Chapter 7/Consumers, Producers, and the Efficiency of Markets ? 461

4. Given the following equations two 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).ANS:

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.

DIF: 2

TOP: Total surplus REF: 7-3 NAT: Analytic

MSC: Analytical

LOC: Supply and demand

462 ? Chapter 7/Consumers, Producers, and the Efficiency of Markets 5.

Answer the following questions based on the graph that represents J.R.'s demand for ribs per week of ribs at

Judy's rib shack. a. b. c. d. e. f. g. h. i.

At the equilibrium price, how many ribs would J.R. be willing to purchase? How much is J.R. willing to pay for 20 ribs?

What is the magnitude of J.R.'s consumer surplus at the equilibrium price? At the equilibrium price, how many ribs would Judy be willing to sell? How high must the price of ribs be for Judy to supply 20 ribs to the market? At the equilibrium price, what is the magnitude of total surplus in the market? If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus? If the price of ribs fell to $5, what would happen to Judy's producer surplus?

Explain why the graph that is shown verifies the fact that the market equilibrium (quantity) maximizes the sum of producer and consumer surplus.

201816141210865421020304050607080QuantityPriceSupplyDemandANS:

a. b. c. d. e. f. g. h. i.

40 $10.00 $80.00. 40 $5 $200

It would fall from $80 to only $20. It would fall from $120 to only $30.

At quantities less than the equilibrium quantity, the marginal value to buyers exceeds the marginal 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 marginal cost to sellers exceeds the marginal value to buyers and total surplus falls.

LOC: Supply and demand MSC: Analytical

DIF: 3 REF: 7-3 NAT: Analytic TOP: Consumer surplus | Producer surplus | Total surplus

Sec00 - Consumers, Producers, and the Efficiency of Markets

MULTIPLE CHOICE1.

Welfare economics is the study of how

a. the allocation of resources affects economic well-being. b. a price ceiling compares to a price floor. c. the government helps poor people.

d. a consumer’s optimal choice affects her demand curve.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: A

NAT: Analytic MSC: Definitional

TOP: Welfare

Chapter 7/Consumers, Producers, and the Efficiency of Markets ? 463

2.

Welfare economics is the study of

a. taxes and subsidies.

b. how technology is best put to use in the production of goods and services. c. government welfare programs for needy people.

d. how the allocation of resources affects economic well-being.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: D

NAT: Analytic MSC: Definitional3.

TOP: Welfare

Welfare economics is the study of

a. the well-being of less fortunate people. b. welfare programs in the United States.

c. how the allocation of resources affects economic well-being. d. the effect of income redistribution on work effort.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: C

NAT: Analytic MSC: Definitional4.

TOP: Welfare

The study of how the allocation of resources affects economic well-being is called a. consumer economics. b. macroeconomics.

c. willingness-to-pay economics. d. welfare economics.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: D

NAT: Analytic MSC: Definitional5.

TOP: Welfare

An example of positive analysis is studying a. how market forces produce equilibrium. b. whether equilibrium outcomes are fair.

c. whether equilibrium outcomes are socially desirable. d. if income distributions are fair.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: A

NAT: Analytic MSC: Definitional6.

TOP: Positive statements

An example of normative analysis is studying a. how market forces produce equilibrium. b. surpluses and shortages.

c. whether equilibrium outcomes are socially desirable. d. income distributions.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: C

NAT: Analytic MSC: Definitional7.

TOP: Normative statements

Which of the Ten Principles of Economics does welfare economics explain more fully? a. The cost of something is what you give up to get it.

b. Markets are usually a good way to organize economic activity. c. Trade can make everyone better off.

d. A country’s standard of living depends on its ability to produce goods and services.

DIF: 2 REF: 7-0 LOC: Supply and demand

ANS: B

NAT: Analytic MSC: Interpretive

TOP: Welfare

464 ? Chapter 7/Consumers, Producers, and the Efficiency of Markets 8.

Which of the Ten Principles of Economics does welfare economics explain more fully?

a. The cost of something is what you give up to get it. b. Rational people think at the margin.

c. Markets are usually a good way to organize economic activity. d. People respond to incentives.

DIF: 2 REF: 7-0 LOC: Supply and demand

ANS: C

NAT: Analytic MSC: Interpretive9.

TOP: Welfare

One of the basic principles of economics is that markets are usually a good way to organize economic activity. This principle is explained by the study of a. factor markets. b. energy markets. c. welfare economics. d. labor economics.

DIF: 1 REF: 7-0 LOC: Supply and demand

ANS: C

NAT: Analytic MSC: Interpretive

TOP: Welfare

10. A result of welfare economics is that the equilibrium price of a product is considered to be the best price

because it

a. maximizes both the total revenue for firms and the quantity supplied of the product. b. maximizes the combined welfare of buyers and sellers. c. minimizes costs and maximizes output. d. minimizes the level of welfare payments.

ANS: B

NAT: Analytic MSC: Interpretive

DIF: 2 REF: 7-0 LOC: Supply and demand

TOP: Welfare

11. The particular price that results in quantity supplied being equal to quantity demanded is the best price because

it

a. maximizes costs of the seller.

b. maximizes tax revenue for the government.

c. maximizes the combined welfare of buyers and sellers. d. minimizes the expenditure of buyers.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2 REF: 7-0 LOC: Supply and demand

TOP: Welfare

12. Welfare economics explains which of the following in the market for DVDs?

a. The government sets the price of DVDs; firms respond to the price by producing a specific level of

output.

b. The government sets the quantity of DVDs; firms respond to the quantity by charging a specific

price.

c. The market equilibrium price for DVDs maximizes the total welfare to DVD buyers and sellers. d. The market equilibrium price for DVDs maximizes consumer welfare but minimizes producer

welfare.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2 REF: 7-0 LOC: Supply and demand

TOP: Welfare