepriceofcigaretteswill (a)causelowerincomehouseholdstoincuragreaterlossofconsumersurplusthanthatincurredby higherincomehouseholds. (b)causehigherincomehouseholdstoincuragreaterlossofconsumersurplusthanthatincurred bylowerincomehouseholds. (c)raiseconsumersurplusamonghigherincomehouseholds. 2

(d)causeconsumersurplustodeclineamongsmokers,buttherelativeimpactcannotbedetermined fromthegiveninformation. Answer:D 8)Supposeconsumersofcigarettescanbeclassifiedintotwogroups:heavyusersandlightusers. Heavyuserspurchasemorecigarettesandarelesssensitivetopricechangesrelativetolightusers. Todeterminewhetheraheavyusersuffersagreaterlossofconsumersurplusthanalightuserdoes whenthepriceofcigarettesincreases,onewouldneedtoknow (a)eachgroupsaverageincome. (b)theactualquantitiespurchasedbyeach. (c)eachindividualspriceelasticityofdemand. (d)noadditionalinformation. Answer:D 9)SarahsdemandcurveforwhiskeyhasthesameslopeasPetes;however,itliestotherightof Petes.Anincreaseinthepriceofwhiskeywillcause (a)SarahtoincuragreaterlossofconsumersurplusthanPetewill. (b)PetetoincuragreaterlossofconsumersurplusthanSarahwill. (c)SarahandPetetoincurthesamelossofconsumersurplus. (d)SarahsdemandcurvetoshiftclosertoPetes. Answer:A 10)SarahandDavidbothhavelineardemandcurvesforlemonade.Sarahsdemandcurveforlemonade intersectsDavidsdemandcurveatapriceof50centsperglass.Sarahsdemandcurveismore inelasticthanDavids.Achangeinthepriceoflemonadefrom50centsto25centsperglasswill (a)decreaseSarahsconsumersurplusmorethanDavids. (b)decreaseDavidsconsumersurplusmorethanSarahs. (c)increaseSarahsconsumersurplusmorethanDavids. (d)increaseDavidsconsumersurplusmorethanSarahs. Answer:C 11)Producersurplusisequalto (a)theareaunderthesupplycurve. (b)thedifferencebetweenpriceandaveragecostforallunitssold. (c)thedifferencebetweenpriceandmarginalcostforallunitssold. (d)thefirmsprofitwhenfixedcostsexist. Answer:C 12)MisterJoneswassellinghishouse.Theaskingpricewas$220,000,andJonesdecidedhewould takenolessthan$200,000.Aftersomenegotiation,MisterSmithpurchasedthehousefor$205,000. Jonesproducersurplusis (a)$5,000. (b)$15,000. (c)$20,000. (d)notabletobecalculatedfromtheinformationgiven. Answer:A

13)Supposethemarketsupplycurveisp=5+Q.Atapriceof10,producersurplusequals (a)50. (b)25. (c)12.50. (d)10. Answer:C 14)Ifamarketproducesalevelofoutputbelowthecompetitiveequilibrium,then (a)socialwelfareisnotmaximized. (b)consumersurplusmightstillbemaximized. (c)theactualpricewillbebelowtheequilibriumprice. (d)socialwelfaremightstillbeenhancedifapriceceilingkeepspricebelowthecompetitiveprice. Answer:A 15)Acompetitivemarketmaximizessocialwelfarebecauseinacompetitivemarket (a)profitsarezero. (b)priceequalsmarginalcostofthelastunitproduced. (c)priceequalsaveragecostofthelastunitproduced. (d)thereisfreeentryandexit. Answer:B 16)Ifamarketproducesalevelofoutputthatexceedsthecompetitiveequilibriumoutput,then (a)socialwelfarewillbehigher. (b)producersurpluswillbehigher. (c)marginalcostwillexceedprice. (d)Alloftheabove. Answer:C 17)Ifaneconomiststatesthatnotenoughofagoodisbeingproduced,sheusuallymeansthat (a)noteveryonecanaffordthegood. (b)priceexceedsmarginalcost. (c)consumersurplusequalszero. (d)atequilibrium,somepeoplewhostillwishtobuythegoodcannotfindaseller. Answer:B 18)Deadweightlossoccurswhen (a)producersurplusisgreaterthanconsumersurplus. (b)themaximumleveloftotalwelfareisnotachieved. (c)consumersurplusisreduced. (d)aninferiorgoodisconsumed. Answer:B 19)Thedeadweightlossassociatedwithoutputlessthanthecompetitivelevelcanbedeterminedby (a)subtractingthecompetitivelevelproducersurplusfromtheproducersurplusassociatedwithless output. (b)subtractingtheconsumersurplusfromtheproducersurplusassociatedwithlessoutput. (c)summingtheconsumerandproducersurplusassociatedwithlessoutput. (d)summingthechangeinthetotalconsumerandproducersurplusfrommovingfromthe 4

competitivelevelofoutputtolessoutput. Answer:D

20)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,thelossin socialwelfareequals (a)b+c. (b)f. (c)a. (d)f+g. Answer:D 21)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,deadweight lossoccursbecause (a)consumersplaceagreatervalueonthelastapartmentunitthanthecosttosupplyit. (b)thesupplierofthelastapartmentunitreceivesarentalpricethatislessthanthemarginalcostof supplyingit. (c)thequantityofapartmentssuppliedhasdecreased. (d)Alloftheabove. Answer:A 22)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,theconsumers netgaininsurplusequals (a)cf. (b)bf. (c)df. (d)Answercannotbedeterminedfromtheinformationgiven. Answer:A 23)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,producer 5

surplus (a)increases. (b)decreases. (c)staysthesame. (d)changesinadirectionthatcannotbedeterminedfromtheinformationgiven. Answer:B 24)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,producer surplusdecreasesby (a)d. (b)b+f. (c)c+g. (d)i. Answer:C 25)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Ifthecity governmentpassesalawthatestablishes$350permonthasthelegalmaximumrent,producer surpluswillbe (a)d. (b)d+e. (c)d+g. (d)d+c+g. Answer:A 26)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Attheunregulated equilibrium,producersurpluswillbe (a)d. (b)d+e. (c)d+g. (d)d+c+g. Answer:D 27)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Theareae represents (a)thelossinproducersurplusifarentceilingof$350isimposed. (b)thetotalvariablecostofsupplyingQ1units. (c)themarginalcostofsupplyingQ1units. (d)thetotalrevenuereceivedbysupplyingQ1units. Answer:B 28)Figure9.2showssupplyanddemandcurvesforapartmentunitsinalargecity.Theareac represents (a)thelossinconsumersurplusifarentceilingof$350isimposed. (b)atransferfromproducerstoconsumersifarentceilingof$350isimposed. (c)atransferfromconsumerstoproducersifarentceilingof$350isimposed. (d)thetotalrevenuereceivedbysupplyingQ1units. Answer:B 6