Chap07-micro

Chapter 7
Consumers, Producers, and the Efficiency of

Markets
MULTIPLE CHOICE
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 1
2 Chapter 7/Consumers, Producers, and the Efficiency of Markets
1
. 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.
2
. 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.
3
. Positive analysis refers to
a. what is.
b. what should be.
c. what could be.
d. what is politically correct.
4
. Normative analysis refers to
a. what is.
b. what should be.
c. what maximizes efficiency.
d. what is politically correct.
5
. The equilibrium of supply and demand in a market
a. maximizes the profits of producers.
b. maximizes the total benefits received by buyers and sellers.
c. minimizes the costs incurred by consumers.
d. minimizes the expenditures of buyers.
6
. 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.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 7/Consumers, Producers, and the Efficiency of Markets 3
7
. Suppose that John, Paul, George, and Ringo are bidding in an auction for a mint-condition recording
of Elvis Presley’s 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.
8
. Willingness to pay measures
a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
b. the amount a seller actually receives for a good minus the minimum amount the seller is willing
to accept.
c. the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to
accept.
d. the maximum amount that a buyer will pay for a good.
9
. A consumer’s 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.
10
. If a consumer is willing and able to pay $15.50 for a particular good but the price of the good is
$16.00, then
a. the consumer would have consumer surplus of $0.50.
b. the consumer would not purchase the good and would not have any consumer surplus.
c. the consumer would increase his/her willingness and ability to pay by earning more.
d. the market must not be a perfectly competitive market.
11
. 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.
12
. 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.
13
. Caitlin would be willing to pay $50 to see Les Misérables, but buys a ticket for only $30. Caitlin
values the performance at
a. $20.
b. $30.
c. $50.
d. $80.
14
. Dakota is willing to pay $20 to see Independence Day for the fourth time. He finds a theater showing
Independence Day for $5. Dakota’s consumer surplus is
a. $5.
b. $15.
c. $20.
d. $25.
15
. Sharon values a lawnmower at $300, but buys it for $200. Sharon’s willingness to pay is
a. $100.
b. $200.
c. $300.
d. $500.
16
. 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.
13
ANSWER: c. $50.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y
14
ANSWER: b. $15.
15
ANSWER: c. $300.
16
ANSWER: d. $250.
c. $150.
d. $250.
17
. Ray buys a new tractor for $99,000. He receives consumer surplus of $13,000 on his purchase. Ray’s
willingness to pay is
a. $13,000.
b. $86,000.
c. $99,000.
d. $112,000.
18
. 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
19
. 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. Cameron’s consumer surplus from the purchase is
a. $225.
b. $525.
c. $750.
d. $1,275.
20
. Greg buys a new sound system for his dorm room for $300. He receives consumer surplus of $800
from the purchase. How much does Greg value his sound system?
a. $300
b. $500
c. $800
17
ANSWER: d. $112,000.
18
ANSWER: b. $2,300
19
ANSWER: a. $225.
20
ANSWER: d. $1,100
d. $1,100
21
. 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.
22
. 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.
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.
6
ANSWER: b. it maximizes the total welfare of buyers and sellers.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
5
ANSWER: b. maximizes the total benefits received by buyers and sellers.
4
ANSWER: b. what should be.
3
ANSWER: a. what is.
2
ANSWER: c. welfare economics.
1
ANSWER: a. the study of how the allocation of resources affects economic well-being.
7
ANSWER: b. willingness to pay.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
8
ANSWER: d. the maximum amount that a buyer will pay for a good.
9
ANSWER: b. how much a buyer values a good.
10
ANSWER: b. the consumer would not purchase the good and would not have any consumer
surplus.
b. It decreases.
c. It is not affected by this change in market forces.
d. It increases very briefly then decreases.
23
. If you pay a price exactly equal to your willingness to pay, then
a. your consumer surplus is $0.
b. your willingness to pay is less than your consumer surplus.
c. your consumer surplus is negative.
d. you place little value on the good.
24
. A demand curve reflects each of the following EXCEPT
a. the willingness to pay of all buyers in the market.
b. the value each buyer in the market places on the good.
c. the highest price buyers are willing to pay for each quantity.
d. the ability of buyers to obtain the quantity they desire.
This table refers to five possible buyers’ willingness to pay for Good Z.
Buyer Willingness to Pay

