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ECON 2133: Test 2
Welfare Economics
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The study of how the allocation of resources affects the economic wellbeing
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Consumers Surplus
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Measures the benefits to buyers; A buyers willingness to pay minus their actual amount they paid
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The Seller's cost of producing a good is derived from the
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supply curve
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Producer Surplus
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Measure of benefits to sellers; The amount a seller is paid for a good minus the seller's cost; The area above a supply curve but below the price
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Willingness to Pay
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Maximum amount that a buyer will pay for a good
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The price on the demand curve indicates
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The willingness to pay of the marginal buyer
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Welfare economics is the study of the welfare system (T/F)
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False; it is the study of how the allocation of resources affects economic wellbeing
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The equilibrium of supply and demand in a market maximizes the total benefits received by the buyers and sellers (T/F)
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TRUE
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Consumer surplus is the amount a buyer has to pay for a good minus the amount that they are willing to pay for it. (T/F)
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False; It is the amount they are willing to pay minus the amount that they actually paid
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Joel has a 1966 mustang, which he sells to susie, an avid car collector. Susie is pleased that she paid $8,000 for the car, but she was willing to pay $11,000. Susie's consumer surplus is $2,000 (T/F)
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False; her consumer surplus is $3,000
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For any given quantity, the price on the demand curve represents the marginal buyers willingness to pay. (T/F)
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TRUE
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The area above the demand curve and below the price measures the consumer surplus in the market. (T/F)
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False; to be above the demand curve you would have to be forced to buy the products. It is below the demand curve and above the price of consumer surplus
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Consumer surplus measures the benefit of buyers for participating in the market (T/F)
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TRUE
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Cost
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The value of everything that a seller must give up to produce a good.
Price on the supply curve is the willingness to sell for the
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Price on the supply curve is the willingness to sell for the
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Marginal Seller; Therefore we can use a supply curve to measure consumer surplus
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Each seller of a product is wiling to sell as long as the price he or she can receive is greater than the opportunity cost of providing the product (T/F)
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True dat
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In a competitive market, sales go to the producers who are willing to sell a product at the lowest price. (T/F)
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TRUE
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Producer surplus is the amount a seller paid minus the cost of production (T/F)
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TRUE
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Connie can clean windows in large office buildings at a cost of 1$ per window. The market price for cleaning windows is 3$ per window. If connie cleans 100 windows her producer surplus is $100.
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false; it would be $200
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At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller. (T/F)
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False; This is the marginal Seller
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The area below the price and above the supply curve measures the producer surplus in a market (T/F)
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True; everything above the cost is producer surplus
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When market price increases, producer surplus increases because (1) producer surplus received by sellers increases, and and (2) new sellers enter the market (T/F)
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TRUE
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Total surplus
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... |
Efficiency
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allocation that maximizes total surplus
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Equity
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Fair distribution of well-being in society
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What is the cost to sellers?
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Social Cost
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What is the value to buyers?
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Social benefit
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Benevolent Planner
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Works to maximize total surplus MB> MC; pushes to the equilibrium; Max total surplus is at Market Eq
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Smaller than the market quantity
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The value of a product is greater than the cost to sellers ; total surplus would rise if output increases
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Greater than the equilibrium quantity
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The value of a product to buyers is less than the cost to sellers; total surplus would rise if output decreases
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What does a free market lead to?
