Test Bank for Macroeconomics in Modules, 4th Edition, Paul Krugman Robin Wells

Test Bank for Macroeconomics in Modules, 4th

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Module 9 - Efficiency and Markets

Multiple Choice

1. (Ref 9-1 Figure: Wireless Mouse Market) Use the graph to calculate consumer surplus when the market is at
equilibrium.
a. $4,000
b. $5,000
c. $2,000
d. $3,000
ANSWER: c

2. (Ref 9-2 Figure: The Market for Hamburgers) The figure The Market for Hamburgers shows the weekly
market for hamburgers in Irvine, Kentucky. If the price of a hamburger is $1 and 200 hamburgers are supplied,
producer surplus will equal:
a. $60.
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b. $65.
c. $50.
d. $360.
ANSWER: c

3. (Ref 9-2 Figure: The Market for Hamburgers) The figure The Market for Hamburgers shows the weekly
market for hamburgers in Irvine, Kentucky. If 400 hamburgers are sold, producer surplus will equal:
a. $650.
b. $400.
c. $510.
d. $200.
ANSWER: d

4. (Ref 9-2 Figure: The Market for Hamburgers) The figure The Market for Hamburgers shows the weekly
market for hamburgers in Irvine, Kentucky. If the price of burgers falls from $1.50 to $1.00, there is a loss in
producer surplus. How much of the loss accrues as a direct result of the hamburgers that are no longer supplied
in the market?
a. $50
b. $45
c. $75
d. $90
ANSWER: a

5. Total surplus is:

a. the difference between price and the cost to the seller.
b. the sum of consumer and producer surplus.
c. equal to the area below the demand curve.
d. always more for consumers than producers.
ANSWER: b

6. Maximum total surplus in the market for chocolate occurs when:

a. total net gain to producers is minimized.
b. all consumers who value chocolate can buy chocolate.
c. all producers can sell their chocolate.
d. the market is in equilibrium.
ANSWER: d

7. The total surplus in a market is the:

a. excess supply due to a price above the equilibrium price.
b. surplus that accrues when a good is not scarce, defined as the total amount (if any) by which quantity
supplied exceeds quantity demanded at a zero price.
c. net benefit to consumers, defined as the excess of consumer surplus over producer surplus.
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d. sum of consumer surplus and producer surplus.

ANSWER: d

8. Look at the figure Gain in Producer Surplus. Which areas represent producer surplus when the price is equal
to P2?
a. D, E, and F
b. B and C
c. D and E
d. A, B, and C
ANSWER: a

9. (Ref 9-4 Figure: The Market for Hamburgers) Look at the figure The Market for Hamburgers. The maximum
total surplus for the market is _____, and it occurs at a price equal to _____.
a. $550; $1.50
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b. $600; $1.50
c. $1,050; $2
d. Not enough information is provided to answer this question, since the maximum total surplus could
occur anywhere.
ANSWER: b

10. Suppose you pay $10 to see Ryan Reynolds in his next movie. Suppose Mr. Reynolds receives $31 million
to work in this movie. This means that:
a. you would have been better off being more self-reliant in the movie market.
b. Ryan Reynolds received a producer surplus of $31 million.
c. you received a consumer surplus of $10.
d. you and Ryan Reynolds benefited from this transaction.
ANSWER: d

11. Total surplus is:

a. the difference between the price and the cost to the seller.
b. the sum of consumer surplus and producer surplus.
c. equal to the area below the demand curve.
d. always more for consumers than for producers.
ANSWER: b

12. Alex is willing to buy the last ticket to the Billy Bragg concert for $15, while Jake is willing to pay $25.
Alex is first in line and buys a ticket for $15. He then resells his ticket to Jake for $20. By reselling the ticket
instead of going to the concert himself, Alex caused:
a. the sum of the consumer and producer surplus to increase.
b. the sum of the consumer and producer surplus to decrease.
c. a deadweight loss of $5.
d. consumer surplus to decrease and producer surplus to increase.
ANSWER: a

13. Suppose the equilibrium rent for apartments in Boston is $1,600. If the city of Boston imposes a price
ceiling of $1,200, there will be a(n):
a. increase in producer surplus for each landlord.
b. surplus of new apartments in Boston.
c. increase in consumer surplus for Bostonians who can find apartments for $1,200.
d. increase in total surplus.
ANSWER: c

14. When a market is in equilibrium and there is no outside intervention to change the equilibrium price:
a. total surplus is minimized.
b. inefficiency is maximized.
c. no mutually beneficial trades are missed.
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d. some mutually beneficial trades may be missed.