Cassie $8.50
Jamie 7.00
John 5.50
Jeremy 4.00
Sarah 3.50
11
ANSWER: a. the consumer surplus is $60.
12
ANSWER: a. $150.
23
ANSWER: a. your consumer surplus is $0.
24
ANSWER: d. the ability of buyers to obtain the quantity they desire.
25
. 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.
26
. 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
27
. Refer to the table shown. Which of the following is NOT true?
a. The table is the demand schedule for good Z.
b. When the price is $3.50, each person would have a positive consumer surplus.
c. The demand schedule represented by the table shows the willingness to pay of the marginal
buyer.
d. At a price of $4.00, total consumer surplus in the market will be $9.00.
25
ANSWER: b. $4.50.
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N
26
ANSWER: d. Cassie and Jamie
27
ANSWER: b. When the price is $3.50, each person would have a positive consumer surplus.
28
. Consumer surplus equals
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.
29
. The area below a demand curve and above the price measures
a. producer surplus.
b. total surplus.
c. consumer surplus.
d. willingness to pay.
30
. If the cost of producing automobiles increases, consumer surplus will
a. increase.
b. decrease.
c. remain constant.
d. increase, then decrease.
31
. The cost of producing chocolate decreases. As a result, consumer surplus
a. decreases.
b. increases.
c. remains constant.
d. decreases, then increases.
32
. 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.
28
ANSWER: a. Value to buyers - Amount paid by buyers.
29
ANSWER: c. consumer surplus.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: N
30
ANSWER: b. decrease.
31
ANSWER: b. increases.
32
ANSWER:
b. increases.
33
. Refer 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.
34
. Refer to the graph shown. At the higher price of P2, consumer surplus is
a. A.
b. B.
c. A + B.
d. A + B + C.
35
. 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.
36
. 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.
37
. 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.
38
. 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.
39
. John buys good X, and would be willing to pay more than he now has to pay. Suppose that John has
a change in his tastes such that he values good X more than before. If the market price is the same as
before, then
a. John’s consumer surplus would be unaffected.
b. John’s consumer surplus would increase.
c. John’s consumer surplus would decrease.
d. John would be wise to buy less of good X than before.
40
. 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.
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: d. The total value of what is purchased remains unchanged.
39
ANSWER: b. John’s consumer surplus would increase.
40
ANSWER: b. to make normative judgements about the desirability of market outcomes.
41
. 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.
42
. Out-of-pocket expenses plus the value of the seller’s own resources used in production are
considered to be
a. the seller’s total revenue.
b. the seller’s consumer surplus.
c. producer surplus.
d. the cost of production.
43
. Cost is a measure of the
a. seller’s willingness to sell.
b. seller’s producer surplus.
c. producer shortage.
d. seller’s willingness to buy.
44
. A seller would be willing to sell a product ONLY IF
a. the price received is less than the cost of production.
b. the price received is at least as great as the cost of production.
c. the price received is equal to the cost of production.
d. the price received is at least double the cost of production.
41
ANSWER: a. reflects economic well-being.
42
ANSWER: d. the cost of production.
43
ANSWER: a. seller’s willingness to sell.
44
ANSWER: b. the price received is at least as great as the cost of production.
45
. Refer to the graph shown. What area represents consumer surplus when the price is P1?
a. A
b. B
c. C
d. D
46
. Refer to the graph shown. What area represents producer surplus when the price is P1?
a. A
b. B
c. C
d. D
47
. Refer to the graph shown. What area represents total surplus in the market when the price is P1?
a. A + B
b. B + C
c. C + D
d. A + B + C + D
48
. 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.
45
ANSWER: b. B
46
ANSWER: c. C
47
ANSWER: b. B + C
48
ANSWER: a. It increases.
49
. If demand increases, the price of a product, as well as producer surplus
a. increases.
b. decreases.
c. remains the same.
d. may increase, decrease, or remain the same.
50
. 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
51
. 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
52
. Producer surplus equals
d. Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.
53
. Which of the following would be true of the seller’s cost?
a. The seller would be eager to sell her services at a price higher than her cost.
b. The seller would refuse to sell her services at a price lower than her cost.
c. The seller would be indifferent about selling her services at a price equal to her cost.
d. All of the above are true.
49
ANSWER: a. increases.
50
ANSWER: c. decreases, decreases
51
ANSWER: b. increase, increase
52
ANSWER: b. Amount received by sellers - Costs of sellers.
53
ANSWER: d. All of the above are true.
54
. 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.
55
. Producer surplus measures all of the following EXCEPT
a. the amount sellers receive above the minimum they would accept.
b. the benefit to sellers of participating in a market.
c. the amount sellers are paid less the amount they were willing to accept.
d. the total value of a good to sellers.
The Costs of Five Possible Sellers
Seller Cost
Kyle $1,500
Nathan 1,200
Cheslea 1,000
Hillary 750
Landon 500
56
. Refer to the table shown. If the market price is $1,000, the producer surplus in the market would be
a. $700.
b. $750.
c. $2,250.
d. $3,700.
57
. 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.
58
. Refer to the table shown. If the price is $1,000, Landon’s producer surplus would be
a. $1,000.
b. $750.
c. $500.
d. $250.
59
. 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
60
. The marginal seller is
a. the seller who cannot compete with the other sellers in the market.
b. the seller who would leave the market first if the price were any lower.
c. the seller who can produce at the lowest cost.
d. the seller who has the greatest producer surplus.
61
. 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.
62
. 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.
63
. According to the graph shown, at the price of P1, producer surplus is
a. A.
b. A + B.
c. C.
d. A + B + C.
64
. 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.
65
. In the graph shown, area B represents
a. producer surplus to new producers entering the market as the result of price rising from P1 to P2.
b. the increase in consumer surplus that results from an upward sloping supply curve.
c. a decrease in producer surplus to each producer in the market.
d. an increase in total surplus when sellers are willing and able to increase supply from Q1 to Q2.
66
. 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.
67
. Producer surplus measures
a. the well-being of sellers.
b. the well-being of society as a whole.
c. the well-being of buyers and sellers.
d. the loss to sellers.
68
. 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.
69
. 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.
70
. If Dale sells a shirt for $40, and his producer surplus from the sale is $23, his cost must have been
a. $63.
b. $40.
c. $23.
d. $17.
71
. 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.
72
. 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.
73
. Ben sells investment advice for $100 per hour. His cost is $10 per hour. Ben’s producer surplus is
a. $10.
b. $90.
c. $100.
d. $110.
74
. Nick’s 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.
Market Supply and Demand for Good X
Price Quantity Demanded Quantity Supplied

