Chapter 7

Consumers, Producers, and the Efficiency of Markets

TRUE/FALSE

1. Welfare economics is the study of the welfare system.ANS: F DIF: 1 REF: 7-1 LOC: Supply and demand TOP: Welfare

NAT: Analytic

MSC: Definitional

2.

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.ANS: T DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Willingness to pay MSC: Definitional

3. For any given quantity, the price on a demand curve represents the marginal buyer's willingness to pay.ANS: T DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Willingness to pay MSC: Interpretive

4.

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.ANS: F DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Willingness to pay MSC: Definitional

5.

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.ANS: F DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Definitional

6.

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually has to pay for it.ANS: T DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Definitional

7. Consumer surplus measures the benefit to buyers of participating in a market.ANS: T DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Interpretive

8. Consumer surplus can be measured as the area between the demand curve and the equilibrium price.ANS: T DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Interpretive

9. Consumer surplus can be measured as the area between the demand curve and the supply curve.ANS: F DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Interpretive

10. Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000

for the car but would have been willing to pay $11,000 for the car. Susie's consumer surplus is $2,000.ANS: F DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Interpretive

453

454 ? Chapter 7/Consumers, Producers, and the Efficiency of Markets

11. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $10.ANS: T DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Applicative

12. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90.ANS: F DIF: 1 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Applicative

13. All else equal, an increase in supply will cause an increase in consumer surplus.ANS: T DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Applicative

14. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1)

consumer surplus received by existing buyers increases and (2) new buyers enter the market.ANS: T DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Interpretive

15. If the government imposes a binding price floor in a market, then the consumer surplus in that market will

increase.ANS: F DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Applicative

16. If the government imposes a binding price floor in a market, then the consumer surplus in that market will

decrease.ANS: T DIF: 2 REF: 7-1 NAT: Analytic LOC: Supply and demand TOP: Consumer surplus MSC: Applicative

17. 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.ANS: T DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Opportunity cost MSC: Interpretive

18. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.ANS: F DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Opportunity cost MSC: Interpretive

19. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price.ANS: T DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive

20. Producer surplus is the amount a seller is paid minus the cost of production.ANS: T DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Definitional

21. Producer surplus is the cost of production minus the amount a seller is paid.ANS: F DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Definitional

Chapter 7/Consumers, Producers, and the Efficiency of Markets ? 455

22. All else equal, an increase in demand will cause an increase in producer surplus.

ANS: T DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

23. All else equal, a decrease in demand will cause an increase in producer surplus.ANS: F DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

24. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $45.ANS: F DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

25. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $35.ANS: T DIF: 1 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

26. Connie can clean windows in large office buildings at a cost of $1 per window. The market price for

window-cleaning services is $3 per window. If Connie cleans 100 windows, her producer surplus is $100.ANS: F DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

27. Connie can clean windows in large office buildings at a cost of $1 per window. The market price for

window-cleaning services is $3 per window. If Connie cleans 100 windows, her producer surplus is $200.ANS: T DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

28. The area below the price and above the supply curve measures the producer surplus in a market.ANS: T DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Interpretive

29. The area below the demand curve and above the supply curve measures the producer surplus in a market.ANS: F DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Interpretive

30. If the government imposes a binding price ceiling in a market, then the producer surplus in that market will

increase.ANS: F DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Applicative

31. When demand increases so that market price increases, producer surplus increases because (1) producer

surplus received by existing sellers increases, and (2) new sellers enter the market.ANS: T DIF: 2 REF: 7-2 NAT: Analytic LOC: Supply and demand TOP: Producer surplus MSC: Interpretive

32. Total surplus in a market is consumer surplus minus producer surplus.ANS: F DIF: 1 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Definitional

456 ? Chapter 7/Consumers, Producers, and the Efficiency of Markets 33. Total surplus = Value to buyers - Costs to sellers.ANS: T DIF: 2 REF: 7-3 LOC: Supply and demand TOP: Total surplus MSC: Interpretive

NAT: Analytic

34. Total surplus in a market can be measured as the area below the supply curve plus the area above the demand

curve, up to the point of equilibrium.ANS: F DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Interpretive

35. Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50.

For this transaction, the total surplus in the market is $40.ANS: F DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Total surplus MSC: Applicative

36. The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of

participating in that market.ANS: T DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive

37. Efficiency refers to whether a market outcome is fair, while equality refers to whether the maximum amount

of output was produced from a given number of inputs.ANS: F DIF: 1 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency | Equality MSC: Definitional

38. Efficiency is related to the size of the economic pie, whereas equality is related to how the pie gets sliced and

distributed.ANS: T DIF: 1 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency | Equality MSC: Definitional

39. Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand

for goods to the sellers who can produce them at least cost.ANS: T DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive

40. Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs

to society of this activity outweigh the benefits.ANS: F DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive

41. Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.ANS: T DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency MSC: Interpretive

42. If the United States legally allowed for a market in transplant organs, it is estimated that one kidney would sell

for at least $100,000.ANS: F DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Efficiency | Equality MSC: Interpretive

43. Even though participants in the economy are motivated by self-interest, the \

marketplace guides this self-interest into promoting general economic well-being.ANS: T DIF: 2 REF: 7-3 NAT: Analytic LOC: Supply and demand TOP: Invisible hand MSC: Interpretive