ANSWER: c

15. If the market for grapefruit is in equilibrium without any outside intervention to change the equilibrium
price:
a. total surplus is minimized.
b. there is some deadweight loss.
c. a few mutually beneficial trades are missed.
d. consumer and producer surplus are maximized.
ANSWER: d

16. A competitive market for cell phone chargers is in equilibrium. If the price temporarily falls below the
equilibrium price:
a. producer surplus will rise.
b. producer surplus will fall.
c. the change in producer surplus is indeterminate.
d. there will be no change in producer surplus.
ANSWER: b

17. When a market is efficient:

a. there is no way to make some people better off without making other people worse off.
b. consumers who value buying a good the least are the ones who can purchase the good.
c. producers whose willingness to accept a price above the market price can sell their good.
d. there are ways to make everyone better off.
ANSWER: a

18. If the government intervened in the market by lowering the price of a good below the equilibrium price,
which scenario would NOT occur?
a. Some consumers would receive an increase in consumer surplus.
b. Producers would likely lose some producer surplus.
c. The outcome would be efficient.
d. Total surplus would be lower.
ANSWER: c

19. Which factor is key in the effectiveness of well-functioning markets?

a. outcomes that are equitable for consumers and producers
b. the role of the government to deliver economic signals to consumers and producers
c. a significant degree of government intervention to maximize efficiency
d. your right to use and dispose of your private property as you see fit
ANSWER: d

20. Property rights are an important feature of an effective market because they:
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a. lead to the development of government control over prices.

b. prevent harm to the environment from pollution.
c. give owners of goods and services the right to use and dispose of those goods and services as they
choose.
d. are the basis for an equitable tax system.
ANSWER: c

21. The lack of property rights and inaccuracy of prices as economic signals often lead to:
a. too much competition in markets.
b. an increase in consumer surplus and a decrease in producer surplus.
c. an increase in total surplus.
d. market failure.
ANSWER: d

22. Market failure refers to a situation in which:

a. markets fail to reach a fair outcome.
b. markets establish a high price for necessities.
c. market-determined wages are not high enough to raise all workers above the poverty line.
d. markets fail to reach an efficient outcome.
ANSWER: d

23. A factor that is not a possible reason for market failure is:
a. firms having too much market power.
b. externalities.
c. public goods.
d. extremely high prices for medical care.
ANSWER: d

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24. (Ref 9-5 Figure: Gain in Consumer Surplus) Refer to Figure 9-5: Gain in Consumer Surplus. Identify the
area or areas that represent the gain in consumer surplus to consumers already participating in the market when
the price falls from P1 to P2.
a. A and B
b. B
c. B and C
d. C
ANSWER: b

25. (Ref 9-5 Figure: Gain in Consumer Surplus) Refer to Figure 9-5: Gain in Consumer Surplus. Identify the
area or areas that represent the total change in consumer surplus when the price falls from P1 to P2.
a. A and B
b. B and C
c. D and E
d. A, B, and C
ANSWER: b

26. (Ref 9-6 Figure: Wireless Mouse Market) Refer to Figure 9-6: Wireless Mouse Market. Calculate producer
surplus when the market is in equilibrium.
a. $4,000
b. $2,000
c. $8,000
d. $1,000
ANSWER: b

27. (Ref 9-6 Figure: Wireless Mouse Market) Refer to Figure 9-6: Wireless Mouse Market. Calculate the
change in producer surplus when the price increases from $10 to $15.
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a. $250
b. $1,000
c. $625
d. $1,125
ANSWER: c

28. (Ref 9-7 Figure: Change in Total Surplus) Refer to Figure 9-7: Change in Total Surplus. Which areas
represent the change in total surplus when the price falls from P1 to P2?
a. A, B, and C
b. B and C
c. B, C, D, and E
d. C and E
ANSWER: d

29. (Ref 9-7 Figure: Change in Total Surplus) Refer to Figure 9-7: Change in Total Surplus. Which areas
represent the change in total surplus when the price falls from P2 to P3?
a. A, B, and C
b. B and C
c. B, C, D, and E
d. C and E
ANSWER: d