$12.00 0 24
10.00 4 20
8.00 8 16
6.00 12 12
4.00 16 8
2.00 20 4
0.00 24 0
75
. Refer to the table shown. The equilibrium or market-clearing price is
a. $10.00.
b. $ 8.00.
c. $ 6.00.
d. $ 4.00.
76
. Refer to the table shown. At a price of $4.00, total surplus would be
a. more than it would be at the equilibrium price.
b. less than it would be at the equilibrium price.
c. the same as it would be at the equilibrium price.
d. There is insufficient information to say.
77
. We can say that the allocation of resources is efficient if
a. producer surplus is maximized.
b. consumer surplus is maximized.
c. total surplus is maximized.
d. None of the above are correct.
78
. Which of the following is NOT correct?
a. consumer surplus = value to buyers - amount paid by buyers
b. producer surplus = amount received by sellers - cost of sellers
c. total surplus = value to buyers - amount paid by buyers + amount received by sellers - costs of
sellers
d. total surplus = value to sellers - costs of sellers
79
. Total surplus in a market is
a. the total costs to sellers of providing the goods less the total value to buyers of the goods.
b. always less than consumer surplus plus producer surplus.
c. the total value to buyers of the goods less the costs to sellers of providing those goods.
d. always greater than consumer surplus plus producer surplus.
80
. Total surplus in a market equals
d. Amount received by sellers - Amount paid by buyers.
81
. Total surplus in a market equals
a. Consumer surplus + Producer surplus.
b. Value to buyers - Amount paid by buyers.
c. Amount received by sellers - Costs of sellers.
d. Producer surplus - Consumer surplus.
82
. An allocation of resources is said to be inefficient if
a. a good is not being produced by the sellers with lowest cost.
b. producer surplus is not at a minimum.
c. consumer surplus is not at a maximum.
78
ANSWER: d. total surplus = value to sellers - costs of sellers
79
ANSWER: c. the total value to buyers of the goods less the costs to sellers of providing those
goods.
80
ANSWER: c. Value to buyers - Costs of sellers.
81
ANSWER: a. Consumer surplus + Producer surplus.
82
ANSWER: a. a good is not being produced by the sellers with lowest cost.
83
. In the figure shown, the equilibrium (market-clearing) price is
a. P1.
b. P2.
c. P3.
d. P4.
84
. 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.
85
. 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.
86
. In the figure shown, at the market-clearing equilibrium, total surplus is represented by the area
a. A + B + C.
b. A + B + D + F.
c. A + B + C + D + E + F.
d. A + B + C + D + E + F + G + H.
87
. In the figure shown, the efficient price-quantity combination is
a. P1 - Q1.
b. P2 - Q2.
c. P3 - Q1.
d. None of the combinations are efficient.
88
. In the figure shown, at the quantity Q2,
a. the market is in equilibrium.
b. willingness to pay is greater than willingness to sell.
c. consumer surplus plus producer surplus is maximized.
d. willingness to pay is less than willingness to sell.
89
. In the figure shown, for the quantity Q3,
a. willingness to buy and willingness to sell are both P2.
b. willingness to buy is P1 and willingness to sell is P3.
c. willingness to buy and willingness to sell are both P3.
d. willingness to buy is P3 and willingness to sell is P2.
90
. When a market is in equilibrium,
a. the price determines which buyers and sellers participate in the market.
b. those buyers who value the good more than the price choose to buy the good.
c. those sellers whose costs are less than the price choose to produce and sell the good.
91
. According to the graph, beyond the equilibrium quantity in a free market,
a. the value to buyers is greater than the cost to sellers.
b. the cost to sellers is greater than the value to buyers.
c. cost to sellers is equal to the value to buyers.
d. producer surplus would be greater than consumer surplus.
92
. The “invisible hand” refers to
a. the marketplace guiding the self-interests of market participants into promoting general
economic well-being.
b. the marketplace as a place where government looks out for the self-interests of individual
participants in the market.
c. the equity that results from market forces allocating the goods produced in the market.
d. the automatic maximization of consumer surplus in free markets.
93
. The “invisible hand”
a. is the name of an old radio program.
b. is a concept used by Adam Smith to describe the virtues of free markets.
c. is a concept used by J.M. Keynes to describe the role of government in guiding the allocation of
resources in the economy.
d. always rewards individuals for using the well-being of society as the basis for economic decision-
