Multiple Choice Questions for Self study Chapter 7 (Mankiw & Taylor) Consumers, Producers, and the Efficiency of Markets 1) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith s consumer surplus is (a) $5,000. (b) $15,000. (c) $20,000. (d) not able to be calculated from the information given. 2) Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Mary s consumer surplus from the toy is (a) less than $5. (b) at least $95. (c) at least $100. (d) $105. 3) Joe s demand for spring water can be represented as p = 10 Q (where p is measured in $/gallon and Q is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His consumer surplus from this water is (a) $0. (b) $50. (c) $100. (d) unknown based upon the information provided. 1
4) Figure 9.1 shows the market demand curve for telecommunication while driving one s car (time spent on the car phone). The current price is $0.35 per minute. If the price were to increase by ten cents per minute, consumer surplus will (a) fall to $820. (b) fall by $84. (c) fall by $58. (d) fall to $369. 5) Figure 9.1 shows the market demand curve for telecommunication while driving one s car (time spent on the car phone). At the current price of $0.35 per minute, consumer surplus equals (a) $301.00. (b) $924.50. (c) $1,225.50. (d) $1,250.00. 6) As the price of a good increases, the loss in consumer surplus is larger, (a) the more elastic demand is. (b) the more money previously spent on the good. (c) the less money previously spent on the good. (d) the smaller the price increase. 7) If lower income households spend a greater share of their income on cigarettes than do higherincome households, then a tax that raises the price of cigarettes will (a) cause lower income households to incur a greater loss of consumer surplus than that incurred by higher income households. (b) cause higher income households to incur a greater loss of consumer surplus than that incurred by lower income households. (c) raise consumer surplus among higher income households. 2
(d) cause consumer surplus to decline among smokers, but the relative impact cannot be determined from the given information. 8) Suppose consumers of cigarettes can be classified into two groups: heavy users and light users. Heavy users purchase more cigarettes and are less sensitive to price changes relative to light users. To determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of cigarettes increases, one would need to know (a) each group s average income. (b) the actual quantities purchased by each. (c) each individual s price elasticity of demand. (d) no additional information. 9) Sarah s demand curve for whiskey has the same slope as Pete s; however, it lies to the right of Pete s. An increase in the price of whiskey will cause (a) Sarah to incur a greater loss of consumer surplus than Pete will. (b) Pete to incur a greater loss of consumer surplus than Sarah will. (c) Sarah and Pete to incur the same loss of consumer surplus. (d) Sarah s demand curve to shift closer to Pete s. 10) Sarah and David both have linear demand curves for lemonade. Sarah s demand curve for lemonade intersects David s demand curve at a price of 50 cents per glass. Sarah s demand curve is more inelastic than David s. A change in the price of lemonade from 50 cents to 25 cents per glass will (a) decrease Sarah s consumer surplus more than David s. (b) decrease David s consumer surplus more than Sarah s. (c) increase Sarah s consumer surplus more than David s. (d) increase David s consumer surplus more than Sarah s. 11) Producer surplus is equal to (a) the area under the supply curve. (b) the difference between price and average cost for all units sold. (c) the difference between price and marginal cost for all units sold. (d) the firm s profit when fixed costs exist. 12) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Jones producer surplus is (a) $5,000. (b) $15,000. (c) $20,000. (d) not able to be calculated from the information given. 3
13) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals (a) 50. (b) 25. (c) 12.50. (d) 10. 14) If a market produces a level of output below the competitive equilibrium, then (a) social welfare is not maximized. (b) consumer surplus might still be maximized. (c) the actual price will be below the equilibrium price. (d) social welfare might still be enhanced if a price ceiling keeps price below the competitive price. 15) A competitive market maximizes social welfare because in a competitive market (a) profits are zero. (b) price equals marginal cost of the last unit produced. (c) price equals average cost of the last unit produced. (d) there is free entry and exit. 16) If a market produces a level of output that exceeds the competitive equilibrium output, then (a) social welfare will be higher. (b) producer surplus will be higher. (c) marginal cost will exceed price. (d) All of the above. 17) If an economist states that not enough of a good is being produced, she usually means that (a) not everyone can afford the good. (b) price exceeds marginal cost. (c) consumer surplus equals zero. (d) at equilibrium, some people who still wish to buy the good cannot find a seller. 18) Deadweight loss occurs when (a) producer surplus is greater than consumer surplus. (b) the maximum level of total welfare is not achieved. (c) consumer surplus is reduced. (d) an inferior good is consumed. 19) The deadweight loss associated with output less than the competitive level can be determined by (a) subtracting the competitive level producer surplus from the producer surplus associated with less output. (b) subtracting the consumer surplus from the producer surplus associated with less output. (c) summing the consumer and producer surplus associated with less output. (d) summing the change in the total consumer and producer surplus from moving from the 4
competitive level of output to less output. 20) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, the loss in social welfare equals (a) b + c. (b) f. (c) a. (d) f + g. 21) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, deadweight loss occurs because (a) consumers place a greater value on the last apartment unit than the cost to supply it. (b) the supplier of the last apartment unit receives a rental price that is less than the marginal cost of supplying it. (c) the quantity of apartments supplied has decreased. (d) All of the above. 22) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, the consumer s net gain in surplus equals (a) c f. (b) b f. (c) d f. (d) Answer cannot be determined from the information given. 23) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer 5
surplus (a) increases. (b) decreases. (c) stays the same. (d) changes in a direction that cannot be determined from the information given. 24) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer surplus decreases by (a) d. (b) b + f. (c) c + g. (d) i. 25) Figure 9.2 shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, producer surplus will be (a) d. (b) d + e. (c) d + g. (d) d + c + g. 26) Figure 9.2 shows supply and demand curves for apartment units in a large city. At the unregulated equilibrium, producer surplus will be (a) d. (b) d + e. (c) d + g. (d) d + c + g. 27) Figure 9.2 shows supply and demand curves for apartment units in a large city. The area e represents (a) the loss in producer surplus if a rent ceiling of $350 is imposed. (b) the total variable cost of supplying Q1 units. (c) the marginal cost of supplying Q1 units. (d) the total revenue received by supplying Q1 units. 28) Figure 9.2 shows supply and demand curves for apartment units in a large city. The area c represents (a) the loss in consumer surplus if a rent ceiling of $350 is imposed. (b) a transfer from producers to consumers if a rent ceiling of $350 is imposed. (c) a transfer from consumers to producers if a rent ceiling of $350 is imposed. (d) the total revenue received by supplying Q1 units. 6