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30. (Ref 9-8 Figure: The Market for Hamburgers) Refer to Figure 9-8: The Market for Hamburgers shows the
weekly market for hamburgers in Tuscaloosa. If the price of a burger is $2, consumer surplus will equal:
a. $650.
b. $400.
c. $225.
d. $450.
ANSWER: c

31. (Ref 9-8 Figure: The Market for Hamburgers) Refer to Figure 9-8: The Market for Hamburgers shows the
weekly market for hamburgers in Tuscaloosa. If 400 hamburgers are sold, consumer surplus will equal:
a. $650.
b. $400.
c. $225.
d. $450.
ANSWER: b

32. (Ref 9-8 Figure: The Market for Hamburgers) Refer to Figure 9-8: The Market for Hamburgers shows the
weekly market for hamburgers in Tuscaloosa. If the price of a hamburger falls from $2.00 to $1.50, the gain in
consumer surplus to consumers who are persuaded to buy at the lower price (and who were not buying when the
price was $2.00) is equal to:
a. $100.
b. $75.
c. $50.
d. $25.
ANSWER: d

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33. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is:
a. $12.
b. $10.
c. $8.
d. $6.
ANSWER: c

34. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium quantity of pumpkins is:
a. two.
b. three.
c. four.
d. five.
ANSWER: d

35. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
Andy buys _____ pumpkins and his consumer surplus is _____.
a. four; $2
b. three; $6
c. two; $8
d. one; $4
ANSWER: b

36. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
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Ben buys _____ pumpkins, and his consumer surplus is _____.
a. four; $2
b. three; $6
c. two; $4
d. one; $3
ANSWER: c

37. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
total consumer surplus is:
a. $10.
b. $8.
c. $6.
d. $0.
ANSWER: a

38. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
Cindy sells _____ pumpkins, and her producer surplus is _____.
a. four; $2
b. three; $8
c. two; $3
d. one; $5
ANSWER: b

39. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
Diane sells _____ pumpkins, and her producer surplus is _____.
a. four; $11
b. three; $8
c. two; $6
d. one; $4
ANSWER: c

40. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
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equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
total producer surplus is:
a. $0.
b. $8.
c. $11.
d. $14.
ANSWER: d

41. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. At the equilibrium price and quantity,
total surplus is:
a. $40.
b. $36.
c. $24.
d. $8.
ANSWER: c

42. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. If Andy consumes one more pumpkin
and Ben consumes one fewer pumpkin than in equilibrium, total surplus will _____ by _____.
a. increase; $17
b. increase; $15
c. decrease; $8
d. decrease; $3
ANSWER: d

43. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. If Andy consumes one fewer pumpkin
and Ben consumes one more pumpkin than in equilibrium, total surplus will _____ by _____.
a. increase; $17
b. increase; $15
c. decrease; $8
d. decrease; $1
ANSWER: d

44. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
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Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. If Cindy sells one more pumpkin and
Diane sells one fewer pumpkin than in equilibrium, total surplus will _____ by _____.
a. increase; $16
b. increase; $14
c. decrease; $4
d. decrease; $2
ANSWER: c

45. (Ref 9-9 Table: Pumpkin Market) Refer to Table 9-9: The Pumpkin Market. There are two consumers, Andy
and Ben, in the market for pumpkins. Their willingness to pay for each pumpkin is shown in the table Pumpkin
Market. There are two producers of pumpkins, Cindy and Diane, and their costs are also shown. The
equilibrium price for pumpkins is $8 and the equilibrium quantity is 5. If Cindy sells one fewer pumpkin and
Diane sells one more pumpkin than in equilibrium, total surplus will _____ by _____.
a. increase; $16
b. increase; $14
c. decrease; $1
d. decrease; $2
ANSWER: c

46. Which statement is true concerning the relationship between efficiency and equity?
a. Policies designed to increase efficiency will also increase equity.
b. Policies designed to increase equity will also increase efficiency.
c. Policies designed to increase efficiency may decrease equity.
d. There is no trade-off between efficiency and equity if policies are fair.
ANSWER: c

47. If there is an increase in demand (parallel shift of demand to the right), assuming a positively sloped supply
curve and a negatively sloped demand curve, total surplus:
a. will increase.
b. will decrease.
c. will remain the same.
d. may change, but we can't tell how.
ANSWER: a