making.
94
. Economists tend to see ticket scalping as
a. a way for a few to profit while producing nothing of value.
b. an inequitable interference in the orderly process of ticket distribution.
c. a way of increasing the efficiency of ticket distribution.
d. an unproductive activity which should be made illegal everywhere.
95
. “Laissez-faire” is a French expression which literally means
a. to make do.
b. to get involved.
c. allow them to do.
d. whatever works.
94
ANSWER: c. a way of increasing the efficiency of ticket distribution.
95
ANSWER: c. allow them to do.
33
ANSWER: c. A + B + C
34
ANSWER: a. A
35
ANSWER: b. decreases by an amount equal to B + C.
36
ANSWER: b. consumer surplus to new consumers who enter the market when the price falls
from P2 to P1 .
54
ANSWER: b. the amount a seller is paid less the cost of production.
55
ANSWER: d. the total value of a good to sellers.
56
ANSWER:
b. $750.
57
ANSWER: c. $2,250.
58
ANSWER: c. $500.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y
59
ANSWER: c. Cheslea, Hillary and Landon
96
. 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 police’s time.
d. keep the cost of tickets to consumers low.
97
. Market power refers to
a. the side effects that may occur in a market.
b. the government regulations imposed on the sellers in a market.
c. the ability to influence price.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y
60
ANSWER: b. the seller who would leave the market first if the price were any lower.
61
ANSWER: c. the area below the price and above the supply curve.
62
ANSWER: c. A + B + C.
63
ANSWER: c. C.
64
ANSWER: c. decreases by an amount equal to A + B.
65
ANSWER:
a. producer surplus to new producers entering the market as the result of price rising from
P1 to P2.
66
ANSWER: c. The total cost of what is now sold by sellers is actually higher.
67
ANSWER: a. the well-being of sellers.
68
ANSWER: b. $300 per ton.
69
ANSWER: b. $20 per board.
70
ANSWER: d. $17.
d. the forces of supply and demand in determining equilibrium price.
98
. 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.
99
. 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.
71
ANSWER: c. $0.5 million.
72
ANSWER: d. $0.04.
73
ANSWER: b. $90.
74
ANSWER: d. $12 a dozen.
75
ANSWER: c. $6.00.
76
ANSWER: b. less than it would be at equilibrium price.
77
ANSWER: c. total surplus is maximized.
83
ANSWER: a. P2.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 5 GRAPH FORMAT: M RANDOM: Y
84
ANSWER: b. A + B + C.
85
ANSWER: c. D + E + F.
86
ANSWER: c. A + B + C + D + E + F.
87
ANSWER: b. P2 - Q2.
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.
100
. When markets fail,
a. public policy can do nothing to improve the situation.
b. public policy can potentially remedy the problem and increase economic efficiency.
c. public policy can always remedy the problem and increase economic efficiency.
d. public policy can, in theory, remedy the problem, but in practice, has proven to be ineffective.
88
ANSWER: b. willingness to pay is greater than willingness to sell.
89
ANSWER: d. willingness to buy is P3 and willingness to sell is P2.
90
ANSWER: d. All of the above are correct.
91
ANSWER: b. the cost to sellers is greater than the value to buyers.
92
ANSWER: a. the marketplace guiding the self-interests of market participants into promoting
general economic well-being.
93
ANSWER: b. is a concept used by Adam Smith to describe the virtues of free markets.
96
ANSWER: d. keep the cost of tickets to consumers low.
97
ANSWER: c. the ability to influence price.
98
ANSWER: a. side effects passed on to a party other than the buyers and sellers in the market.
99
ANSWER: a. the inability of some unregulated markets to allocate resources efficiently.
100
ANSWER: b. public policy can potentially remedy the problem and increase economic
efficiency.
TRUE/FALSE
101
. Welfare economics is the study of the welfare system.
101
ANSWER: F
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
102
. The equilibrium of supply and demand in a market maximizes the total benefits received by buyers
and sellers.
103
. The willingness to pay is the maximum amount that a buyer will pay for a good.
104
. A buyer’s willingness to pay measures how much the buyer values the good.
105
. 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.
106
. Consumer surplus measures the number of consumers who are not able to purchase the good.
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
105
ANSWER: F
106
ANSWER: F
107
. 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. Susie’s consumer surplus is $1,000.
108
. For any given quantity, the price on a demand curve represents the marginal buyer’s willingness to
pay.
