Principles of Economics Arab World Edition 2nd Edition Mankiw Test Bank

Principles of Economics Arab World
Edition 2nd Edition Mankiw Test Bank

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Chapter 7 Consumers, Producers, and the Efficiency of Markets
MULTIPLE CHOICE
1. Welfare economics is the study of how

a. the allocation of resources affects economic well-being.
b. a price ceiling compares to a price floor.
c. the government helps poor people.
d. a consumer’s optimal choice affects her demand curve.
ANS: A PTS: 1 DIF: 1 REF: 7-0
2. A result of welfare economics is that the equilibrium price of a product is considered to be the best price be-
cause it
a. maximizes both the total revenue for firms and the quantity supplied of the product.
b. maximizes the combined welfare of buyers and sellers.
c. minimizes costs and maximizes output.
d. minimizes the level of welfare payments.
ANS: B PTS: 1 DIF: 2 REF: 7-0
CONSUMER SURPLUS
1. The maximum price that a buyer will pay for a good is called the
a. cost.
b. willingness to pay.
c. Equity.
d. efficiency.
2. When a buyer’s willingness to pay for a good is equal to the price of the good, the
a. buyer’s consumer surplus for that good is maximized.
b. buyer will buy as much of the good as the buyer’s budget allows.
c. price of the good exceeds the value that the buyer places on the good.
d. buyer is indifferent between buying the good and not buying it.
ANS: D PTS: 1 DIF: 2 REF: 7-1
3. A demand curve reflects each of the following except the

a. willingness to pay of all buyers in the market.
b. value each buyer in the market places on the good.
c. highest price buyers are willing to pay for each quantity.
d. ability of buyers to obtain the quantity they desire.
4. On a graph, consumer surplus is represented by the area

a. between the demand and supply curves.
b. below the demand curve and above price.
c. below the price and above the supply curve.
d. below the demand curve and to the right of equilibrium price.
5. In a market, the marginal buyer is the buyer

a. whose willingness to pay is higher than that of all other buyers and potential buyers.
b. whose willingness to pay is lower than that of all other buyers and potential buyers.
c. who is willing to buy exactly one unit of the good.
d. who would be the first to leave the market if the price were any higher.
1
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2 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
6. A drought destroys many red grapes. As a result of the drought, the consumer surplus in the market for red
grapes
a. increases, and the consumer surplus in the market for red wine increases.
b. increases, and the consumer surplus in the market for red wine decreases.
c. decreases, and the consumer surplus in the market for red wine increases.
d. decreases, and the consumer surplus in the market for red wine decreases.
7. If a customer is willing to pay 20 dinar for a haircut, but he is able to pay 5 dinar at the local salon. His con-
sumer surplus is
a. 0 because the cost exceeds his maximum willingness to pay.
b. 15.
c. 25.
d. 65.
8. If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer sur-
plus relevant to that purchase is
a. zero.
b. negative, and the consumer would not purchase the product.
c. positive, and the consumer would purchase the product.
d. There is not enough information given to answer this question.
9. If the cost of producing sofas decreases, then consumer surplus in the sofa market will
a. increase.
b. decrease.
c. remain constant.
d. increase for some buyers and decrease for other buyers.
10. Which of the following will cause an increase in consumer surplus?

a. an increase in the production cost of the good
b. a technological improvement in the production of the good
c. a decrease in the number of sellers of the good
d. the imposition of a binding price floor in the market
11. Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline
market
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 3
Figure 7-1
P
350
300
250
200
150
100
50 Demand
1 2 3 4 5 Q
12. Refer to Figure 7-1. If the price of the good is 250, then consumer surplus amounts to
a. 50.
b. 100.
c. 150.
d. 200.
13. Refer to Figure 7-1. The value of the good to consumers minus the cost of the good to consumers amounts to
325 if the price of the good is
a. 200.
b. 150.
c. 125.
d. 100.
ANS: C PTS: 1 DIF: 2 REF: 7-1
Figure 7-2
Price
A
P2
B
C
P1
D F
Demand
Q2 Q1 Quantity
14. Refer to Figure 7-2. When the price is P1, consumer surplus is
a. A.
b. A+B.
c. A+B+C.
d. A+B+D.
15. Refer to Figure 7-2. When the price rises from P1 to P2, consumer surplus
a. increases by an amount equal to A.
b. decreases by an amount equal to B+C.
c. increases by an amount equal to B+C.
d. decreases by an amount equal to C.
Figure 7-6
Price
250
225
200
175
150
125
100
75
50
25
Demand
25 50 75 100 125 150 Quantity
16. Refer to Figure 7-6. What happens to the consumer surplus if the price rises from 100 to 150?
a. The new consumer surplus is half of the original consumer surplus.
b. The new consumer surplus is 25 percent of the original consumer surplus.
c. The new consumer surplus is double the original consumer surplus.
d. The new consumer surplus is triple the original consumer surplus.
17.Economists normally assume people’s preferences should be