48. If there is an increase in supply, assuming a positively sloped supply curve and a negatively sloped demand
curve, total surplus:
a. will increase.
b. will decrease.
c. will remain the same.
d. may change, but we can't tell how.
ANSWER: a
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49. If there is a decrease in demand (parallel shift of demand to the right), assuming a positively sloped supply
curve and a negatively sloped demand curve, total surplus:
a. will increase.
b. will decrease.
c. will remain the same.
d. may change, but we can't tell how.
ANSWER: b

50. If there is a decrease in supply (parallel shift of demand to the right), assuming a positively sloped supply
curve and a negatively sloped demand curve, total surplus:
a. will increase.
b. will decrease.
c. will remain the same.
d. may change, but we can't tell how.
ANSWER: b

51. If total surplus falls, there may have been a(n) _____ in demand or a(n) _____ in supply.
a. increase; decrease
b. increase; increase
c. decrease; decrease
d. decrease; increase
ANSWER: c

52. If total surplus rises, there may have been a(n) _____ in demand or a(n) _____ in supply.
a. increase; decrease
b. increase; increase
c. decrease; decrease
d. decrease; increase
ANSWER: b

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53. (Ref 9-10 Figure: The Gains from Trade) Refer to Figure 9-10: The Gains from Trade. What is the total
surplus in this market when the demand curve is D1 and the market is in equilibrium?
a. $25.00
b. $31.25
c. $62.50
d. $90.00
ANSWER: c

54. (Ref 9-10 Figure: The Gains from Trade) Refer to Figure 9-10: The Gains from Trade. What is the total
surplus in this market when the demand curve is D2 and the market is in equilibrium?
a. $31.25
b. $45.00
c. $62.50
d. $90.00
ANSWER: d

55. (Ref 9-10 Figure: The Gains from Trade) Refer to Figure 9-10: The Gains from Trade. When demand
increases from D1 to D2, equilibrium total surplus:
a. decreases by $10.00.
b. increases by $12.75.
c. decreases by $15.00.
d. increases by $27.50.
ANSWER: d

56. Coffee and tea are substitutes in consumption. If there is an increase in the price of coffee, assuming a
positively sloped supply curve and a negatively sloped demand curve, total surplus in the tea market:

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a. will increase.
b. will decrease.
c. will not change.
d. may change, but we cannot determine the change without more information.
ANSWER: a

57. If a frost destroys much of the grapefruit crop, assuming a positively sloped supply curve and a negatively
sloped demand curve, total surplus in the grapefruit market:
a. will increase.
b. will decrease.
c. will not change.
d. may change, but we cannot determine the change without more information.
ANSWER: b

58. If the price is above the equilibrium price in the market for grapefruit, assuming a positively sloped supply
curve and a negatively sloped demand curve, total surplus:
a. will be greater than if price were at equilibrium.
b. will be less than if price were at equilibrium.
c. will be the same as if price were at equilibrium.
d. may be different than if price were at equilibrium, but we cannot determine this without more
information.
ANSWER: b

59. If the price is below the equilibrium price in the market for grapefruit, assuming a positively sloped supply
curve and a negatively sloped demand curve, total surplus:
a. will be greater than if price were at equilibrium.
b. will be less than if price were at equilibrium.
c. will be the same as if price were at equilibrium.
d. may be different than if price were at equilibrium, but we cannot determine this without more
information.
ANSWER: b

60. Suppose a competitive market has a downward-sloping demand curve and a horizontal supply curve. If the
supply curve shifts downward, equilibrium price will _____, equilibrium quantity will _____, consumer surplus
will _____, and producer surplus will _____.
a. decrease; increase; increase; decrease
b. decrease; decrease; increase; not change
c. decrease; increase; increase; not change
d. decrease; increase; not change; increase
ANSWER: c

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61. (Ref 9-10 Figure: Consumer and Producer Surplus) Refer to Figure 9-10: Consumer and Producer Surplus.
If the price is held above equilibrium, consumer surplus will be _____ if the market were in equilibrium and
total surplus will be _____ if the market were in equilibrium.
a. greater than; less than
b. less than; the same as
c. greater than; the same as
d. less than; less than
ANSWER: d