109
. Consumer surplus is closely related to the supply curve for a product.
110
. The area above the demand curve and below the price measures the consumer surplus in a market.
111
. The height of the demand curve measures the value buyers place on the good, as measured by their
willingness to pay for it.
112
. 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.
113
. 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.
114
. Consumer surplus reflects economic well-being in all markets, even in the markets for illegal drugs.
107
ANSWER: T
108
ANSWER: T
109
ANSWER: F
110
ANSWER: F
111
ANSWER: T
112
ANSWER: T
113
ANSWER: F
114
ANSWER: F
115
. 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.
116
. In a competitive market, sales go to those producers who are willing to supply the product at the
lowest price.
117
. A seller’s opportunity cost includes both out-of-pocket expenses and the value of their time.
118
. Supply curves are not a good measure of producers’ true willingness to sell.
119
. Producer surplus is the amount a seller is paid minus the cost of production.
120
. 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.
121
. Producer surplus measures the volume of goods which are produced but not sold at the market
price.
122
. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
123
. The area below the price and above the supply curve measures the producer surplus in a market.
124
. When market price increases, producer surplus increases because (1) producer surplus received by
existing sellers increases, and (2) new sellers enter the market.
125
. Producer surplus measures the cost to sellers of participating in a market.
121
ANSWER: F
122
ANSWER: F
123
ANSWER: T
124
ANSWER: T
125
ANSWER: F
115
ANSWER: T
116
ANSWER: T
117
ANSWER: T
118
ANSWER: F
119
ANSWER: T
120
ANSWER: T
126
. The tools of consumer surplus and producer surplus can help us determine whether free market
allocation of resources is desirable.
127
. Total surplus in a market is consumer surplus minus producer surplus.
128
. Total surplus = Value to buyers - Costs to sellers.
129
. Consumer surplus = Value to buyers - Costs to Sellers.
130
. An allocation of resources which maximizes total surplus is said to be equitable.
131
. If an allocation is not efficient, some of the gains of trade among buyers and sellers are not being
realized.
132
. 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.
133
. 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.
134
. Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets
sliced and distributed.
135
. Total surplus in a market can be measured as the area below the supply curve and the area above
the demand curve.
136
. 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.
137
. Economists believe that free markets are most often the best way to organize economic activity
because they lead to an efficient allocation of resources.
138
. 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.
139
. “Laissez-faire” is a French expression that literally means to make do .
140
. Ticket scalping leads to a reduction in economic efficiency and, therefore, to a reduction in
economic well-being.
137
ANSWER: T
126
ANSWER: T
127
ANSWER: F
128
ANSWER: T
129
ANSWER: F
130
ANSWER: F
131
ANSWER: T
132
ANSWER: F
133
ANSWER: F
134
ANSWER: T
135
ANSWER: F
136
ANSWER: T
141
. Economists generally believe that although there may be advantages to society from ticket-scalping,
the costs to society of this activity outweigh the benefits.
142
. Restrictions against ticket scalping actually drive up the cost of many tickets.
143
. 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.
144
. Legalizing ticket scalping would make everyone worse off.
145
. In order for market outcomes to maximize the total benefits to buyers and sellers, the markets must
be perfectly competitive.
146
. Market power, the ability of buyers or sellers to control the market price, leads to an inefficient
market outcome.
147
. Pollution and other externalities, while bothersome, do not interfere with efficiency.
138
ANSWER: T
139
ANSWER: F
140
ANSWER: F
141
ANSWER: F
142
ANSWER: T
143
ANSWER: F
144
ANSWER: F
145
ANSWER: T
146
ANSWER: T
147
ANSWER: F
148
. Market failure refers to firms which go bankrupt because they do not produce the goods and
services that consumers want.
149
. When markets fail, public policy can potentially remedy the problem and increase economic
efficiency.
SHORT ANSWER
150
. 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
151
. 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
152
. Megan loves donuts. The table shown reflects the value Megan places on each donut she eats:
Value of first donut $.60

