Chapter 9/Applying the Competitive Model
Chapter 9Applying the Competitive Model
MULTIPLE CHOICE
Choose the one alternative that best completes the statement or answers the question.
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.
Answer: D
Diff: 1
Topic: Consumer Welfare
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.
Answer: B
Diff: 1
Topic: Consumer Welfare
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.
Answer: B
Diff: 1
Topic: Consumer Welfare
Figure 9.1
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.
Answer: B
Diff: 1
Topic: Consumer Welfare
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.
Answer: B
Diff: 1
Topic: Consumer Welfare
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.
Answer: B
Diff: 1
Topic: Consumer Welfare
7)If lower-income households spend a greater share of their income on cigarettes than do higher-income 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.
D) cause consumer surplus to decline among smokers, but the relative impact cannot be determined from the given information.
Answer: D
Diff: 2
Topic: Consumer Welfare
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.
Answer: D
Diff: 2
Topic: Consumer Welfare
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.
Answer: A
Diff: 2
Topic: Consumer Welfare
10)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.
Answer: C
Diff: 1
Topic: Producer Welfare
11)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.
Answer: A
Diff: 1
Topic: Producer Welfare
12)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.
Answer: C
Diff: 1
Topic: Producer Welfare
13)In the short run, if a firm operates, it earns a profit of $500. The fixed costs of the firm are $100. This firm has a producer surplus of
A)$500.
B)$100.
C)$400.
D)$600.
Answer: C
Diff: 1
Topic: Producer Surplus
14)Economists claim that measuring society's welfare as CS + PS
A) is inappropriate since ultimately everyone is a consumer.
B) is valid only when the same person could be either a consumer or a producer.
C) treats the gains to consumers and producers equally.
D) is not commonly accepted.
Answer: C
Diff: 1
Topic: Competition Maximizes Welfare
15)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.
Answer: A
Diff: 1
Topic: Competition Maximizes Welfare
16)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.
Answer: B
Diff: 1
Topic: Competition Maximizes Welfare
17)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.
Answer: C
Diff: 1
Topic: Competition Maximizes Welfare
18)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.
Answer: B
Diff: 2
Topic: Competition Maximizes Welfare
19)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.
Answer: B
Diff: 1
Topic: Competition Maximizes Welfare
20)The services of real estate brokers are provided in a competitive market. If the state Board of Realtors enacts several requirements that limit the number of real estate brokers, which of the following is most likely to occur?
A)The supply curve of real estate brokers will shift to the left.
B)The supply curve of real estate brokers will shift to the right.
C)Social welfare will remain unchanged.
D)The supply curve will remain unchanged.
Answer: A
Diff: 1
Topic: Policies that Shift Supply Curves
21)The services of real estate brokers are provided in a competitive market. If the state Board of Realtors enacts several requirements that limit the number of real estate brokers, which of the following is most likely to occur?
A) Consumer surplus will increase.
B) Producer surplus will increase.
C) Entry of new brokers will increase.
D) Social welfare will increase.
Answer: B
Diff: 2
Topic: Policies that Shift Supply Curves
22)The services of real estate brokers are provided in a competitive market. If the state Board of Realtors enacts several requirements that limit the number of real estate brokers, then consumer surplus will most likely
A) increase.
B) decrease.
C) remain unchanged.
D) There is not enough information to answer.
Answer: B
Diff: 1
Topic: Policies that Shift Supply Curves
23)The services of real estate brokers are provided in a competitive market. If the state Board of Realtors enacts several requirements that limit the number of real estate brokers, then social welfare will most likely
A) not change but there will be a transfer from consumer to producer.
B) not change but there will be a transfer from producer to consumer.
C) decrease although producers are made better off.
D) decrease although consumers are made better off.
Answer: C
Diff: 1
Topic: Policies that Shift Supply Curves
Figure 9.2
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, the loss in social welfare equals
A) b + c.
B) f.
C) a.
D) f + g.
Answer: D
Diff: 1
Topic: Policies that Create a Wedge
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, 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.
Answer: A
Diff: 1
Topic: Policies that Create a Wedge
26)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.
Answer: A
Diff: 1
Topic: Policies that Create a Wedge
27)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
A) increases.
B) decreases.
C) stays the same.
D) changes in a direction that cannot be determined from the information given.
Answer: B
Diff: 1
Topic: Policies that Create a Wedge
28)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.
Answer: C
Diff: 1
Topic: Policies that Create a Wedge
29)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.
Answer: A
Diff: 1
Topic: Policies that Create a Wedge
30)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.
Answer: D
Diff: 1
Topic: Policies that Create a Wedge
31)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.
Answer: B
Diff: 1
Topic: Policies that Create a Wedge
32)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.
Answer: B
Diff: 1
Topic: Policies that Create a Wedge
Figure 9.3
33)Figure 9.3 shows supply and demand curves for milk. In an effort to help farmers, the government passes a law that establishes a $3 per gallon price support. To maintain the price support, government expenditures must equal
A) k + i.
B) f + g + h + i + j.
C) f + g + h + i + j + k.
D) f + g + h + i + j + k + e.
