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Welfare economics is
a. the study of how the allocation of resources affects economic well-being.
b. the study of welfare programs in the United States.
c. the study of the effect of income redistribution on work effort.
d. the study of the well-being of less fortunate people.
ANSWER: a.
the study of how the allocation of resources affects economic well-being.
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1
The study of how the allocation of resources affects economic well-being is called
a. consumer economics.
b. macroeconomics.
c. welfare economics.
d. fad economics.
ANSWER: c.
welfare economics.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2
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The particular price that results in quantity supplied being equal to quantity demanded is the best
price because
a. it maximizes costs of the seller.
b. it maximizes the total welfare of buyers and sellers.
c. it minimizes the expenditure of buyers.
d. it maximizes the profit of buyers.
ANSWER: b.
it maximizes the total welfare of buyers and sellers.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
6
Suppose that John, Paul, George, and Ringo are bidding in an auction for a mint-condition recording
of Elvis Presleys first album. 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 KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
7
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. If a consumer is willing and able to pay $200 for a particular good but only has to pay $140,
a. the consumer surplus is $60.
b. the consumer surplus is $140.
c. the consumer surplus is $200.
d. the consumer surplus is $340.
ANSWER: a.
the consumer surplus is $60.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
11
. If Brock is willing to pay $500 for a new suit, but is able to buy the suit for $350, his consumer surplus
is
a. $150.
b. $350.
c. $500.
d. $850.
ANSWER: a.
$150.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
12
. Caitlin would be willing to pay $50 to see Les Misrables, but buys a ticket for only $30. Caitlin values
the performance at
a. $20.
b. $30.
c. $50.
d. $80.
ANSWER: c.
$50.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
13
. Dakota is willing to pay $20 to see Independence Day for the fourth time. He finds a theater showing
Independence Day for $5. Dakotas consumer surplus is
a. $5.
b. $15.
c. $20.
d. $25.
ANSWER: b.
$15.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
14
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. 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 KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
16
. Ray buys a new tractor for $99,000. He receives consumer surplus of $13,000 on his purchase. Rays
willingness to pay is
a. $13,000.
b. $86,000.
c. $99,000.
d. $112,000.
ANSWER: d. $112,000.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
17
. Gayle decides that she would pay as much as $3,000 for a new laptop computer. She buys the
computer and realizes consumer surplus of $700. How much did Gayle pay for her computer?
a. $700
b. $2,300
c. $3,000
d. $3,700
ANSWER: b.
$2,300
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
18
. 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 $525. Camerons consumer surplus from the purchase is
a. $225.
b. $525.
c. $750.
d. $1,275.
ANSWER: a.
$225.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
19
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Consumer surplus is
a. the quantity of a good consumers get free.
b. the amount a consumer has to pay less the amount the consumer was willing to pay.
c. the amount a consumer is willing to pay less the amount the consumer actually pays.
d. the total value of a good to a consumer.
ANSWER: c.
the amount a consumer is willing to pay less the amount the consumer actually pays.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
21
. 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 KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
22
This table refers to five possible buyers willingness to pay for Good Z.
Buyer
Cassie
Jamie
Willingness to Pay
$8.50
7.00
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
5.50
4.00
3.50
. Refer 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 KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
25
. Refer to the table shown. If the price of good Z is $6.90, who will purchase the good?
a. John and Sarah
b. John, Jeremy and Sarah
c. Cassie, Jamie and John
d. Cassie and Jamie
ANSWER: d. Cassie and Jamie
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
26
. 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 KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: N
29
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Other things equal, if the price of a good falls, the consumer surplus
a. decreases.
b. increases.
c. is unchanged.
d. may increase, decrease, or remain unchanged.
ANSWER: b. increases.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
32
. Refer to the graph shown. When the price is P1, consumer surplus is
33
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Refer 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 KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
35
. Refer 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 KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
37
. 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 KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
38
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Economists generally agree that the goal in developing the concept of consumer surplus is
a. to make positive judgments about the desirability of market outcomes.
b. to make normative judgments about the desirability of market outcomes.
c. to measure the profit of firms producing the good.
d. to assess the forgone value when the price is too high.
ANSWER: b.
to make normative judgments about the desirability of market outcomes.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
40
. 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 KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
42
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Refer to the graph shown. What area represents consumer surplus when the price is P1?
a. A
b. B
c. C
d. D
ANSWER: b.