Value of second donut $.50
Value of third donut $.40
Value of fourth donut $.30
Value of fifth donut $.20
Value of sixth donut $.10
a. Use this information to construct Megan’s demand curve for donuts.

b. If the price of donuts is $.20, how many donuts will Megan buy?
c. Show Megan’s consumer surplus on your graph. How much consumer surplus would she have
at a price of $.20?
d. If the price of donuts rose to $.40, how many donuts would she purchase now? What would
happen to Megan’s consumer surplus? Show this change on your graph.
ANSWER: a.
b. At a price of $.20, Megan would buy 5 donuts.

c. Figure 7-1b shows Megan’s consumer surplus. At a price of $.20, Megan’s consumer surplus would be $1.00.
d. If the price of donuts rose to $.40, Megan’s consumer surplus would fall to $.30 and she would
purchase only 3 donuts.
TABLE A
Buyer Willingness to Pay
Greg $50.00
Melissa 40.00
Kendra 30.00
Brian 20.00
153
. Use the information in the Table A to fill in the blanks of Table B.
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
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
154
. Use the information in Table A to graph a demand curve for this product.
ANSWER: This question could also be answered using Table B when completed by the students.
155
.Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate
using a demand curve.
ANSWER:
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.
Price of Pizza Quantity of Pizza Demanded

