Chapter7—MarketEfficiencyandWelfare
TRUE/FALSE
1. Alowerpricewillincreaseyourconsumersurplusforeachoftheunitsyouwerealreadyconsumingandwillalsoincreaseyourconsumersurplusfromincreasedpurchasesatthelowerprice.
ANS: T PTS: 1
2. Becausesomeunitscanbeproducedatacostthatislowerthanthemarketprice,thesellerreceivesasurplus,ornetbenefit,fromproducingthoseunits.
ANS: T PTS: 1
3. Producersurplusisshowngraphicallyastheareaunderthedemandcurveandabovethesupplycurve.
ANS: F PTS: 1
4. Ifthemarketpriceofagoodfallsasaresultofadecreaseindemand,additionalproducersurplusisgenerated.
ANS: F PTS: 1
5. Atthemarketequilibrium,bothconsumersandproducersbenefitfromtradingeveryunituptothemarketequilibriumoutput.
ANS: T PTS: 1
6. Oncetheequilibriumoutputisreachedattheequilibriumprice,allofthemutuallybeneficialtradeopportunitiesbetweenthesuppliersandthedemanderswillhavetakenplace,andthesumofconsumerandproducersurplusismaximized.
ANS: T PTS: 1
7. Thedeadweightlossofataxisthedifferencebetweenthelostconsumerandproducersurplusesandthetaxrevenuegenerated.
ANS: T PTS: 1
8. Thedeadweightlossofataxoccursbecausethetaxreducesthequantityexchangedbelowtheoriginaloutputlevel,reducingthesizeofthetotalsurplusrealizedfromtrade.
ANS: T PTS: 1
9. Otherthingsbeingequal,themoreelasticthedemandcurveorthemoreelasticthesupplycurve,thesmallerthedeadweightloss.
ANS: F PTS: 1
10. Ifeitherthesupplyordemandcurvebecomesmoreinelastic,agiventaxwillreducethequantityexchangedbyagreateramount.
ANS: F PTS: 1
11. Thosegoodsthatareheavilytaxedoftenhavearelativelyinelasticdemandcurveintheshortrun,sotheburdenfallsmainlyonthebuyer,andthedeadweightlosstosocietyissmallerthanifthedemandcurveweremoreelastic.
ANS: T PTS: 1
12. Consumersneverbenefitfromabindingpriceceiling.
ANS: F PTS: 1
13. Anypossiblegainstoconsumersaremorethanoffsetbylossestoproducerswhenabindingpriceceilingisinplace.
ANS: T PTS: 1
14. Withanagriculturalpricesupportprogramwherethegovernmentbuysupthesurplus,anetbenefitisrealizedbecausethebenefitstoproducersaregreaterthanthecosttoconsumers.
ANS: F PTS: 1
15. Thedeadweightlossisgreaterinanagriculturalprice-supportprogramthaninadeficiencypaymentplan.
ANS: T PTS: 1
MULTIPLECHOICE
1. Inasupplyanddemandgraph,thetriangularareaunderthedemandcurvebutabovethemarketpriceis
a. theconsumersurplus. b. theproducersurplus. c. themarginalcost. d. thedeadweightloss. e. thenetgaintosocietyfromtradingthatgood.
ANS: A PTS: 1
Usethefollowingdemandscheduletoanswerthefollowingquestion(s).Fred’sdemandscheduleforDVDsisasfollows:At$30each,hewouldbuy1;at$25,hewouldbuy2;at$15,hewouldbuy3;andat$10,hewouldbuy4.
2. IfthepriceofDVDsis$20,theconsumersurplusFredreceivesfrompurchasingtwoDVDswouldbe
a. $10. b. $15. c. $20. d. $55. e. $90.
ANS: B PTS: 1
3. IfthepriceofDVDsis$25,theconsumersurplusFredreceivesfrompurchasingoneDVDwouldbe
a. $0. b. $5. c. $25. d. $55. e. $70.
ANS: B PTS: 1
4. Whichofthefollowingisnottrueaboutconsumersurplus?
a. Consumersurplusisthedifferencebetweenwhatconsumersarewillingtopayandwhattheyactuallypay. b. Consumersurplusisshowngraphicallyastheareaunderthedemandcurvebutabovethemarketprice. c. Anincreaseinthemarketpriceduetoadecreaseinsupplywillincreaseconsumersurplus. d. Adecreaseinmarketpriceduetoanincreaseinsupplywillincreaseconsumersurplus.