B
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
45
. Refer to the graph shown. What area represents producer surplus when the price is P1?
a. A
b. B
c. C
d. D
ANSWER: c.
C
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
46
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Suppose that the demand for French bread increases. What will happen to producer surplus in the
market for French bread?
a. It increases.
b. It decreases.
c. It is unaffected by this change in market forces.
d. It decreases briefly, then increases.
ANSWER: a.
It increases.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
48
. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the
equilibrium market price of chocolate __________, and producer surplus ___________.
a. increases, increases
b. increases, decreases
c. decreases, decreases
d. decreases, increases
ANSWER: c.
decreases, decreases
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
50
. Suppose consumer income increases. If swimsuits are normal goods, the equilibrium price of
swimsuits will __________, and producer surplus in the swimsuit industry will __________.
a. decrease, decrease
b. increase, increase
c. decrease, increase
d. increase, decrease
ANSWER: b.
increase, increase
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
51
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Producer surplus is
a. the area under the supply curve to the left of the amount sold.
b. the amount a seller is paid less the cost of production.
c. the amount represented by the area under the supply curve.
d. the cost to sellers of participating in a market.
ANSWER: b.
the amount a seller is paid less the cost of production.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
54
Cost
$1,500
1,200
1,000
750
500
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. Refer to the table shown. If the market price is $1,000, the total cost in the market would be
a. $3,700.
b. $2,700.
c. $2,250.
d. $1,500.
ANSWER: c.
$2,250.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: N
57
. Refer to the table shown. If the price is $1,000, Landons producer surplus would be
a. $1,000.
b. $750.
c. $500.
d. $250.
ANSWER: c.
$500.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y
58
. Refer to the table shown. If the price is $1,100, who would be willing to supply the product?
a. Kyle and Nathan
b. Kyle, Nathan and Cheslea
c. Cheslea, Hillary and Landon
d. Cheslea and Hillary
ANSWER: c.
Cheslea, Hillary and Landon
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y
59
. Producer surplus is
a. the area under the supply curve.
b. the area between the supply and demand curves.
c. the area below the price and above the supply curve.
d. the area under the demand curve, and above the price.
ANSWER: c.
the area below the price and above the supply curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
61
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
According to the graph shown, when the price is P2, producer surplus is
a. A.
b. A + C.
c. A + B + C.
d. D + E.
ANSWER: c.
A + B + C.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
62
According to the graph shown, when the price falls from P2 to P1, producer surplus
a. decreases by an amount equal to A.
b. decreases by an amount equal to A + C.
c. decreases by an amount equal to A + B.
d. increases by an amount equal to A + B.
ANSWER: c.
decreases by an amount equal to A + B.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
64
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Refer to the graph shown. When the price falls from P2 to P1, which of the following would NOT be
true?
a. The sellers who still sell the good are worse off because they now receive less.
b. Some sellers leave the market because they are not willing to sell the good at the lower price.
c. The total cost of what is now sold by sellers is actually higher.
d. All of the above are actually correct.
ANSWER: c.
The total cost of what is now sold by sellers is actually higher.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
66
. Donald produces nails at a cost of $200 per ton. If he sells the nails for $500 per ton, his producer
surplus is
a. $200 per ton.
b. $300 per ton.
c. $500 per ton.
d. $700 per ton.
ANSWER: b.
$300 per ton.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
68
. Anne produces computer boards. Her production cost is $5 per board. She sells the boards for $25
each. Her producer surplus is
a. $5 per board.
b. $20 per board.
c. $25 per board.
d. $30 per board.
ANSWER: b.
$20 per board.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
69
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. Ken earns $5 million for playing baseball. His producer surplus is $4.5 million. His willingness to sell
is
a. $5 million.
b. $4.5 million.
c. $0.5 million.
d. $9.5 million.
ANSWER: c.
$0.5 million.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
71
. Billy and Andy sell lemonade on the corner for $0.10 per glass. Their producer surplus is $0.06 per
glass. Their willingness to sell is
a. $0.16.
b. $0.10.
c. $0.06.
d. $0.04.
ANSWER: d. $0.04.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
72
. Ben sells investment advice for $100 per hour. His cost is $10 per hour. Bens producer surplus is
a. $10.
b. $90.
c. $100.
d. $110.
ANSWER: b.
$90.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
73
. Nicks willingness to sell his homemade chocolate chip cookies is $2 per dozen. He sells them, and
realizes producer surplus of $10 per dozen. Nick sells his cookies for
a. $2 a dozen.
b. $8 a dozen.
c. $10 a dozen.
d. $12 a dozen.