62. (Ref 9-10 Figure: Consumer and Producer Surplus) Refer to Figure 9-10: Consumer and Producer Surplus.
If the price is held below equilibrium, producer surplus will be _____ if the market were in equilibrium and
total surplus will be _____ if the market were in equilibrium.
a. less than; less than
b. greater than; the same as
c. less than; the same as
d. greater than; less than
ANSWER: a

63. (Ref 9-10 Figure: Consumer and Producer Surplus) Refer to Figure 9-10: Consumer and Producer Surplus.
An increase in supply will:
a. increase consumer surplus.
b. have no impact on consumer surplus
c. decrease consumer surplus
d. not enough information to determine the impact on consumer surplus
ANSWER: d

64. Peanut butter is an inferior good. If there is an increase in income, total surplus in the peanut butter market:
a. will increase.
b. will decrease.
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c. will not change.

d. may change, but we cannot determine the change without more information.
ANSWER: b

65. If the technology of producing peanuts improves, total surplus in the peanut butter market:
a. will increase.
b. will decrease.
c. will not change.
d. may change, but we cannot determine the change without more information.
ANSWER: a

66. The total surplus generated in the market for blackberries is the total net gain to consumers in that market.
a. True
b. False
ANSWER: b

67. Total surplus is the excess of consumer surplus over producer surplus.
a. True
b. False
ANSWER: b

68. The gains from trade are the reason that consumers and producers are better off participating in a market
economy than they would be if each tried to be self-sufficient.
a. True
b. False
ANSWER: a

69. Total surplus shows the total benefit to society from production and consumption of a good.
a. True
b. False
ANSWER: a

70. Total surplus in a market is the excess of the number of consumers above the optimum number.
a. True
b. False
ANSWER: b

71. Total surplus in a market is the number of extra consumers and producers that are not needed for the market
to come to an equilibrium price and quantity.
a. True
b. False
ANSWER: b
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72. When there is a positive amount of total surplus in a market, it means that the cost of producing the good is
zero.
a. True
b. False
ANSWER: b

73. If the market for smartphones is initially in equilibrium at a price of $250 and consumption is reallocated so
that Amanda, who values a phone at $300, is required to give it to Brent, who values a phone at $225, total
surplus in the smartphone market will increase.
a. True
b. False
ANSWER: b

74. If the market for tickets to the World Series is in equilibrium but owners of tickets who would have sold
their tickets are not allowed to sell, while fans who would not sell their tickets are required to sell, total surplus
would decrease.
a. True
b. False
ANSWER: a

75. If the market for concert tickets is in equilibrium and the fire marshal tries to reduce the number of tickets
sold, all other things equal, total surplus will decrease.
a. True
b. False
ANSWER: a

76. Efficiency exists when there is no way to make someone better off without making someone else worse off.
a. True
b. False
ANSWER: a

77. Prices above equilibrium on agricultural products like milk exist to maximize the consumer surplus.
a. True
b. False
ANSWER: b

78. There is a trade-off between equity and efficiency in that policies designed to promote equity often come at
the cost of decreased efficiency.
a. True
b. False
ANSWER: a

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Module 9 - Efficiency and Markets

79. Policies designed to promote efficiency will never decrease equity; however, policies designed to promote
equity will usually decrease efficiency.
a. True
b. False
ANSWER: b

80. Efficiency deals with helping society decide what its goals should be.
a. True
b. False
ANSWER: b

81. Efficiency addresses the best way to achieve a goal once it has been determined.
a. True
b. False
ANSWER: a

82. Property rights and the role of prices as economic signals are two features that make markets function
effectively.
a. True
b. False
ANSWER: a

83. If property rights are restricted by government regulation, many more mutually beneficial transactions will
occur.
a. True
b. False
ANSWER: b

84. Property rights benefit sellers of goods much more than they benefit consumers.
a. True
b. False
ANSWER: b

85. Prices are important economic signals because they convey information about how much consumers are
willing to pay for a good and how much it costs sellers to produce a good.
a. True
b. False
ANSWER: a

86. Prices are important economic signals because they convey information about how much producers are
willing to pay for a good and how much it costs consumers to produce a good.
a. True
b. False
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Module 9 - Efficiency and Markets

ANSWER: b

87. Market failure occurs when a market fails to produce efficient outcomes for society.
a. True
b. False
ANSWER: a

88. When a monopolist prevents mutually beneficial trades from occurring, total surplus increases.
a. True
b. False
ANSWER: b