ANS: C PTS: 1
5. Whichofthefollowingisnottrueaboutproducersurplus?
a. Producersurplusisthedifferencebetweenwhatsellersarepaidandtheircostofproducingthoseunits. b. Producersurplusisshowngraphicallyastheareaunderthemarketpricebutabovethesupplycurve. c. Anincreaseinthemarketpriceduetoanincreaseindemandwillincreaseproducersurplus. d. Alloftheabovearetrueaboutproducersurplus.
ANS: D PTS: 1
6. Atthemarketequilibriumpriceandquantity,thetotalwelfaregainsfromtradearemeasuredby
a. thetotalconsumersurpluscapturedbyconsumers. b. thetotalproducersurpluscapturedbyproducers. c. thesumofconsumersurplusandproducersurplus. d. theconsumersurplusminustheproducersurplus.
ANS: C PTS: 1
7. Inasupplyanddemandgraph,thetriangularareaunderthedemandcurvebutabovethesupplycurveis
a. theconsumersurplus. b. theproducersurplus. c. themarginalcost. d. thedeadweightloss. e. thenetgaintosocietyfromtradingthatgood.
ANS: E PTS: 1
8. Inasupplyanddemandgraph,thetriangularareabetweenthedemandcurveandthesupplycurvelostbecauseoftheimpositionofatax,priceceiling,orpriceflooris
a. theconsumersurplus. b. theproducerssurplus. c. themarginalcost. d. thedeadweightloss. e. thenetgaintosocietyfromtradingthatgood.
ANS: D PTS: 1
9. Taxesongoodswith____demandcurveswilltendtoraisemoretaxrevenueforthegovernmentthantaxesongoodswith____demandcurves.
a. elastic;unitelastic b. elastic;inelastic c. inelastic;elastic d. unitelastic;inelastic
ANS: C PTS: 1
10. Aftertheimpositionofatax,
a. consumerspayahigherprice,includingthetax. b. consumersloseconsumersurplus. c. producersreceivealowerpriceaftertaxes. d. producersloseproducersurplus. e. alloftheaboveoccur.
ANS: E PTS: 1
11. Otherthingsbeingequal,foragiventax,ifthedemandcurveislesselastic,
a. thegreaterthetaxrevenueraisedandthegreaterthedeadweightcostofthetax. b. thegreaterthetaxrevenueraisedandthesmallerthedeadweightcostofthetax. c. thelessthetaxrevenueraisedandthegreaterthedeadweightcostofthetax. d. thelessthetaxrevenueraisedandthesmallerthedeadweightcostofthetax.
ANS: B PTS: 1
12. Anincreaseinasubsidywillincrease
a. consumersurplus. b. producersurplus. c. thedeadweightloss. d. alloftheabove.
ANS: D PTS: 1
13. Withasubsidy,
a. thepriceproducersreceiveisthepriceconsumerspayplusthesubsidy. b. thesubsidyleadstotheproductionofmorethantheefficientlevelofoutput. c. thereisadeadweightloss. d. alloftheabovearetrue.
ANS: D PTS: 1
14. Thelongerthetimepeoplehavetoadjusttoatax,the____revenueitwillraiseandthe____quantitytradedwillfall.
a. more;more b. more;less c. less;more d. less;less
ANS: C PTS: 1
15. Apermanentincreaseinpricewouldtendtodecreasetheconsumersurplusby____orincreasetheproducerssurplusby____inthelongrunthanintheshortrun.
a. more;more b. more;less c. less;more d. less;less
ANS: A PTS: 1
16. Inthecaseofapricefloor,andthegovernmentbuysupthesurplus,
a. consumersurplusdecreases. b. producersurplusincreases. c. agreaterdeadweightlossoccursthanwithadeficiencypaymentsystem. d. alloftheabovearetrue.
