Appendex to Chapter 3

Appendix to Chapter 3 Practice Quiz Consumer Surplus, Producer Surplus, and Market Efficiency

1. If Bill is willing to pay $10 for one good X, $8 for a second, and $6 for a third, and the market price is a $5, then Bill’s consumer surplus is a. $24 b. $18 c. $9 d. $6

ANS: c. Consumer surplus is the difference between the price consumers are willing to pay and the cost. For one unit of good X the surplus is $5, $3 for the second unit, and $1 for the third. Therefore, the total consumer surplus is $9.

2. Suppose Gizmo Inc. is willing to sell one gizmo for $10, a second gizmo for $12, a third for $14, and a fourth for $20, and the market price is $20. What is Gizmo Inc.’s producer surplus? a. $56 b. $24 c. $20 d. $10

ANS: b. Producer surplus is the difference between the selling price and price producers are willing to sell a gizmo. For one gizmo the producer surplus is $10, $8 for the second gizmo, and $6 for the third gizmo. Therefore, the total producer surplus is $24.

3. In an efficient market, deadweight loss is a. maximum b. minimum c. constant d. zero

ANS: d. In equilibrium, there is no net loss of either consumer or producer surplus. 4. Deadweight loss results from a. equilibrium. b. underproduction. c. overproduction. d. none of the above are correct. e. either b or c.

ANS: e. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.

5. Total surplus equals a. consumer surplus + producer surplus – deadweight loss. b. consumer surplus – producer surplus – deadweight loss. c. consumer surplus – producer surplus + deadweight loss. d. consumer surplus + producer surplus.

ANS: d. Deadweight loss is the value of potential benefits loss, which is not subtracted from or added to total surplus (consumer + producer surplus).

6. Which of the following statements is correct? a. Total surplus is the sum of consumer and producer surplus. b. Deadweight loss is the net loss of both consumer and producer surplus. c. Deadweight loss is a measure of market inefficiency. d. All of the above.

ANS: d. See Exhibit A-3 in the text. Exhibit A-7 Demand and Supply Curves for Good X

A H 16. .S 14 C F 12 . . Price per 10 E unit 8 . 6 4 D. .G 2 B . I. D 0 2 4 6 8 10 12 14 16 8 Quantity of good X

7. In Exhibit A-7, suppose firms devote resources sufficient to produce 4,000 units of good X per month. The result is a deadweight loss of triangle a. ABE. b. CDE. c. EGE. d. EDE.

ANS: b. Only at point C are 4,000 units sold and triangle CDE is the deadweight loss of potential value resulting from underproduction of good X.

8. Suppose in Exhibit A-7 that exchange in the market for good X yields triangle ABE. This means that which of the following conditions exists in the market? a. Only consumer surplus b. Only producer surplus c. Deadweight loss d. Maximum consumer plus producer surplus

ANS: d. Only at the equilibrium point E do both consumers and producers receive maximum surplus value. 9. As shown in Exhibit A-7, assume that the quantity of good X changed results in triangle EIH. This would be caused by ______resources used by producers to produce good X. a. too many b. too few c. an optimal amount of d. asymmetric

ANS: a. See Exhibit A-3 (c) in the text.

10. As shown in Exhibit A-7, assume that the quantity of good X exchanged results in triangle CDE. This would be caused by______resources being used by producers to produce good X. a. too many b. too few c. an optimal amount of d. asymmetric

ANS: b. See Exhibit A-3 (b) in the text.