Consumer Surplus, Producer Surplus and Market Efficiency
Chapter 3A
Consumer Surplus, Producer Surplus and Market Efficiency
1. Consumer surplus measures the value between the price consumers are willing to pay and the
a. producer surplus price.
b. deadweight gain price.
c. actual price paid.
d. preference price.
ANS
a. Incorrect. Consumer surplus is the value between the demand curve and the equilibrium price actually paid.
b. Incorrect. This is a meaningless term.
c. Correct. Consumer surplus is the value between the demand curve and the equilibrium price actually paid.
d. Incorrect. This is a meaningless term.
2. If Sam is willing to pay $50 for one good X, $30 for a second, $20 for a third, $8 for a fourth, and the market price is $10, then Sam’s consumer surplus is
a. $10.
b. $40.
c. $70.
d. $100.
ANS
a. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10), which equals $70. The fourth unit is ignored because the consumer benefits less than the price and it will not be purchased.
b. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10), which equals $70. The fourth unit is ignored because the consumer benefits less than the price and it will not be purchased.
c. Correct. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10), which equals $70. The fourth unit is ignored because the consumer benefits less than the price and it will not be purchased.
d. Incorrect. The consumer surplus equals ($50 - $10) plus ($30 - $10) plus ($20 - $10), which equals $70. The fourth unit is ignored because the consumer benefits less than the price and it will not be purchased.
3. Suppose Tucker Inc. is willing to sell one gizmo for $10, a second gizmo for $15, a third for $20, and the market price is $25. What is Tucker Inc.’s producer surplus?
a. $10
b. $15
c. $30
d. $50
ANS
a. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20), which equals $30.
b. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20), which equals $30.
c. Correct. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20), which equals $30.
d. Incorrect. The producer surplus equals ($25 - $10) plus ($25 - $15) plus ($25 - $20), which equals $30.
4. In an efficient market, deadweight loss is
a. maximum
b. minimum
c. constant
d. zero
ANS
a. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
b. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
c. Incorrect. In equilibrium, there is no net loss of either consumer or producer surplus.
d. Correct. In equilibrium, there is no net loss of either consumer or producer surplus.
5. Deadweight loss results from
a. equilibrium.
b. underproduction.
c. overproduction.
d. none of the above are correct.
e. either b or c.
ANS
a. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.
b. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.
c. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.
d. Incorrect. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.
e. Correct. In equilibrium, the quantity demanded equals the quantity supplied and there is no deadweight loss.
6. Deadweight loss is the net loss of
a. consumer surplus.
b. producer surplus.
c. disequilibrium surplus.
d. both a. and b.
ANS
a. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer surplus.
b. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer surplus.
c. Incorrect. Deadweight loss is the net loss of both consumer surplus and producer surplus.
d. Correct. Deadweight loss is the net loss of both consumer surplus and producer surplus.
7. If the quantity supplied exceeds the quantity demanded in a market, then the result is which of the following?
a. Deadweight loss
b. Inefficiency
c. Overproduction
d. Each of the answers is true.
ANS
a. Incorrect. Each answer is correct.
b. Incorrect. Each answer is correct.
c. Incorrect. Each answer is correct.
d. Correct. Each answer is correct.
8. Suppose a consumer is willing to pay $20 for one good X, $10 for a second, and $5 for a third, and the market price is $4.The consumer surplus is
a.$16.
b.$6.
c.$1.
d.$23.
ANS
a. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which equals $23.
b. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which equals $23.
c. Incorrect. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which equals $23.
d. Correct. The consumer surplus equals ($20 - $4) plus ($10 - $4) plus ($5 - $4), which equals $23.
9.Producer surplus measures the value between the actual selling price and the
a.price sellers are willing to sell the product.
b.deadweight loss price.
c.lowest price sellers are willing to sell the product.
d.profit-maximization price.
ANS
a. Correct. Consumer surplus is the total area under the market demand curve and about the equilibrium price.
b. Incorrect. This is a meaningless term.
c. Incorrect. The supply curve represents the lowest price sellers are willing to sell various quantities of a product.
d. Incorrect. Consumer surplus is a total area concept and not a given price.
10.Suppose seller X is willing to sell one good X for $5, a second good X for $10, a third for $16, a fourth for $25, and the market price is $20. What is seller X’s producer surplus?
a.$15
b.$20
c.$22
d.$29
ANS
a. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16), which equals $29. The fourth unit is ignored because the seller’s willingness to sell this unit is above the market price.
b. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16), which equals $29. The fourth unit is ignored because the seller’s willingness to sell this unit is above the market price.
c. Incorrect. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16), which equals $29. The fourth unit is ignored because the seller’s willingness to sell this unit is above the market price.
d. Correct. The producer surplus equals ($20 - $5) plus ($20 - $10) plus ($20 - $16), which equals $29. The fourth unit is ignored because the seller’s willingness to sell this unit is above the market price.