ANS: D PTS: 1
17. Thelongerapriceceilingisleftbelowtheequilibriumpriceinamarket,the____isthereductioninthequantityexchangedandthe____istheresultingdeadweightloss.
a. greater;greater b. greater;smaller c. smaller;greater d. smaller;smaller
ANS: A PTS: 1
18. Withadeficiencypaymentprogram,
a. thegovernmentsetsthetargetpriceattheequilibriumprice. b. producerandconsumersurplusfalls. c. thereisadeadweightlossbecausetheprogramincreasestheoutputbeyondtheefficientlevelofoutput. d. alloftheabovearetrue.
ANS: C PTS: 1
PROBLEM
1. Ifthegovernment’sgoalistoraisetaxrevenue,whichofthefollowingaregoodmarketstotax?
a.luxuryyachts
b.alcohol
c.movies
d.gasoline
e.grapefruitjuice
ANS:
Ifthegovernment''sgoalistoboosttaxrevenue,thenthebestmarketstotaxarethoseinwhichdemandishighlyinelastic.Inmarketswheredemandisinelastic,salesdonotdeclinesignificantlywhenpricesriseduetoatax.Thedemandforalcohol,cigarettesandgasolinetendstobeinelastic.Taxingthesemarketswillalsominimizethedeadweightlossassociatedwithatax,sincethequantityofoutputtradedwilldeclineproportionatelylessforagiventaxratethaninmarketswheredemandismoreelastic.
PTS: 1
2. Elasticityofdemandinthemarketforone-bedroomapartmentsis2.0,elasticityofsupplyis0.5,thecurrentmarketpriceis$1,000,andtheequilibriumnumberofone-bedroomapartmentsis10,000.Ifthegovernmentimposesapriceceilingof$800onthismarket,predictthesizeoftheresultingapartmentshortage.
ANS:
Thegovernment-imposedpriceceilingcausesa20%reductioninprice(from$1,000to$800).Ifelasticityofdemandequals2.0,quantitydemandedislikelytoincreaseby40%toapproximately14,000apartments.Ifelasticityofsupplyequals0.5,a20%decreaseinpricewillleadtoa10%decreaseinthequantityofapartmentssupplied.Thenewquantitysuppliedwillequalapproximately9,000rentalunits.Ashortageof14,000–9,000=5,000unitsisthepredictedresult.
PTS: 1
3. Whichofthefollowingdoyouthinkaregoodmarketsforthegovernmenttotaxifthegoalistoboosttaxrevenue?
Whichwillleadtotheleastamountofdeadweightloss?Why?
a.luxuryyachts
b.alcohol
c.motorhomes
d.cigarettes
e.gasoline
f.pizza
ANS:
Ifthegoalistoincreasetaxrevenue,goodmarketstotaxarethoseinwhichdemandisrelativelyinelastic,suchasthemarketsforalcoholandgasoline.Ifallyachtsweretaxes,theirdemandislikelytoberelativelyinelastic,andagoodrevenuesource.Butifonlynewyachtsaretaxed,therearegoodsubstitutes(e.g.usedyachts),sothedemandcurveislikelytoberelativelyelasticandataxonnewyachtsislikelytobelessgoodasarevenuesource.
PTS: 1
4. Usingagraph,showthechangestoconsumerandproducersurplusfromapriceceilingonnaturalgas.Labelthedeadweightloss.
ANS:
Whenapriceceilingisimposedbelowequilibriumpriceinthenaturalgasmarket,producersurplusdeclines.Consumersmayeithergainorlosesurplusoverall.Consumerswhoareabletobuyoutputbenefitfrompayingalowerprice,increasingconsumersurplus.However,thequantityofoutputsuppliedtothemarketwilldecline.Somebuyerswillnotbeabletopurchaseoutput,despitetheirwillingness-to-pay.Adeadweightloss(illustratedabove)resultsfromtheimpositionofapriceceilingbelowequilibriumprice,sinceunitsarenotproducedthatconsumersvalueinexcessofwhatitcoststoproducethem.
PTS: 1
5. Ifafreezeruinedthisyear’slettucecrop,showwhatwouldhappentoconsumersurplus.
ANS:
Ifafreezeruinedthisyear’slettucecrop,thesupplyoflettucedecreasesfromS1toS2inthediagramabove--asdoesconsumersurplus.