ANSWER: d. $12 a dozen.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
74
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity Demanded
0
4
8
12
16
20
24
Quantity Supplied
24
20
16
12
8
4
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. In the figure shown, at the market-clearing equilibrium, total consumer surplus is represented by the
area
a. A.
b. A + B + C.
c. D + E + F.
d. A + B + C + D + E + F.
ANSWER: b.
A + B + C.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: Y
84
. In the figure shown, at the market-clearing equilibrium, total producer surplus is represented by the
area
a. F.
b. F + G.
c. D + E + F.
d. D + E + F + G + H.
ANSWER: c.
D + E + F.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: Y
85
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RANDOM: Y
RANDOM: Y
87
88
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
. According to many economists, government restrictions of ticket scalping do all of the following
EXCEPT
a. inconvenience the public.
b. reduce the audience for cultural and sports events.
c. waste the polices time.
d. keep the cost of tickets to consumers low.
ANSWER: d. keep the cost of tickets to consumers low.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
96
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. Externalities are
a. side effects passed on to a party other than the buyers and sellers in the market.
b. external forces that help establish equilibrium price.
c. external forces that cause the price of a good to be higher than it otherwise would be.
d. side effects of government intervention in markets.
ANSWER: a.
side effects passed on to a party other than the buyers and sellers in the market.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
98
. Market failure is
a. the inability of some unregulated markets to allocate resources efficiently.
b. the inability of a market to establish an equilibrium price.
c. the inability of buyers to place a value on the good or service.
d. the inability of buyers to interact harmoniously with sellers in the market.
ANSWER: a.
the inability of some unregulated markets to allocate resources efficiently.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
99
TRUE/FALSE
. Welfare economics is the study of the welfare system.
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
101
The equilibrium of supply and demand in a market maximizes the total benefits received by buyers
and sellers.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
102
. The willingness to pay is the maximum amount that a buyer will pay for a good.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
103
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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.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
105
.
Consumer surplus measures the number of consumers who are not able to purchase the good.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
106
Joel has a 1951 Mickey Mantle rookie baseball card, which he sells to Susie, an avid card collector.
Susie is pleased since she paid $4,000 for the card but would have been willing to pay $5,000 for the
card. Susies consumer surplus is $1,000.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
107
For any given quantity, the price on a demand curve represents the marginal buyers willingness to
pay.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
108
. The area above the demand curve and below the price measures the consumer surplus in a market.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
110
The height of the demand curve measures the value buyers place on the good, as measured by their
willingness to pay for it.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
111
When the market price of a good falls, consumer surplus increases because (1) the consumer
surplus received by existing buyers becomes larger, and (2) more buyers enter the market at the
lower price.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
112
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.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
113
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Each seller of a product is willing to sell as long as the price he or she can receive is greater than the
opportunity cost of producing the product.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
115
In a competitive market, sales go to those producers who are willing to supply the product at the
lowest price.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
116
. A sellers opportunity cost includes both out-of-pocket expenses and the value of their time.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
117
. Supply curves are not a good measure of producers true willingness to sell.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
118
. Producer surplus is the amount a seller is paid minus the cost of production.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
119
Bill can clean windows in large office buildings at a cost of $2 per window. The market price for
window cleaning is $3 per window. If Bill cleans 100 windows, his producer surplus is $100.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
120
Producer surplus measures the volume of goods which are produced but not sold at the market
price.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
121
. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
122
. The area below the price and above the supply curve measures the producer surplus in a market.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
123
When market price increases, producer surplus increases because (1) producer surplus received by
existing sellers increases, and (2) new sellers enter the market.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
124
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The tools of consumer surplus and producer surplus can help us determine whether free market
allocation of resources is desirable.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
126
If an allocation is not efficient, some of the gains of trade among buyers and sellers are not being
realized.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
131
Amy has an old painting which she decides to sell. George and Quinn both offer to buy the
painting. George is willing to pay $500 for the painting, and Quinn is willing to pay $400. Amy sells
the painting to Quinn because she likes him. This market transaction is efficient.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