Fred Frieda
more than $10 0 0
$9 to $10 1 0
$8 to $9 3 1
$7 to $8 5 2
$6 to $7 7 3
$5 to $6 9 4
$4 to $5 11 5
156
. Given the information about Fred and Frieda’s 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
157
. What is producer surplus, and how is it measured?
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.
158
. 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.
159
.Other things equal, what happens to producer surplus when the price of a good rises? Illustrate
your answer on a supply curve.
ANSWER:
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.
148
ANSWER: F
149
ANSWER: T
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.
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.
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 Megan’s consumer surplus. At a price of $.20, Megan’s consumer
surplus would be $1.00. [Insert figure 7-1b here for answer 152c.]
d. If the price of donuts rose to $.40, Megan’s consumer surplus would fall to $.30 and she
would purchase only 3 donuts. [Insert figure 7-1c here for answer 152d.]
153
ANSWER:
TABLE B
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
154
ANSWER: This question could also be answered using Table B when completed by the students.
[Insert figure 7-9 here for answer 154.]
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.
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.
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
160
.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:
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
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.
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.
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.
PCB. Producer surplus would be represented by triangle APB. Therefore, total surplus in the
market would be represented by triangle ABC.
TABLE C
Seller Cost
Jonathan $400
Joshua 300
Jessica 200
Ashley 100
161
. Use the information in the Table C to fill in the blanks of Table D.
TABLE D
Price Sellers Quantity Supplied
$400 or more ________________ ________
300 to 400 ________________ ________
200 to 300 ________________ ________
100 to 200 ________________ ________
Less than $100 ________________ ________
ANSWER: TABLE D
$400 or more Jon, Josh, Jessica, Ashley 4
300 to 400 Josh, Jessica, Ashley 3
200 to 300 Jessica, Ashley 2
100 to 200 Ashley 1
Less than $100 None 0
162
. Use the information in Table C to graph a supply curve for this product.
ANSWER: This question could also be answered using Table D when completed by the students.
162
ANSWER: This question could also be answered using Table D when completed by the students.
[Insert figure 7-10 here for answer 162.]
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y RELATED QUESTION: 161
163
. In what way or ways are free market outcomes, where supply equals demand, beneficial to society?
ANSWER: The market outcome is beneficial in three ways:
(1) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by
their willingness to pay.
(2) Free markets allocate the demand for goods and services to the sellers who can produce them at least
cost.
(3) Free markets produce the quantity of goods that maximizes the sum of consumer and producer
surplus.
164
. Given the following equations:
1) Total Surplus = Consumer Surplus + Producer Surplus
2) Total Surplus = Value to Buyers - Cost to Sellers
Show how equation (1) can be used to derive equation (2).