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during proper operations it will lead to a max in total surplus
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Principal #6
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Markets are a good way to organize economic activity
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Total surplus in a market is consumer surplus minus producer surplus (T/F)
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False; Total surplus is consumer surplus plus producer surplus
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Total surplus = value to buyers - the cost to sellers (T/F)
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True; it is also consumer surplus + Producer surplus
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Efficiency refers to weather a market price is fair, while equity refers to weather the maximum amount of output was produced from a given number of inputs (T/F)
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False; equity refers to weather the market is fair
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Efficiency is related to the size of the economic pie while equity is related to how that pie is divvied up. (T/F)
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TRUE
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Total surplus in a market can be measured as the area below the supply curve and as the area above the demand curve (T/F)
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False; Total surplus is the area above the supply curve and below the demand curve
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Free markets (1) allocate the supply of goods to buyers who value them the most highly and (2) the demand for the goods of the sellers who can produce them at the least cost (T/F)
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TRUE
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Even though participants in an economy are motivated by self-interest, the "invisible hand" of the market place guides this interest into promoting economic wellbeing (T/F)
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TRUE
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Markets are efficient if
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They are perfectly competitive, there is no market failures, there is no externalities; Market equilibrium cannot exist in the above situations
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How can you attempt to remedy market failures
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with public policy
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In order for the market outcomes to maximize the total benefits to buyers and sellers, the markets must be perfectly competitive (T/F)
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True; Max of benefits = efficiency
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When markets fail, public policy can potentially remedy the problem and increase the economic efficiency (T/F)
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true
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Deadweight Loss
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a decrease in both consumer surplus and producer surplus due to an inefficient level of production; an area "cut" from total surplus
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Inefficiency
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A market outcome with less than the maximum total surplus
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Leads to market failure
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Monopoly (One firm) , Public Goods (goods consumed by everyone) , externalities (external costs/benefits)
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Government policy leading to inefficiency
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Taxes, Subsidies (payment to producers), Quotas (Production limits), Price ceilings (High guaranteed price), Price floors (Low price guaranteed ex. minimum wage)
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Underproduction
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Less is traded than the market equilibrium; this is an effect of market failure
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Overproduction
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More is traded than the market equilibrium; this is an effect of market failure
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When there is deadweight loss we can be certain that the entire society experiences a loss (T/F)
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TRUE
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When demand is equal to supply deadweight loss is maximized (T/F)
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False; It is minimized when Demand is = Supply
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Underproduction is caused by an increase in price (T/F)
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False; it is created by market failure or gov't policy
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Market is efficient when there is neither overproduction or underproduction because there is no deadweight loss (T/F)
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TRUE
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Welfare economics is the study of the well-being of the less fortunate (T/F)
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FALSE
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With respect to welfare economics, the equilibrium price of a product is considered to be the best price because it maximizes total revenue to firms and total revenue to buyers (T/F)
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FALSE
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Willingness to pay measures the amount a buyers is willing to pay for a good minus the amount that they actually pay (T/F)
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FALSE
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Consumer surplus is a buyers willingness to pay minus the price (T/F)
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TRUE
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A consumers willingness to pay measures the cost of a good to the buyer (T/F)
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FALSE
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If a consumer is willing and able to pay $20 and has to pay $14. The consumer surplus is 6$ (T/F)
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TRUE
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Belva is willing to pay $65 for shoes for a formal dance. She finds a pair at her favorite outlet sore for $48. Her consumer surplus is $17 (T/F)
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TRUE
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Shannon buys a new CD player for her car for $135. She receives a consumer surplus of 25$ on the purchase. Her willingness to pay is $25 (T/F)
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FALSE
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Janine would be willing to pay $50 to see Les Mis, but buys tickets for only $30. Janine values the performance at only $30. (T/F)
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FALSE
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Amy buys a new dog for $150. She receives a consumer surplus of $100 on her purchase. Her willingness to pay is $50. (T/F)
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FALSE
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If the price a consumer pays for a product is equal to a consumer's willingness to pay, than the consumer surplus of that purchase would be zero (T/F)
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TRUE
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Suppose an early freeze in California ruins the lemon crop. Consumer surplus for lemons in the market would decrease (T/F).