11.Deadweight loss is the result of
a.disequilibrium.
b.underproduction.
c.overproduction.
d.all of the above are correct.
ANS
a. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor overproduction exists.
b. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor overproduction exists.
c. Incorrect. At equilibrium there is no deadweight loss and neither underproduction nor overproduction exists.
d. Correct. Each of the answers is correct.
12.Deadweight loss is computed as the net of
a. consumer surplus minus producer surplus.
b. disequilibrium surplus plus consumer surplus.
c. producer surplus minus disequilibrium surplus.
d. consumer surplus plus producer surplus.
ANS
a. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an inefficient market.
b. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an inefficient market.
c. Incorrect. Deadweight loss is the net loss of both consumer and producer surplus for an inefficient market.
d. Correct. Deadweight loss is the net loss of both consumer and producer surplus for an inefficient market.
13.Deadweight loss is not the result of
a.an efficient market.
b.an inefficient market.
c.zero consumer surplus.
d.zero producer surplus.
ANS
a. Correct. Deadweight loss results from an inefficient market in which underproduction or overproduction occurs.
b. Incorrect. Deadweight loss results from an inefficient market in which underproduction or overproduction occurs.
c. Incorrect. At equilibrium, deadweight loss is zero and not consumer or producer surplus.
d. Incorrect. At equilibrium, deadweight loss is zero and not consumer or producer surplus.
14.At the equilibrium price, deadweight loss is
a.minimized.
b.zero.
c.maximized.
d.equal to the equilibrium price multiplied by the quantity exchanged.
ANS
a. Incorrect. In equilibrium, deadweight loss does not exist and the total of consumer and producer surplus is maximum.
b. Correct. In equilibrium, deadweight loss does not exist and the total of consumer and producer surplus is maximum.
c. Incorrect. In equilibrium, deadweight loss does not exist and the total of consumer and producer surplus is maximum.
d. Incorrect. The price times quantity demanded equals total revenue and not the loss of consumer and producer surplus.
15. If the quantity supplied exceeds the quantity demanded in a market, then the result is which of the following?
a. Deadweight loss
b. Inefficiency
c. Overproduction
d. None of the above answers are correct.
ANS
a. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
b. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
c. Incorrect. Only at equilibrium does efficiency and no deadweight loss occur.
d. Correct. Only at equilibrium does efficiency and no deadweight loss occur.
Exhibit A.7 Comparison of Market Efficiency and Deadweight Loss
16. As shown in Exhibit A.7, if the market is in equilibrium, then ______represents consumer surplus.
a. ABEC
b. AED
c. EGH
d. BEF
ANS
a. Correct. Consumers pay $2.00 per pound, but they would be willing to pay higher prices along the demand curve to point E.
b. Incorrect. This is total surplus.
c. Incorrect. This is deadweight loss.
d. Incorrect. This is deadweight loss.
17. As shown in Exhibit A.7, if the market is in equilibrium, then ______represents producer surplus.
a. ADFB
b. CEFD
c. EGH
d. BEF
ANS
a. Incorrect. This is meaningless.
b. Correct. Producers sell for $2.00 per pound, but they would be willing to sell for lower prices along the supply curve to point E.
c. Incorrect. This is deadweight loss.
d. Incorrect. This is deadweight loss.
18.As shown in Exhibit A.7, if the quantity supplied is 2 million pounds of ground beef per year, the result is
a. deadweight loss.
b. inefficiency.
c. underproduction.
d. all of the above are true.
e. none of the above are true.
ANS
a. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
b. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
c. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
d. Correct. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
e. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
19. As shown in Exhibit A.7, if the quantity supplied is 6 million pounds of ground beef per year, the result is
a. deadweight loss.
b. inefficiency.
c. overproduction.
d. all of the above are true.
e. none of the above are true.
ANS
a. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
b. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
c. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
d. Correct. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
e. Incorrect. Only at 4 million pounds of ground beef per year is there no deadweight loss or inefficiency.
20. As shown in Exhibit A.7, if the quantity supplied is 2 million pounds of ground beef per year, the result is a deadweight loss represented by area
a. ABEC.
b. CEFD.
c. EGH.
d. BEF.
ANS
a. Incorrect. This is consumer surplus.
b. Incorrect. This is producer surplus.
c. Incorrect. This is deadweight loss caused by overproduction.
d. Correct. This is deadweight loss caused by underproduction.
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