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.

165
. Explain why the graph shown verifies the fact that the market equilibrium (quantity) maximizes the
sum of producer and consumer surplus.
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.
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.
166
. Using a demand-supply diagram, identify the following areas:
a. consumer surplus
b. producer surplus
c. total surplus
ANSWER: The graph should look like the graph below.

a. Consumer surplus would be area PCB.
b. Producer surplus would be area PAB.
c. Total surplus would be area ABC.
167
. 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 well-
being.
168
. 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
didn’t have to “pay for.”
169
. 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 buyer’s 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.
170
. Antonio’s Pizza has the following willingness to sell pizza:
Price Quantity Supplied

$10 16
$9 to $10 14
$8 to $9 12
161
ANSWER:
TABLE D
$400 or more Jon, Josh, Jessica, Ashley 4
300 to 400 Josh, Jessica, Ashley 3
200 to 300 Jessica, Ashley 2
100 to 200 Ashley 1
Less than $100 None 0
163
ANSWER: The market outcome is beneficial in three ways:
(1) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by
their willingness to pay.
$7 to $8 10
$6 to $7 8
$5 to $6 6
$4 to $5 4
below $4 0
Determine Antonio’s producer surplus at a price of
164
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.
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.
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.
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 didn’t have to
“pay for.”
169
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 buyer’s 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.
170
ANSWER:
a. $54
a. $10
b. $8
c. $6
d. $4
e. $2
ANSWER: a. $54
b. $28
c. $10
d. $0
e. $0
TYPE: S KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: N
Price of Pizza Quantity of Pizza Demanded

Fred Frieda
more than $10 0 0
$9 to $10 1 0
$8 to $9 3 1
$7 to $8 5 2
$6 to $7 7 3
$5 to $6 9 4
$4 to $5 11 5
171
. Based on the table, if Fred and Frieda are the only buyers in the pizza market, and Antonio’s 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
b. $28
c. $10
d. $0
e. $0
TYPE: S KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: N
172
. Is the pizza market described in the previous questions efficient? Explain. Is it equitable? Explain.
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 Antonio’s.
TYPE: S KEY1: E SECTION: 3 OBJECTIVE: 5 RANDOM: N RELATED QUESTION: 171
173
. What are the economic arguments in favor of allowing ticket scalping?
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.
174
. 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.
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 Antonio’s.
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.
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.

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Chapter 7

Consumers, Producers, and the Efficiency of

Buyer Willingness to Pay

TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 1 RANDOM: Y

The Costs of Five Possible Sellers

Market Supply and Demand for Good X

Price Quantity Demanded Quantity Supplied

TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 INSTRUCTION: 2 RANDOM: Y

d. the forces of supply and demand in determining equilibrium price.

c. the inability of buyers to place a value on the good or service.

Value of first donut $.60

a. Use this information to construct Megan’s demand curve for donuts.

b. At a price of $.20, Megan would buy 5 donuts.

TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

Price of Pizza Quantity of Pizza Demanded

TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 4 RANDOM: Y RELATED QUESTION: 161

1) Total Surplus = Consumer Surplus + Producer Surplus

2) Total Surplus = Value to Buyers - Cost to Sellers

Show how equation (1) can be used to derive equation (2).

Total Surplus = Value to buyers - Costs of sellers.

ANSWER: The graph should look like the graph below.

Price Quantity Supplied

Determine Antonio’s producer surplus at a price of

Price of Pizza Quantity of Pizza Demanded

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