132
Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum
amount of output was produced from a given number of inputs.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
133
Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets
sliced and distributed.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
134
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Total surplus in a market can be measured as the area below the supply curve and the area above
the demand curve.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
135
Free markets allocate (1) the supply of goods to the buyers who value them most highly and (2) the
demand for goods to the sellers who can produce them at least cost.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
136
Economists believe that free markets are most often the best way to organize economic activity
because they lead to an efficient allocation of resources.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
137
Even though participants in the economy are motivated by self-interest, the invisible hand of the
marketplace guides this self-interest into promoting general economic well-being.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
138
Ticket scalping leads to a reduction in economic efficiency and, therefore, to a reduction in economic
well-being.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
140
Economists generally believe that although there may be advantages to society from ticket-scalping,
the costs to society of this activity outweigh the benefits.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
141
. Restrictions against ticket scalping actually drive up the cost of many tickets.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
142
California, which has no laws against scalping, has notoriously high ticket prices and is used as an
example when politicians argue in favor of anti-scalping laws.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
143
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In order for market outcomes to maximize the total benefits to buyers and sellers, the markets must
be perfectly competitive.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
145
Market power, the ability of buyers or sellers to control the market price, leads to an inefficient
market outcome.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
146
. Pollution and other externalities, while bothersome, do not interfere with efficiency.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
147
Market failure refers to firms which go bankrupt because they do not produce the goods and
services that consumers want.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
148
When markets fail, public policy can potentially remedy the problem and increase economic
efficiency.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
149
SHORT ANSWER
. What is consumer surplus, and how is it measured?
ANSWER: Consumer surplus measures the benefit to buyers of participating in a market. It is measured
as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For
an individual purchase, consumer surplus is the difference between the willingness to pay, as
shown on the demand curve, and the market price. For the market, total consumer surplus is the
area under the demand curve and above the price, from the origin to the quantity purchased.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
150
. What is the relationship between the demand curve and the willingness to pay?
ANSWER: Because the demand curve shows the maximum amount buyers are willing to pay for a given
market quantity, the price given by the demand curve represents the willingness to pay of the
marginal buyer.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
151
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
152
Megan loves donuts. The table shown reflects the value Megan places on each donut she eats:
Value of first donut
Value of second donut
Value of third donut
Value of fourth donut
Value of fifth donut
Value of sixth donut
$.60
$.50
$.40
$.30
$.20
$.10
c.
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If the price of donuts rose to $.40, Megans consumer surplus would fall to $.30 and she would
purchase only 3 donuts.
153
Willingness to Pay
$50.00
40.00
30.00
20.00
TABLE B
Price
Buyers
Quantity Demanded
More than $50.00 ________________
________
41 to 50
________________
________
31 to 40
________________
________
21 to 30
________________
________
11 to 20
________________
________
ANSWER: TABLE B
Price
Buyers
Quantity Demanded
More than $50.00
None
0
41 to 50
Greg
1
31 to 40
Greg, Melissa
2
21 to 30
Greg, Melissa, Kendra
3
11 to 20
Greg, Melissa, Kendra, Brian
4
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate
using a demand curve.
ANSWER:
155
When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who
were already buying the good receive an increase in consumer surplus because they are paying less
(area B). Second, some new buyers enter the market because the price of the good is now lower than
their willingness to pay (area C); hence, there is additional 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.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price of Pizza
more than $10
$9 to $10
$8 to $9
$7 to $8
$6 to $7
$5 to $6
$4 to $5
Given the information about Fred and Friedas willingness to pay for pizza, calculate the consumer
surplus for Fred and for Frieda if the price of pizza is
a. $13.
b. $10.
c. $8.
d. $6.
e. $4.
ANSWER: a.
Fred: $0, Frieda: $0
b. Fred: $0, Frieda: $0
c. Fred: $4, Frieda: $1
d. Fred: $16, Frieda: $6
e. Fred: $36, Frieda: $15
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
156
. What is the relationship between the willingness to sell and the supply curve?
ANSWER: Because the supply curve shows the minimum amount sellers are willing to accept for a given
quantity, the supply curve represents the willingness to sell, or cost, of the marginal seller.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
158
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Other things equal, what happens to producer surplus when the price of a good rises? Illustrate
your answer on a supply curve.
ANSWER:
159
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.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 3 RANDOM: Y
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
What is the total surplus in a market, and why might it be a good measure of economic well-being?
Using a demand-supply diagram, show the areas representing total surplus.