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TRUE
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If you pay a price exactly equal to your willingness to pay, than your consumer surplus is negative
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FALSE
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A demand curve measures the buyers willingness to pay (T/F)
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TRUE
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Consumer surplus equals the value to buyers - the amount paid by buyers (T/F)
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TRUE
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The area below a demand curve and above a price measures producer surplus. (T/F)
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FALSE
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If the price of a good increases, consumer surplus decreases (T/F)
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TRUE
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When technology improves, the ice cream industry, consumer surplus will increase (T/F)
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TRUE
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In most markets, consumer surplus reflects economic well-being. (False)
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TRUE
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Out of pocket expenses plus the value of a seller's own resources used in production are considered to be a sellers total revenue (T/F)
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FALSE
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Cost is a measure of a sellers willingness to sell (T/F)
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TRUE
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Cost refers to the seller's producer surplus (T/F)
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FALSE
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A supply curve can be used to measure producer surplus because it reflects the actions of sellers (T/F)
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FALSE
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A seller would be willing to sell a product ONLY IF the price received is less than the cost of production. (T/F)
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FALSE
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Consumer surplus could be represented as the area above the price but below the demand curve (T/F)
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TRUE
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Producer surplus is represented by the area below the price but above the supply (T/F)
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TRUE
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Total surplus is represented by adding consumer surplus and producer surplus. The area above the price and to the demand (Consumer surplus) and the area below the price to the supply curve (Producer surplus) (T/F)
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TRUE
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Suppose the demand for nachos increases, the producer surplus for nachos would increase (T/F)
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TRUE
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If demand decreases, the price of a product, as well as producer surplus, increases (T/F)
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FALSE
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The surgeon general announces that eating chocolate increases tooth decay. As a result, the equilibrium price for chocolate increases, and producer surplus increases (T/F)
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FALSE
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Suppose consumer surplus increases. If grass seed is a normal good, the equilibrium price of grass seed will decrease, the producer surplus in the industry will increase. (T/F)
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FALSE
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Producer surplus equals value to buyers - the amount paid by buyers (T/F)
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FALSE
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Producer surplus is the area under the supply curve and to the left of the amount sold (T/F)
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FALSE
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The marginal seller is the seller who cannot compete with other sellers in the market place (T/F)
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FALSE
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When a price is raised from p1 to p2 the small triangle alone the supply curve represents the new producers entering the market due to the price rise (T/F)
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TRUE
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Producer surplus measures the well being of producers (T/F)
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TRUE
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Denea produces cookies. Her production cost is 3$ a dozen. She sells the cookies for 8$ a dozen. Her producer surplus is $3 per dozen. (T/F)
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FALSE
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Donald produces nails at a cost of $200 per ton. If he sells the nails for $500 per ton, his producer surplus is $200 per ton. (T/F)
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FALSE
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If Roberta sells a shirt for $30, and her producer surplus from the sale is 21$. Her cost must have been 51$. (T/F)
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FALSE
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At Nick's bakery, the cost to make his homemade chocolate cake is 3$ per cake. He sells 3 and receives a total producer surplus of 21$. Nick must be selling his cakes for 2$ each (T/F)
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FALSE
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We can say that the allocation of resources is efficient if producer surplus is maximized. (T/F)
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FALSE
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Total surplus = Value to sellers - cost to sellers .... this is NOT correct (T/F)
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TRUE
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Total surplus in a market is the total costs to sellers of providing the goods less the total value to buyers of the good (T/F)
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FALSE
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In a market, total surplus is equal to producer surplus plus consumer surplus (T/F)
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TRUE
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Total surplus in a market is represented by the total area under the demand curve and above the price (T/F)
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False; that is the consumer surplus
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At the equilibrium price, the good will be purchased by the buyers the good more than the price (T/F)
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TRUE
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Total surplus in a market equals value to buyers - amount paid by the buyers (T/F)
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FALSE
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Total surplus in a market equals consumer surplus + producer surplus (T/F)
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TRUE
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An allocation of resources is said to be inefficient if a good is not being produced by the sellers with the lowest cost (T/F)
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TRUE
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When economists say that markets are inefficient, they are assuming that markets are perfectly competitive (T/F)
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TRUE
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Inefficiency exists in any economy when a good is not being consumed by buyers who value it most highly (T/F)
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TRUE
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The "invisible hand" refers to the marketplace guiding the self-interests of market participants into promoting general economic wellbeing (T/F)