a. respected.
b. adjusted.
c. overruled.
d. ignored.
PRODUCER SURPLUS
1. A seller’s opportunity cost measures the

a. value of everything he must give up to produce a good.
b. amount he is paid for a good minus his cost of providing it.
c. consumer surplus.
d. out of pocket expenses to produce a good but not the value of his time.
2. Producer surplus is
a. measured using the demand curve for a good.
b. always a negative number for sellers in a competitive market.
c. the amount a seller is paid minus the cost of production.
d. the opportunity cost of production minus the cost of producing goods that go unsold.
Figure 7-7
Price
15
Supply
14
13
12
11
10
9
8
7
6
5
4
3
2
1
1 2 3 4 Quantity
3.Refer to Figure 7-7. If the price of the good is 9.50, then producer surplus is
a. 2.50.
b. 6.50.
c. 8.00.
d. 10.00.
Figure 7-8
Price
Supply
A D H
P2
B G
P1
Q1 Q2 Quantity
4. Refer to Figure 7-8. Which area represents producer surplus when the price is P1?
a. BCG
b. ACH
c. ABGD
d. DGH
a. BCG
b. ACH
c. ABGD
d. AHGB
Figure 7-11
Price
170
160
150 S
140
130
120
110
100
90
80
70
60
50
40
30
20
10
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Quantity
6. Refer to Figure 7-11. At the equilibrium price, producer surplus is

a. 200.
b. 400.
c. 450.
d. 900.
Figure 7-12
Price
Supply
P2
B
A
P1
C G
Q1 Q2 Quantity
7. Refer to Figure 7-12. When the price is P2, producer surplus is
a. A.
b. A+C.
c. A+B+C.
d. D+G.
8. Refer to Figure 7-12. Suppose producer surplus is larger than C but smaller than A+B+C. The price of the
good must be
a. lower than P1.
b. P1.
c. between P1 and P2.
d. higher than P2.
9. Refer to Figure 7-12. Area A represents

a. producer surplus to new producers entering the market as the result of an increase in price from P1
to P2.
b. the increase in consumer surplus that results from an upward-sloping supply curve.
c. the increase in total surplus when sellers are willing and able to increase supply from Q1 to Q2.
d. the increase in producer surplus to those producers already in the market when the price increases
from P1 to P2.
10. Refer to Figure 7-12. Area B represents

a. the combined profits of all producers when the price is P2.
b. the increase in producer surplus to all producers as the result of an increase in the price from P1 to
P2.
c. producer surplus to new producers entering the market as the result of an increase in the price from
P1 to P2.
d. that portion of the increase in producer surplus that is offset by a loss in consumer surplus when the
price increases from P1 to P2.
11. Producer surplus equals

a. Value to buyers - Amount paid by buyers.
b. Amount received by sellers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.
12. The marginal seller is the seller who

a. cannot compete with the other sellers in the market.
b. would leave the market first if the price were any lower.
c. can produce at the lowest cost.
d. has the largest producer surplus.
13. Suppose the demand for peaches decreases. What will happen to producer surplus in the market for peaches?
a. It increases.
b. It decreases.
c. It remains unchanged.
d. It may increase, decrease, or remain unchanged.
14. If the demand for light bulbs increases, producer surplus in the market for light bulbs
a. increases.
b. decreases.
c. remains the same.
d. may increase, decrease, or remain the same.
MARKET EFFICIENCY
1. Total surplus
a. can be used to measure a market’s efficiency.
b. is the sum of consumer and producer surplus.
c. is the to value to buyers minus the cost to sellers.
d. All of the above are correct.
2. Total surplus is equal to

a. value to buyers - profit to sellers.
b. value to buyers - cost to sellers.
c. consumer surplus x producer surplus.
d. (consumer surplus + producer surplus) x equilibrium quantity.
3. Total surplus is represented by the area

a. under the demand curve and above the price.
b. above the supply curve and up to the price.
c. under the supply curve and up to the price.
d. between the demand and supply curves up to the point of equilibrium.
4. Which of the following equations is valid?