ANSWER:
160
Total surplus is the sum of consumer surplus and producer surplus. It is measured as the area
between the demand curve and the supply curve, from the origin to the quantity sold. It might be a
good measure of economic well-being because it measures the total benefit to buyers and sellers
from participating in a market. On the graph, consumer surplus would be represented by triangle
PCB. Producer surplus would be represented by triangle APB. Therefore, total surplus in the
market would be represented by triangle ABC.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
TABLE C
Seller
Jonathan
Joshua
Jessica
Ashley
.
161
Cost
$400
300
200
100
TABLE D
Price
$400 or more
300 to 400
200 to 300
100 to 200
Less than $100
Sellers
________________
________________
________________
________________
________________
Quantity Supplied
________
________
________
________
________
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164
1)
2)
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165
Explain why the graph shown verifies the fact that the market equilibrium (quantity) maximizes the
sum of producer and consumer surplus.
ANSWER: At quantities less than the equilibrium quantity, the value to buyers exceeds the cost to sellers.
Increasing the quantity in this region raises total surplus until equilibrium quantity is reached. At
quantities greater than the equilibrium quantity, the cost to sellers exceeds the value to buyers and
total surplus falls.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
.
166
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What was the invisible hand doctrine which Adam Smith discussed in his 1776 book, An Inquiry
into the Nature and Causes of the Wealth of Nations?
ANSWER: Smith said that participants in the economy are motivated by self-interest and that the
invisible hand of the marketplace guides this self-interest into promoting general economic wellbeing.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
167
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?
ANSWER: Since the demand curve represents the maximum price the marginal buyer is willing to pay for
a good, it must also represent the maximum benefit the buyer expects to receive from consuming
the good. Consumer surplus must take into account the amount the buyer actually pays for the
good, with consumer surplus measured as the difference between what the buyer is willing to pay
and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didnt have
to pay for.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 5 RANDOM: Y
168
In the United States, billions of dollars are spent by consumers on illegal drugs each year. If the
price of illegal drugs were to fall, inducing addicts to purchase larger quantities, would the benefit
to society from this activity increase?
ANSWER: While it is true that reductions in price cause consumer surplus to increase, in the case of
illegal drugs, willingness to pay is not usually considered to be a good measure of buyers benefit.
Hence, even though consumer surplus from the activity would increase because of a price decrease,
we would not assume that the economic well-being of society would likewise increase.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
169
170
Quantity Supplied
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16
14
12
10
8
6
4
0
Based on the table, if Fred and Frieda are the only buyers in the pizza market, and Antonios is the
only seller, what is
a. the market equilibrium price?
b. the market equilibrium quantity?
c. the total consumer surplus at the market equilibrium?
d. the total producer surplus at the market equilibrium?
e. the total benefit to society of this market?
ANSWER: a.
$7
b. 10
c. $12
d. $18
e. $30
TYPE: S KEY1: E SECTION: 3 OBJECTIVE: 5 RANDOM: N RELATED QUESTIONS: 156 & 170
171
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. What are the two assumptions which underlie the conclusion that free markets are efficient?
ANSWER: The first assumption is that markets are perfectly competitive, i.e., that no buyer or seller can
exercise market power. The second assumption is that the outcome in a market matters only to the
buyers and sellers, i.e., that there are no externalities.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
174
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
ANSWER: a. the study of how the allocation of resources affects economic well-being.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2
ANSWER: d. the maximum amount that a buyer will pay for a good.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
9
ANSWER: b. the consumer would not purchase the good and would not have any consumer surplus.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
11
ANSWER: a. $150.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
13
ANSWER: c. $50.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
14
ANSWER: b. $15.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
15
ANSWER: c. $300.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
16
ANSWER: d. $250.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
17
ANSWER: d. $112,000.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
18
ANSWER: b. $2,300
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
19
ANSWER: a. $225.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
20
ANSWER: d. $1,100
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 2 RANDOM: Y
21
ANSWER: c. the amount a consumer is willing to pay less the amount the consumer actually pays.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
22
ANSWER: b. It decreases.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
23
ANSWER: b. $4.50.
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
26
ANSWER: b. When the price is $3.50, each person would have a positive consumer surplus.
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
28
ANSWER: b. decrease.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
31
ANSWER: b. increases.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
32
ANSWER:
b.
increases.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
33
ANSWER: c. A + B + C
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
34
ANSWER: a. A
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
35
ANSWER: b. consumer surplus to new consumers who enter the market when the price falls from P2 to
P1 .
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
37
ANSWER:
c.
