welfare economics
the study how the allocation of resources affects economic well-being
willingness to pay
the maximum amount that a buyer will pay for a good
consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays
Consumer surplus at price P1
the qty demanded is Q1 and consumer surplus equals the area of the triangle ABC
Consumer surplus at price P2
the price falls from P1 to P2, the qty demanded rises form Q1 to Q2, and the consumer surplus rises to the area of the triangle ADF. The increase in consumer surplus (area BCFD) occurs in part because existing consumers now pay less (area BCED) and in par
cost
the value of everything a seller must give up to produce a good
producer surplus
the amount a seller is paid for a good minus the seller's cost
Producer surplus at price P1
the qty demanded is Q1 and producer surplus equals the area of the triangle ABC
Producer surplus at price P2
the supplied rises from Q1 to Q2 and the producer surplus rises to the area of the triangle ADF. The increase in producer surplus (area BCFD) occurs in part because existing producers now receive more (area BCED) and in part because new producers enter th
consumer surplus (equation)
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producer surplus (equation)
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total surplus (equation)
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efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equity
the property of distributing economic prosperity (Wohlstand) fairly among the members of society
the efficiency of the equilibrium qty
at qty's less than the equilibrium qty, the value to buyers exceeds the cost to sellers. At qty's greater than the equilibrium qty, the cost to sellers exceeds the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and consum
Consumer surplus is the buyer's willingness to pay minus the seller's cost. (T or F?)
F
If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases. (T or F?)
T
If your willingness to pay for a hamburger is �3.00 and the price is �2.00, your consumer surplus is �5.00. (T or F?)
F
Producer surplus is a measure of the unsold inventories of suppliers in a market. (T or F?)
F
Consumer surplus is a good measure of buyers' benefits if buyers are rational. (T or F?)
T
Cost to the seller includes the opportunity cost of the seller's time. (T or F?)
T
The height of the supply curve is the marginal seller's cost. (T or F?)
T
Total surplus is the seller's cost minus the buyer's willingness to pay. (T or F?)
F
Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price. (T or F?)
F
Producer surplus is the area above the supply curve and below the price. (T or F?)
T
The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient. (T or F?)
T
Equilibrium in a competitive market maximizes total surplus. (T or F?)
T
The two main types of market failure are market power and externalities. (T or F?)
T
Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market. (T or F?)
T
Producing more of a product always adds to total surplus. (T or F?)
F
Consumer surplus is the area
a. below the demand curve and above the price.
b. above the supply curve and below the price.
c. above the demand curve and below the price.
d. below the supply curve and above the price.
e. below the demand curve and above th
A
A buyer's willingness to pay is that buyer's
a. minimum amount they are willing to pay for a good.
b. producer surplus.
c. consumer surplus.
d. maximum amount they are willing to pay for a good.
e. none of these answers.
D
If a buyer's willingness to pay for a new Honda is �20,000 and she is able to actually buy it for �18,000, her consumer surplus is
a. �18,000.
b. �20,000.
c. �2,000.
d. �0.
e. �38,000.
C
An increase in the price of a good along a stationary demand curve
a. improves the material welfare of the buyers.
b. decreases consumer surplus.
c. improves market efficiency.
d. increases consumer surplus.
B
Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay �30 for one, buyer 2 is willing to pay �25 for one, and buyer 3 is willing to pay �20 for one. If the price is �25, how many vases will be sold and what is the va
E
Producer surplus is the area
a. below the supply curve and above the price.
b. below the demand curve and above the supply curve.
c. below the demand curve and above the price.
d. above the demand curve and below the price.
e. above the supply curve and b
E
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
a. total surplus is maximized.
b. the value placed on the last unit of production by buyers exceeds the cost of production.
c. producer surplus is maximiz
B
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
a. the value placed on the last unit of production by buyers exceeds the cost of production.
b. the cost of production on the last unit produced exceeds t
B
The seller's cost of production is
a. none of these answers.
b. the minimum amount the seller is willing to accept for a good.
c. the seller's producer surplus.
d. the maximum amount the seller is willing to accept for a good.
e. the seller's consumer sur
B
Total surplus is the area
a. above the supply curve and below the price.
b. below the demand curve and above the price.
c. below the demand curve and above the supply curve.
d. below the supply curve and above the price.
e. above the demand curve and belo
C
An increase in the price of a good along a stationary supply curve
a. increases producer surplus.
b. does all of the things described in these answers.
c. decreases producer surplus.
d. improves market equity.
A
Adam Smith's "invisible hand" concept suggests that a competitive market outcome
a. maximizes total surplus.
b. generates equality among the members of society.
c. minimizes total surplus.
d. both maximizes total surplus and generates equality among the m
A
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
a. choose a price below the market equilibrium price.
b. allow the market to seek equilibrium on its own.
c. ch
B
If buyers are rational and there is no market failure,
a. free market solutions are efficient.
b. free market solutions maximize total surplus.
c. all of these answers.
d. free market solutions are equitable.
e. free market solutions are efficient and fre
E
If a producer has market power (can influence the price of the product in the market) then free market solutions
a. are equitable.
b. are efficient.
c. maximize consumer surplus.
d. are inefficient.
D
If a market is efficient, then
a. the market allocates buyers to the sellers who can produce the good at least cost.
b. all of these answers.
c. none of these answers.
d. the quantity produced in the market maximizes the sum of consumer and producer surpl
B
If a market generates a side effect or externality, then free market solutions
a. maximize producer surplus.
b. are efficient.
c. are inefficient.
d. are equitable.
C
Medical care clearly enhances people's lives. Therefore, we should consume medical care until
a. everyone has as much as they would like.
b. the benefit buyers place on medical care is equal to the cost of producing it.
c. buyers receive no benefit from a
B
Joe has ten pairs of football boots and Sue has none. A pair of football boots costs �50 to produce. If Joe values an additional pair of boots at �100 and Sue values a pair of boots at �40, then to maximize
a. efficiency Sue should receive the glove.
b. e
B
Suppose that the price of a new bicycle is �300. Natalie values a new bicycle at �400. It costs �200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike?
a. �500
b. �300
c. �200
d. �400
e. �100
C