PTS: 1
6. Ifdemandforapplesincreasedasresultofanewsstorythathighlightedthehealthbenefitsoftwoapplesaday,whatwouldhappentoproducersurplus?
ANS:
IfthedemandforapplesincreasedfromD1toD2inthediagramaboveasaresultofanewsstorythathighlightedthehealthbenefitsoftwoapplesaday,producersurpluswouldincreaseasindicated.
PTS: 1
7. Howistotalsurplus(thesumofconsumerandproducersurpluses)relatedtotheefficientlevelofoutput?Usingasupplyanddemandcurve,demonstratethatproducinglessthantheequilibriumoutputwillleadtoaninefficientallocationofresources—adeadweightloss.
ANS:
Attheefficientlevelofoutput,thesocietalgainsfromtrade,ortotalsurplus,ismaximized.Whenlessthantheefficientlevelofoutputisproduced,adeadweightlossoccurs.Someofthepotentialgainsfromtradearenotrealizedwhenalessthanefficientlevelofoutputisproduced.
PTS: 1
8. Useconsumerandproducersurplustoshowthedeadweightlossfromasubsidy(producingmorethantheequilibriumoutput).(Hint:Rememberthattaxpayerswillhavetopayforthesubsidy.)
ANS:
Adeadweightlossoccursduetoasubsidy(asindicatedinthegraphbelow)becauseproducershaveaprivateincentivetoproducemorethanthesociallyefficientlevelofoutputatQ.Asaresult,unitsaremanufactured(betweenQandQ1)whichconsumersvaluelessthanwhatitcoststoproducethem,leadingtoadeadweightlossfromover-expandingoutput.
PTS: 1
9. Usethediagramtoanswerthefollowingquestions(a–d).
a. Attheequilibriumpricebeforethetaxisimposed,whatarearepresentsconsumersurplus?Whatarearepresentsproducersurplus? b. Saythatataxof$Tperunitisimposedintheindustry.Whatareanowrepresentsconsumersurplus?Whatarearepresentsproducersurplus? c. Whatarearepresentsthedeadweightcostofthetax? d. Whatarearepresentshowmuchtaxrevenueisraisedbythetax?
ANS:
a. ConsumersurplusisareaF+E+D;producersurplusisareaA+B+C.Theareaunderthedemandcurveandabovethemarketpricerepresentsconsumersurplus;theareaabovethesupplycurveandunderthemarketpricerepresentsproducersurplus. b. NewconsumersurplusisareaF;newproducersurplusisareaA.Theareaunderthedemandcurveandabovethenewmarketprice(includingtax)nowrepresentsconsumersurplus;theareaabovethesupplycurveandbelowthenewmarketprice(notincludingtax)nowrepresentsproducersurplus. c. ThedeadweightlossisareaC+D.Thedeadweightcostofthetaxisthedifferenceintheareaunderthedemandcurveandtheareaunderthesupplycurveforthechangeinquantityexchangedwhichresultsfromthetax. d. ThetaxrevenueisareaE+B.Thetaxrevenueraisedisrepresentedbytherectangleofwhichtheheightisthetaxperunitandthelengthisthenumberofunitsexchangedafterthetaxisimposed.
PTS: 1
10. Usethediagramtoanswerthefollowingquestions(a–c).
a. Attheinitialequilibriumprice,whatarearepresentsconsumersurplus?Whatarearepresentsproducesurplus? b. Afterthepriceceilingisimposed,whatarearepresentsconsumersurplus?Whatarearepresentsproducersurplus? c. Whatarearepresentsthedeadweightlosscostofthepriceceiling?
ANS:
a. a+b+c d+e+f b. a+b+d f c. -(c+e)
PTS: 1
11. Usethediagramtoanswerthefollowingquestions(a–c).
a. Atthecompetitiveoutput,Q1,whatarearepresentstheconsumersurplus?Whatarearepresentstheproducersurplus? b. Atthelargeroutput,Q2,whatarearepresentstheconsumersurplus?Whatarearepresentstheproducersurplus? c. Whatarearepresentsthedeadweightlossofproducingtoomuchoutput?
ANS:
a. a+b c+d b. a+b+c+d c+d+b+e c. -f
PTS: 1
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