Answer: C
Diff: 1
Topic: Policies that Create a Wedge
34)Figure 9.3 shows supply and demand curves for milk. In an effort to help farmers, the government passes a law that establishes a $3 per gallon price support. To maintain the price support, government must purchase
A) Q1 gallons.
B) Q2 gallons.
C) Q1-Q2 gallons.
D) Q2-Q1 gallons.
Answer: D
Diff: 1
Topic: Policies that Create a Wedge
35)Figure 9.3 shows supply and demand curves for milk. In an effort to help farmers, the government passes a law that establishes a $3 per gallon price support. As a result, consumer surplus falls by
A) a.
B) b + f.
C) f + g.
D) b + f - c.
Answer: B
Diff: 1
Topic: Policies that Create a Wedge
36)Figure 9.3 shows supply and demand curves for milk. In an effort to help farmers, the government passes a law that establishes a $3 per gallon price support. The loss in social welfare resulting from this price support equals
A) k + i.
B) j.
C) [$3 * (Q2- Q1)] - h.
D) $3 * k.
Answer: C
Diff: 1
Topic: Policies that Create a Wedge
37)Figure 9.3 shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the loss in social welfare will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: B
Diff: 1
Topic: Policies that Create a Wedge
38)Figure 9.3 shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the loss in consumer surplus will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: C
Diff: 1
Topic: Policies that Create a Wedge
39)Figure 9.3 shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the loss in producer surplus will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: D
Diff: 1
Topic: Policies that Create a Wedge
40)Figure 9.3 shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the tax revenue is
A)$2 * Q1.
B)$2 * Q2.
C)$2 *(Q2 - Q1).
D)$2.
Answer: A
Diff: 1
Topic: Policies that Create a Wedge
Figure 9.4
41)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. If imported rice is banned, the loss in social welfare is
A) a + b + c + d + e.
B) a.
C) c + e.
D) a + c + d + e.
Answer: D
Diff: 1
Topic: Comparing Both Types of Policies
42)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. If a $1 tariff is imposed on imported rice, the loss in social welfare is
A) b + c + d + e.
B) a.
C) c + e.
D) a + c + d + e.
Answer: C
Diff: 1
Topic: Comparing Both Types of Policies
43)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. If a $1 per unit tariff is imposed on imported rice, the quantity of imported rice will decrease by
A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.
Answer: B
Diff: 2
Topic: Comparing Both Types of Policies
44)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. An import quota of 30 units would
A) cause consumer surplus to fall by "e".
B) cause social welfare to fall by $30.
C) increase producer surplus by "d".
D) have no effect.
Answer: D
Diff: 2
Topic: Comparing Both Types of Policies
45)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. The smallest tariff necessary to completely eliminate imported rice is
A) $1 per unit.
B) $2 per unit.
C) $3 per unit.
D) $4 per unit.
Answer: B
Diff: 2
Topic: Comparing Both Types of Policies
46)Figure 9.4 shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. A $1 per unit tariff has the same effect on producer and consumer surplus as a quota of
A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.
Answer: A
Diff: 2
Topic: Comparing Both Types of Policies
47)Tariffs and quotas create a loss in social welfare because
A) producer surplus declines.
B) revenues from tariffs are misspent.
C) consumer surplus declines.
D) All of the above.
Answer: C
Diff: 1
Topic: Comparing Both Types of Policies
48)The welfare loss from an import quota is greater than that of an equivalent tariff because
A) tariff revenues can be used to society's benefit.
B) the loss in consumer surplus is not as large.
C) domestic producers gain more from a quota than from a tariff.
D) tariff revenues represent an additional deadweight loss.
Answer: A
Diff: 1
Topic: Comparing Both Types of Policies
49)The cost of lobbying for an import quota in a perfectly competitive market
A)increases the welfare loss of the quota.
B)decreases the deadweight loss of the quota.
C)shifts the supply curve of the good to the left.
D)increases the consumer surplus.
Answer: A
Diff: 1
Topic: Comparing Both Types of Policies
TRUE/FALSE/EXPLAIN QUESTIONS
1)Consumer surplus from a given purchase is the difference between what one was willing to pay for that purchase and what was actually paid.
Answer: True. This is the definition of consumer surplus.
Diff: 1
Topic: Consumer Welfare
2)Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any given price increase.
Answer: False. Consumers who are more sensitive to the price increase will reduce their purchase of the good by a greater extent than those who are not price sensitive. As a result, they incur a smaller loss of consumer surplus.
Diff: 2
Topic: Consumer Welfare
3)Producer surplus is the sum of the profits earned by all firms in a market.
Answer: False. This definition ignores fixed costs. Producer surplus minus fixed costs equals profits.
Diff: 1
Topic: Producer Welfare
4)As the quantity produced of a good increases, the social welfare generated by that good increases.
Answer: False. This only takes consumer surplus into account. Beyond the competitive equilibrium, additional units of output have less value than the cost to make them. Thus, beyond the competitive equilibrium, social welfare declines as the quantity of a good increases.
Diff: 1
Topic: Competition Maximizes Welfare
5)Policies that restrict supply could generate an increase in social welfare because the increase in producer surplus could exceed the decrease in consumer surplus.