The total value of what is now purchased to buyers is actually higher.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
38
ANSWER: b. B
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 2 GRAPH FORMAT: M RANDOM: N
46
ANSWER: c. C
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
47
ANSWER: b. B + C
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: N
48
ANSWER: a. It increases.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
49
ANSWER: a. increases.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
50
ANSWER:
b.
$750.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: N
57
ANSWER: c. $2,250.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: N
58
ANSWER: c. $500.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y
59
ANSWER: b. the seller who would leave the market first if the price were any lower.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
61
ANSWER: c. the area below the price and above the supply curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
62
ANSWER: c. A + B + C.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
63
ANSWER: c. C.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M
RANDOM: N
64
RANDOM: N
65
ANSWER:
a.
to P2.
producer surplus to new producers entering the market as the result of price rising from P1
66
ANSWER: c. The total cost of what is now sold by sellers is actually higher.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: N
67
68
ANSWER: d. $17.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
71
ANSWER: d. $0.04.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
73
ANSWER: b. $90.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
74
ANSWER: c. $6.00.
TYPE: M KEY1: T SECTION: 3 OBJECTIVE: 5 INSTRUCTION: 1 RANDOM: N
76
ANSWER: c. the total value to buyers of the goods less the costs to sellers of providing those goods.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
80
ANSWER: a. a good is not being produced by the sellers with lowest cost.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
83
ANSWER: a. P2.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: Y
84
ANSWER: b. A + B + C.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
85
ANSWER: c. D + E + F.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
86
ANSWER: c. A + B + C + D + E + F.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
87
ANSWER: b. P2 - Q2.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M
RANDOM: Y
88
RANDOM: Y
89
ANSWER: a. the marketplace guiding the self-interests of market participants into promoting general
economic well-being.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
93
ANSWER: b. is a concept used by Adam Smith to describe the virtues of free markets.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
94
ANSWER: a. side effects passed on to a party other than the buyers and sellers in the market.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
99
ANSWER: b. public policy can potentially remedy the problem and increase economic efficiency.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
101
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
102
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
103
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
104
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
105
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
106
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
107
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
108
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
109
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
110
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
111
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
112
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
113
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
114
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
115
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
116
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
117
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
118
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y
119
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
120
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
121
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
122
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
123
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
124
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
125
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
126
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
127
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
128
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
129
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
130
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
131
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
132
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
133
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
134
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
135
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
136
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
137
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
138
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
139
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
140
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
141
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
142
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
143
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
144
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y
145
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
146
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
147
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
148
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
149
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 5 RANDOM: Y
150
ANSWER: Consumer surplus measures the benefit to buyers of participating in a market. It is measured
as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an
individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the
demand curve, and the market price. For the market, total consumer surplus is the area under the demand
curve and above the price, from the origin to the quantity purchased.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y
151
ANSWER: Because the demand curve shows the maximum amount buyers are willing to pay for a given
market quantity, the price given by the demand curve represents the willingness to pay of the marginal
buyer.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
152
ANSWER:
a.
[Insert Figure 7-1a here for answer 152a.]
b.
At a price of $.20, Megan would buy 5 donuts.
c.
Figure 7-1b shows Megans consumer surplus. At a price of $.20, Megans consumer surplus
would be $1.00. [Insert figure 7-1b here for answer 152c.]
d.
If the price of donuts rose to $.40, Megans consumer surplus would fall to $.30 and she
would purchase only 3 donuts. [Insert figure 7-1c here for answer 152d.]
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
153
ANSWER:
TABLE B
Price
More than $50.00
41 to 50
31 to 40
21 to 30
11 to 20
Buyers
None
Greg
Greg, Melissa
Greg, Melissa, Kendra
Greg, Melissa, Kendra, Brian
Quantity Demanded
0
1
2
3
4
ANSWER: This question could also be answered using Table B when completed by the students.
[Insert figure 7-9 here for answer 154.]
155
ANSWER:
When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were
already buying the good have an increase in consumer surplus because they are paying less (area B). Second,
some new buyers enter the market because the price of the good is now lower than their willingness to pay
(area C); hence, there is additional consumer surplus generated from their purchases. Graph 7-3 shows that
as price falls from P2 to P1, consumer surplus increase from area A to area A + B + C.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
156
ANSWER:
a.
Fred: $0, Frieda: $0
b.
Fred: $0, Frieda: $0
c.
Fred: $4, Frieda: $1
d.
Fred: $16, Frieda: $6
e.