a. Consumer surplus = Total surplus - Cost to sellers
b. Producer surplus = Total surplus - Consumer surplus
c. Total surplus = Value to buyers - Amount paid by buyers
d. Total surplus = Amount received by sellers - Cost to sellers
5. Efficiency in a market is achieved when

a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to
pay and sellers' costs.
b. the sum of producer surplus and consumer surplus is maximized.
c. all firms are producing the good at the same low cost per unit.
d. no buyer is willing to pay more than the equilibrium price for any unit of the good.
6. If an allocation of resources is efficient, then

a. consumer surplus is maximized.
b. producer surplus is maximized.
c. all potential gains from trade among buyers are sellers are being realized.
d. the allocation achieves equality as well.
Figure 7-14
P
350
300 Supply
250
200
150
100
50
1 2 3 4 5 Q
7. Refer to Figure 7-14. Suppose the willingness to pay of the marginal buyer of the 3 rd unit is $225. Then total
surplus is maximized if
a. 1 unit of the good is produced and sold.
b. 2 units of the good are produced and sold.
c. 3 units of the good are produced and sold.
d. 4 units of the good are produced and sold.
Figure 7-16
Price
J Supply
K N
Demand
L M R Quantity
8. Refer to Figure 7-16. Total surplus can be measured as the area

a. JNK.
b. JNML.
c. JRL.
d. JNL.
9. Refer to Figure 7-16. For quantities greater than M, the value to the marginal buyer is
a. greater than the cost to the marginal seller, so increasing the quantity increases total surplus.
b. less than the cost to the marginal seller, so increasing the quantity increases total surplus.
c. greater than the cost to the marginal seller, so decreasing the quantity increases total surplus.
d. less than the cost to the marginal seller, so decreasing the quantity increases total surplus.
Figure 7-17
Price
Supply
P2
P1
Demand
Q1 Quantity
10. Refer to Figure 7-17. Which area represents consumer surplus when the price is P1?
a. A
b. B
c. C
d. D
a. A
b. B
c. C
d. D
Figure 7-20
Price
K
48 Supply
A
44
40
36
F
32 G
28
H
24
B Demand
20
16
12
8
C
4
1 2 3 4 5 6 7 8 9 10 11 Quantity
12. Refer to Figure 7-20. At equilibrium, total surplus is measured by the area
a. ACG.
b. AFG.
c. KBG.
d. CFG.
13. Refer to Figure 7-20. The equilibrium allocation of resources is

a. efficient because total surplus is maximized at the equilibrium.
b. efficient because consumer surplus is maximized at the equilibrium.
c. inefficient because consumer surplus is larger than producer surplus at the equilibrium.
d. inefficient because total surplus is maximized when 10 units of output are produced and sold.
Figure 7-22
Price
Supply
P2
P1
P3
Demand
Q2 Q1 Q3 Quantity
14. Refer to Figure 7-22. At the quantity Q3,

a. the market is in equilibrium.
b. consumer surplus is maximized.
c. the sum of consumer surplus and producer surplus is maximized.
d. the marginal value to buyers is less than the marginal cost to sellers.
15. Refer to Figure 7-22. At the quantity Q2, the marginal value to buyers
a. and the marginal cost to sellers are both P2.
b. is P2, and the marginal cost to sellers is P3.
c. and the marginal cost to sellers are both P3.
d. is P3, and the marginal cost to sellers is P2.
16. Total surplus in a market will increase when the government

a. imposes a binding price floor or a binding price ceiling on that market.
b. imposes a tax on that market.
c. Both a and b are correct.
d. Neither a nor b is correct.
CONCLUSION
1. Which of the following statements is not correct?

a. An invisible hand leads buyers and sellers to an equilibrium that maximizes total surplus.
b. Market power can cause markets to be inefficient.
c. Externalities can cause markets to be inefficient.
d. The invisible hand can remedy most if not all types of market failures.
TRUE/FALSE
1. Welfare economics is the study of the welfare system.

ANS: F PTS: 1 DIF: 1 REF: 7-1
2. A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but would refuse
to buy a product at a price less than his willingness to pay.
3. Consumer surplus can be measured as the area between the demand curve and the equilibrium price.
ANS: T PTS: 1 DIF: 1 REF: 7-1
4. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1) con-
sumer surplus received by existing buyers increases and (2) new buyers enter the market.
5. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
6. The area below the demand curve and above the supply curve measures the producer surplus in a market.
7. The lower the price, the lower the producer surplus, all else equal.
8. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply
curve is . If 80 units of the good are produced and sold, then producer surplus amounts to
$1,200.
9. Total surplus = Value to buyers - Costs to sellers.