89. Externalities occur when the welfare of others not involved in the production or consumption of a good or
service are affected in ways that markets don't take into account on their own.
a. True
b. False
ANSWER: a

90. A price below the equilibrium price will cause a reduction in consumer surplus.
a. True
b. False
ANSWER: b

91. Well-functioning markets allow:

a. mutually beneficial trades to take place.
b. consumers to gain at the expense of producers.
c. producers to reap greater benefits, since they have greater power in the market.
d. property rights to be unnecessary components of effective distribution.
ANSWER: a

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Module 9 - Efficiency and Markets

92. (Ref 9-12 Figure: A Market in Equilibrium) Refer to Figure 9-12: A Market in Equilibrium. At the
equilibrium price, this market's consumer surplus is equal to the area:
a. ABC.
b. ADI.
c. DIF.
d. EHF.
ANSWER: b

93. (Ref 9-12 Figure: A Market in Equilibrium) Refer to Figure 9-12: A Market in Equilibrium. At the
equilibrium price, this market's producer surplus is equal to the area:
a. ADI.
b. EHF.
c. AIF.
d. DIF.
ANSWER: d

94. (Ref 9-12 Figure: A Market in Equilibrium) Refer to Figure 9-12: A Market in Equilibrium. At the
equilibrium price, this market's total producer and consumer surplus equals the area:
a. BCDG.
b. AIF.
c. DIF.
d. ADI.
ANSWER: b

95. Suppose purchases do not occur because the value of the good to the potential seller exceeds the value to a
potential consumer. This situation will occur in:
a. a market dominated by government regulation.
b. well-functioning markets.
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Module 9 - Efficiency and Markets

c. a market made up of many buyers and sellers.

d. a centralized market system.
ANSWER: b

96. Markets work because they allocate sales to the sellers who are willing and able to produce the good at the
lowest cost. This statement shows how markets maximize:
a. producer surplus.
b. consumer surplus.
c. total surplus.
d. deadweight loss.
ANSWER: a

97. Well-defined property rights:

a. can allow for mutually beneficial trades.
b. will result in government regulation.
c. often result in more market failures.
d. lead to more centralized decision making.
ANSWER: a

98. Economic signals:

a. result in shortages and surpluses.
b. interfere with the trades that can be mutually beneficial.
c. guide decision makers in their transactions in the marketplace.
d. never provide adequate information to consumers.
ANSWER: c

99. Which statement(s) is/are true about market failures?

I. They arise when property rights are clearly defined.
II. They arise when information is available to all decision makers.
III. They arise when external costs are not considered in production decisions by producers.
a. I
b. I and II
c. III
d. I, II, and III
ANSWER: c

Essay

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Test Bank for Macroeconomics in Modules, 4th Edition, Paul Krugman Robin Wells

Name: Class: Date:

Module 9 - Efficiency and Markets

100. (Ref 9-11 Figure: The Market for Books) Refer to Figure 9-11: The Market for Books. At the equilibrium
price of $24, find the total surplus in the market for books.
ANSWER: Total surplus is the sum of consumer and producer surplus. Consumer surplus is the triangle 0.5 *
($16) * (48 units) = $384. Producer surplus is the triangle 0.5 * ($18) * (48 units) = $432. Total
surplus is therefore $384 + $432 = $816.

101. (Ref 9-11 Figure: Market for Books) Refer to Figure 9-11: The Market for Books. Suppose the price is
temporarily $18. Do consumers gain or lose from this price, and by how much? Do producers gain or lose from
this price control, and by how much? How is total surplus affected?
ANSWER: The first thing to notice is that only 32 units will be produced at a price of $18. Producers lose. The
triangle below $18 and above the supply curve is much smaller. Producer surplus = 0.5 * (12) * (32
units) = $192. Consumer surplus = 0.5 * ($10.67) * (32 units) + ($11.33) * (32 units) = $533.12,
which is more than it was before the price control. Total surplus is $192 + $533.12 = $725.12,
which is $90.72 lower than before the price control. The change in consumer surplus is $533.12 -
$384 = +$149.28. The change in producer surplus is $192 - $432 = -$240. Consumers gain and
producers lose, but the producers lose more than the consumers gain, and thus society takes a net
loss of welfare.

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