01-Chapter 7—Market Efficiency and Welfare . Questions and Answers

01-Chapter 7—Market Efficiency and Welfare . Questions and Answers TRUE/FALSE 1. If Ming is willing to pay $75 to attend the Broadway production of The Lion King but actually pays $40, she receives a consumer surplus of $35. ANS: T PTS: 1 2. If James is willing to sell an extra concert ticket for $40 and actually sells it for $100, his consumer surplus is $60. ANS: F PTS: 1 3. If the world supply of diamonds decreases, diamonds become more valuable, and therefore, the consumer surplus derived from diamonds increases. ANS: F PTS: 1 4. If the world supply of diamonds increases, the market price of diamonds decreases, and the consumer surplus derived by diamond consumers increases. ANS: T PTS: 1 5. Consumer surplus equals the quantity supplied minus the quantity demanded. ANS: F PTS: 1 6. Consumer surplus increases whenever the price of a good decreases due to a rightward shift of the supply curve. ANS: T PTS: 1 7. Consumer surplus increases whenever the price of a good increases due to a leftward shift of the supply curve. ANS: F PTS: 1 8. Producer surplus is always the total area below the demand curve and above the supply curve. ANS: F PTS: 1 9. Producer surplus from a unit of output is the difference between the market price and the seller's cost of producing that unit. ANS: T PTS: 1 10. Total welfare gains from trade to the economy can be measured by the sum of consumer and producer surplus. ANS: T PTS: 1 11. The deadweight loss from a tax is the reduction in producer and consumer surplus minus the tax revenue transferred to the government. ANS: T PTS: 1 12. The more elastic the demand curve, the smaller is the deadweight loss resulting from the imposition of a tax. ANS: F PTS: 1 13. If two people had identical demand curves, but one was able to purchase at a lower price than the other, the one facing the lower price would receive more consumer surplus. ANS: T PTS: 1 14. If two producers had identical supply curves, but one sold at a lower price than the other, the one receiving the lower price would receive more producer. ANS: F PTS: 1 15. If a customer had to pay a $5 entry charge to get into a roller coaster theme park, and then pay $2 per ride, she would get less consumer surplus than if she was able to pay $2 per ride with no entry charge. ANS: T PTS: 1 16. A subsidy in an industry would be likely to increase the consumer surplus for buyers in that industry and increase the producer surplus for sellers in that industry. ANS: T PTS: 1 17. Other things equal, a price ceiling will increase consumer surplus by allowing customers to buy more at the lower price. ANS: F PTS: 1 18. Other things equal, a price floor will reduce consumer surplus, but it will increase producer surplus if the government buys up any surplus at the price floor. ANS: T PTS: 1 19. If the government provides a subsidy in one industry and raises the tax revenue by taxing another industry, would, other things equal, cause welfare costs in both industries. ANS: T PTS: 1 20. Producer surplus is always the total area below the price and above the supply curve. ANS: T PTS: 1 21. Producer surplus is always the total area below the demand curve and above the price. ANS: T PTS: 1 MULTIPLE CHOICE 1. The difference between the value of a good to consumers and its price is known as: a. demand. b. marginal utility. c. total utility. d. opportunity cost e. consumer surplus. ANS: E PTS: 1 2. The difference between the value of a good to sellers and its price is known as: a. consumer surplus. b. producer surplus. c. total utility. d. demand. e. supply. ANS: C PTS: 1 3. Graphically, consumer surplus is measured by: a. the area below the demand curve. b. the area below the demand curve, but above the upward-sloping supply curve. c. the area below the demand curve, but above the market price. d. the area below the market demand curve, but above the supply curve. ANS: C PTS: 1 4. Total welfare gains from trade to the economy can be measured: a. as the sum of consumer and producer surpluses. b. as the difference between producer surplus and consumer surplus. c. as the sum of consumer and producer surpluses minus taxes d. as the net gain in consumer surplus that results from an action that alters a market equilibrium. ANS: A PTS: 1 5. The area between the market price and the demand curve provides a measure of: a. consumer surplus. b. producer surplus. c. consumer surplus plus producer surplus. d. marginal utility. e. the deadweight loss arising from free trade. ANS: A PTS: 1 6. The area between the market price and the supply curve provides a measure of: a. consumer surplus. b. producer surplus. c. consumer surplus plus producer surplus. d. marginal utility. e. the deadweight loss arising from free trade. ANS: B PTS: 1 Table 7-1 Miles demands jazz CDs according to the following demand schedule: Price of Jazz CDs Quantity of Jazz CDs $30 1 $25 2 $20 3 $15 4 $10 5 7. Refer to Table 7-1. If the price of jazz CDs equals $15, the consumer surplus Miles receives from purchasing jazz CDs is: a. $15. b. $25. c. $30. d. $55. e. $90. ANS: C PTS: 1 8. Refer to Table 7-1. If the price of jazz CDs equals $20, the consumer surplus Miles receives from purchasing jazz CDs is: a. $10. b. $15. c. $20. d. $55. e. $75. ANS: B PTS: 1 9. Refer to Table 7-1. If in the schedule, consumer surplus equals $5, the market price of a jazz CD is: a. $10. b. $15. c. $20. d. $25. e. $30. ANS: D PTS: 1 10. Gains from trade are measured by: a. consumer surplus. b. producer surplus. c. the sum of consumer and producer surplus. d. producer surplus minus consumer surplus. ANS: C PTS: 1 11. Lydia enjoys going to the theater to see Broadway musicals. The following demand schedule shows Lydia's willingness to pay for theater tickets in a year. Ticket Price Number of Tickets $90 1 $80 2 $70 3 $60 4