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TRUE
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Externalities are side effects based passed on to a party other than the buyers and sellers in a market. (T/F)
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TRUE
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When markets fail, public policy can do nothing to improve the situation (T/F)
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FALSE
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If a market is allowed to move freely to its equilibrium price and quantity, than an increase in supply will increase consumer surplus (T/F)
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TRUE
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For the most part, all government, federal, state, and local, rely on taxes to raise revenue for for public purposes (T/F)
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TRUE
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The term tax incidence refers to the Boston tea party (T/F)
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FALSE
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The initial effect of a tax on the buyers of a good is on the supply of that good (T/F)
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FALSE
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If a tax is imposed on a buyer, the demand curve would be shifted down by the amount of the tax (T/F)
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TRUE
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If buyers are asked to pay at $.10 tax per bag of Hershey kisses, the demand for the Kisses will shift up by $.10 per bag (T/F)
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FALSE
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A tax on the buyers of popcorn increases the size of the popcorn market (T/F)
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FALSE
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For the most part, buyers and sellers both share the burden of a tax (T/F)
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TRUE
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When a tax is placed on the buyer of milk, the size of the milk market is reduced (T/F)
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TRUE
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A tax placed on the seller of a product will raise equilibrium price and lower equilibrium quantity (T/F)
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TRUE
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A tax placed on the seller of a good raises the price buyers pay and lowers the price sellers receive (T/F)
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TRUE
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When a tax is placed on sellers, the size of the market decreases. (T/F)
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TRUE
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A tax on the sellers of cell phones will reduce the size of the cell phone market (T/F)
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TRUE
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A tax placed on the sellers of blueberries increases costs, lowers profit and shifts supply to the left (upward) (T/F)
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TRUE
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In the end, tax incidence depends on the legislated burden (T/F)
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FALSE
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If a tax is imposed on a market with inelastic demand and elastic supply, buyers will burden most of the tax (T/F)
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TRUE
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Buyers of a product will pay the majority of a tax when supply is more elastic than demand (T/F)
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TRUE
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If a tax is imposed on a market with elastic demand and inelastic supply, buyers will bear most of the tax burden (T/F)
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FALSE
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For the most part, tax burden lies more heavily on the side of the tax market that is more inelastic (T/F)
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TRUE
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The burden of tax placed on a product relies heavily on the supply and demand of that product. (T/F)
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TRUE
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Suppose that a tax is placed on DVDs. If the seller ends up paying the majority of the tax, we know that the demand curve is more inelastic than the supply curve (T/F)
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FALSE
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Suppose that a tax is placed on books. If the buyer pays the majority of the tax, we know that the supply curve is more inelastic than the demand curve. (T/F)
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FALSE
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When analyzing the economic effects of government policies, supply and demand are useful tools for analysis (T/F)
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TRUE
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Tax incidince
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How the burden of taxes are shared
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If buyers experience higher prices, then....
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Consumer surplus must go down
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Sellers experience lower prices, than...
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Producer surplus must go down
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Economists use the term tax incidence to refer to who is legally responsible for paying tax (T/F)
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False; it is for who shares the taxes
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If buyers of a product are required to pay a tax, the demand curve for the product will shift downward by exactly the price of the tax (T/F)
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TRUE
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A government imposed tax on a market shrinks the size of the market. (T/F)
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True; quantity delivered is lowered
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A tax on a golf club will cause the equilibrium market price of golf clubs to increase, and the equilibrium quantity sold to decrease (T/F)
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TRUE
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If a tax is imposed on a buyer of a product, the tax incidence will fall entirely on the buyer, causing the buyer to pay more (T/F)
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False; both buyers and sellers pay part of the price
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A tax on sellers shifts the supply curve upward by exactly the size of a tax (T/F)
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TRUE
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The incidence of a tax depends on weather the tax is levied on buyers or sellers. (T/F)
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FALSE
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Lawmakers can decide weather the buyer or the seller must send a tax to the government, but they cannot legislate the true burden of the tax (T/F)
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TRUE
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In general, a tax burden falls more heavily on the side of the market that is more elastic (T/F)
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True; Inelastic = stuck/not flexible
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Economic policies often have effects that their architects did not intend or anticipate (T/F)
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TRUE
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Policymakers uses taxes both to raise revenue for public purposes and to influence market outcomes (T/F)
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TRUE
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