10. Efficiency refers to whether a market outcome is fair, while equality refers to whether the maximum amount
of output was produced from a given number of inputs.
11. Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand
for goods to the sellers who can produce them at least cost.
12. Even though participants in the economy are motivated by self-interest, the "invisible hand" of the market-
place guides this self-interest into promoting general economic well-being.
13. If a market is in equilibrium, then it is impossible for a social planner to raise economic welfare by increasing
or decreasing the quantity of the good.
14.In order to conclude that markets are efficient, we assume that they are perfectly competitive.
15. Market power and externalities are examples of market failures.

SHORT ANSWER
1. Answer each of the following questions about demand and consumer surplus.
a. What is consumer surplus, and how is it measured?
b. What is the relationship between the demand curve and the willingness to pay?
c. Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate
using a demand curve.
d. In what way does the demand curve represent the benefit consumers receive from participating in a
market? In addition to the demand curve, what else must be considered to determine consumer
surplus?
ANS:
a. Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the
amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an
individual purchase, consumer surplus is the difference between the willingness to pay, as shown
on the demand curve, and the market price. For the market, total consumer surplus is the area under
the demand curve and above the price, from the origin to the quantity purchased.
b. Because the demand curve shows the maximum amount buyers are willing to pay for a given
market quantity, the price given by the demand curve represents the willingness to pay of the
marginal buyer.
c. When the price of a good falls, consumer surplus increases for two reasons. First, those buyers
who were already buying the good receive an increase in consumer surplus because they are
paying less (area B). Second, some new buyers enter the market because the price of the good is
now lower than their willingness to pay (area C); hence, there is additional consumer surplus
generated from their purchases. The graph should show that as price falls from P2 to P1,
consumer surplus increases from area A to area A+B+C.
d. Since the demand curve represents the maximum price the marginal buyer is willing to pay for a
good, it must also represent the maximum benefit the buyer expects to receive from consuming
the good. Consumer surplus must take into account the amount the buyer actually pays for the
good, with consumer surplus measured as the difference between what the buyer is willing to pay
and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have
to "pay for."
Price
A
P2
B
C
P1
D F
Demand
Q2 Q1 Quantity
PTS: 1 DIF: 2 REF: 7-1
2. Tammy loves sweets. The table shown reflects the value Tammy places on each sweet she eats:
Value of first sweet 0.60
Value of second sweet 0.50
Value of third sweet 0.40
Value of fourth sweet 0.30
Value of fifth sweet 0.20
Value of sixth sweet 0.10
a. Use this information to construct Tammy's demand curve for sweets.
b. If the price of sweets is 0.20, how many donuts will Tammy buy?
c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she have
at a price of 0.20?
d. If the price of sweets rose to 0.40, how many sweets would she purchase now? What would
happen to Tammy's consumer surplus? Show this change on your graph.
ANS:
a. Price
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Demand
1 2 3 4 5 6 7 8 Quantity
b. At a price of 0.20, Tammy would buy 5 sweets.

c. The figure below shows Tammy's consumer surplus. At a price of 0.20, Tammy's consumer surplus
would be 1.00.
Price
1
0.9
0.8
0.7
0.6
0.1
0.5
0.1 0.1
0.4
0.1 0.1 0.1
0.3
0.1 0.1 0.1 0.1
0.2
0.1
Demand
1 2 3 4 5 6 7 8 Quantity
d. If the price of sweets rose to 0.40, Tammy's consumer surplus would fall to 0.30 and she would
purchase only 3 sweets.
Price
1
0.9
0.8
0.7
0.6
0.1
0.5
0.1 0.1
0.4
0.3
0.2
0.1
Demand
1 2 3 4 5 6 7 8 Quantity
3. Answer each of the following questions about supply and producer surplus.
a. What is producer surplus, and how is it measured?
b. What is the relationship between the cost to sellers and the supply curve?
c. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate
your answer on a supply curve.
ANS:
a. Producer surplus measures the benefit to sellers of participating in a market. It is measured as the
amount a seller is paid minus the cost of production. For an individual sale, producer surplus is
measured as the difference between the market price and the cost of production, as shown on the
supply curve. For the market, total producer surplus is measured as the area above the supply
curve and below the market price, between the origin and the quantity sold.
b. Because the supply curve shows the minimum amount sellers are willing to accept for a given
quantity, the supply curve represents the cost of the marginal seller.
c. When the price of a good rises, producer surplus increases for two reasons. First, those sellers
who were already selling the good have an increase in producer surplus because the price they
receive is higher (area A). Second, new sellers will enter the market because the price of the good
is now higher than their willingness to sell (area B); hence, there is additional producer surplus
generated from their sales. The graph should show that as price rises from P1 to P2, producer
surplus increases from area C to area A+B+C.
Price
Supply
P2
B
A
P1
C G
Q1 Q2 Quantity
4. Given the following two equations:

1) Total Surplus = Consumer Surplus + Producer Surplus
2) Total Surplus = Value to Buyers - Cost to Sellers
Show how equation (1) can be used to derive equation (2).
ANS:
Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus. Then, since Consumer Surplus
= Value to buyers - Amount paid by buyers, and since Producer Surplus = Amount received by sellers - Costs
of sellers, Total Surplus can be written as: Value to buyers - Amount paid by buyers + Amount received by
sellers - Costs of sellers. Since the Amount paid by buyers equals the Amount received by sellers, the middle
two terms cancel out and the result is:
Total Surplus = Value to buyers - Costs of sellers.
5. Answer the following questions based on the graph that represents J.R.'s demand for ribs per week at J. R.’s
Rib Shack.
a. At the equilibrium price, how many ribs would J.R. be willing to purchase?
b. How much is J.R. willing to pay for 20 ribs?
c. What is the magnitude of J.R.'s consumer surplus at the equilibrium price?
d. At the equilibrium price, how many ribs would J. R. be willing to sell?
e. How high must the price of ribs be for J. R. to supply 20 ribs to the market?
f. At the equilibrium price, what is the magnitude of total surplus in the market?
g. If the price of ribs rose to 10 dinar, what would happen to J. R.'s consumer surplus?
h. If the price of ribs fell to 5 dinar, what would happen to J. R.'s producer surplus?
i. Explain why the graph that is shown verifies the fact that the market equilibrium (quantity)
maximizes the sum of producer and consumer surplus.
Price
20
18
16
14
Supply
12
10
6
5
4 Demand
2
10 20 30 40 50 60 70 80 Quantity
ANS:
a. 40
b. 10.00 dinar
c. 80.00 dinar
d. 40
e. 5 dinar
f. 200 dinar
g. It would fall from 80 dinar to only 20 dinar.
h. It would fall from 120 dinar to only 30 dinar.
i. At quantities less than the equilibrium quantity, the marginal value to buyers exceeds the marginal
cost to sellers. Increasing the quantity in this region raises total surplus until equilibrium quantity
is reached. At quantities greater than the equilibrium quantity, the marginal cost to sellers exceeds
the marginal value to buyers and total surplus falls.

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Principles of Economics Arab World

Edition 2nd Edition Mankiw Test Bank

1. Welfare economics is the study of how

3. A demand curve reflects each of the following except the

4. On a graph, consumer surplus is represented by the area

5. In a market, the marginal buyer is the buyer

10. Which of the following will cause an increase in consumer surplus?

17.Economists normally assume people’s preferences should be

1. A seller’s opportunity cost measures the

ANS: B PTS: 1 DIF: 2 REF: 7-2

6. Refer to Figure 7-11. At the equilibrium price, producer surplus is

7. Refer to Figure 7-12. When the price is P2, producer surplus is

9. Refer to Figure 7-12. Area A represents

10. Refer to Figure 7-12. Area B represents

11. Producer surplus equals

12. The marginal seller is the seller who

2. Total surplus is equal to

3. Total surplus is represented by the area

4. Which of the following equations is valid?

5. Efficiency in a market is achieved when

6. If an allocation of resources is efficient, then

8. Refer to Figure 7-16. Total surplus can be measured as the area

13. Refer to Figure 7-20. The equilibrium allocation of resources is

14. Refer to Figure 7-22. At the quantity Q3,

16. Total surplus in a market will increase when the government

1. Which of the following statements is not correct?

1. Welfare economics is the study of the welfare system.

ANS: F PTS: 1 DIF: 2 REF: 7-2

9. Total surplus = Value to buyers - Costs to sellers.

15. Market power and externalities are examples of market failures.

PTS: 1 DIF: 2 REF: 7-1

b. At a price of 0.20, Tammy would buy 5 sweets.

PTS: 1 DIF: 2 REF: 7-1

PTS: 1 DIF: 2 REF: 7-2

4. Given the following two equations:

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