Fred: $36, Frieda: $15
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y
157
ANSWER: 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.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
158
ANSWER: Because the supply curve shows the minimum amount sellers are willing to accept for a given
quantity, the supply curve represents the willingness to sell, or cost, of the marginal seller.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y
159
ANSWER:
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, some 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. Graph 7-4
shows that as price rises from P1 to P2, producer surplus increases from area C to area A + B + C.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 3 RANDOM: Y
160
ANSWER: [Insert figure 7-8 here for answer 160.]
Total surplus is the sum of consumer surplus and producer surplus. It is measured as the area between the
demand curve and the supply curve, from the origin to the quantity sold. It might be a good measure of
economic well-being because it measures the total benefit to buyers and sellers from participating in a
market. On Graph 7-8 , consumer surplus would be represented by triangle PCB. Producer surplus would
be represented by triangle APB. Therefore, total surplus in the market would be represented by triangle
ABC.
161
ANSWER:
TABLE D
Price
Sellers
$400 or more
Jon, Josh, Jessica, Ashley
300 to 400
Josh, Jessica, Ashley
200 to 300
Jessica, Ashley
100 to 200
Ashley
Less than $100
None
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 3 RANDOM: Y
Quantity Supplied
4
3
2
1
0
162
ANSWER: This question could also be answered using Table D when completed by the students.
[Insert figure 7-10 here for answer 162.]
163
ANSWER:
Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus.
Then, since Consumer Surplus = Value to buyers - Amount paid by buyers,
and since Producer Surplus = Amount received by sellers - Costs of sellers,
then Total Surplus can be written as: Value to buyers - Amount paid by buyers + Amount received by sellers
- Costs of sellers.
Since the Amount paid by buyers equals the Amount received by sellers, the middle two terms cancel out
and the result is:
Total Surplus = Value to buyers - Costs of sellers.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
165
ANSWER:
At quantities less than the equilibrium quantity, the value to buyers exceeds the cost to sellers. Increasing the
quantity in this region raises total surplus until equilibrium quantity is reached. At quantities greater than
the equilibrium quantity, the cost to sellers exceeds the value to buyers and total surplus falls.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y
166
ANSWER:
The graph should look like graph 7-8.
a.
Consumer surplus would be area PCB.
b.
Producer surplus would be area PAB.
c.
Total surplus would be area ABC.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
167
ANSWER: Smith said that participants in the economy are motivated by self-interest and that the
invisible hand of the marketplace guides this self-interest into promoting general economic well-being.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
168
ANSWER: Since the demand curve represents the maximum price the marginal buyer is willing to pay for
a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good.
Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer
surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid.
Consumer surplus, then, measures the benefit the buyer didnt have to pay for.
ANSWER: While it is true that reductions in price cause consumer surplus to increase, in the case of
illegal drugs, willingness to pay is not usually considered to be a good measure of buyers benefit. Hence,
even though consumer surplus from the activity would increase because of a price decrease, we would not
assume that the economic well-being of society would likewise increase.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
170
ANSWER:
a.
$54
b.
$28
c.
$10
d.
$0
e.
$0
TYPE: S KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: N
171
ANSWER:
a.
$7
b.
10
c.
$12
d.
$18
e.
$30
TYPE: S KEY1: E SECTION: 3 OBJECTIVE: 5 RANDOM: N RELATED QUESTIONS: 156 & 170
172
ANSWER: The pizza market is efficient because it allocates resources in a way to give the maximum
possible total surplus at the market equilibrium. It may or may not be equitable. Equity is a normative
concept and requires value judgments in order to evaluate the distribution of surplus among Fred, Frieda,
and Antonios.
TYPE: S KEY1: E SECTION: 3 OBJECTIVE: 5 RANDOM: N RELATED QUESTION: 171
173
ANSWER: Economists argue that legalizing ticket scalping increases economic efficiency by reducing the
time many people would otherwise spend waiting in line. It also allocates tickets to the people who value
them most highly. It also saves resources that would otherwise be used to enforce anti-scalping laws, and
allows actual ticket prices to adjust to the competitive market equilibrium, and in so doing, raises the sum of
consumer surplus and producer surplus.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 5 RANDOM: Y
174
ANSWER: The first assumption is that markets are perfectly competitive, i.e., that no buyer or seller can
exercise market power. The second assumption is that the outcome in a market matters only to the buyers
and sellers, i.e., that there are no externalities.
TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y