Economics 1st Edition Acemoglu Test Bank

Economics 1st Edition Acemoglu Test
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Microeconomics (Acemoglu/Laibson/List)
Chapter 7 Perfect Competition and the Invisible Hand
7.1 Perfect Competition and Efficiency
1) A ________ is the price at which a trading partner is indifferent between making the trade and not
doing so.
A) market value
B) reservation value
C) shadow value
D) discounted value
Answer: B
Difficulty: Easy
Topic: Perfect Competition and Efficiency
2) Reservation value of a buyer reflects her ________.

A) willingness to pay for a good or service
B) trade-off between buying various goods and services
C) total utility from a good or service
D) total income
Answer: A
Difficulty: Easy
3) A buyer is willing to buy 10 units of a good at a maximum price of $10 per unit. The reservation value
of the buyer in this case is:
A) $1.
B) $10.
C) $20.
D) $100.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
4) Reservation value of a seller reflects her ________.

A) willingness to pay for using a resource
B) marginal cost
C) marginal revenue
D) total cost
Answer: B
Difficulty: Easy
1
Copyright © 2015 Pearson Education, Inc.
5) The marginal cost and total revenue of a firm are $5 and $275, respectively. The reservation value of the
seller in this case is ________.
A) $0
B) $5
C) $55
D) $275
Answer: B
Difficulty: Easy
6) A seller is willing to sell 5 units of a good at a minimum price of $1 per unit. The reservation value of
the seller in this case is:
A) $1.
B) $5.
C) $6.
D) $10.
Answer: A
Difficulty: Easy
7) The equilibrium price and quantity of a good under perfect competition are determined:
A) by the intersection of the market demand and total revenue curves.
B) by the intersection of the total revenue and total cost curves.
C) by the intersection of the market demand and market supply curves.
D) by the intersection of the market supply and total revenue curves.
Answer: C
Difficulty: Easy
2
The following table displays the reservation values of eight buyers and eight sellers where each
individual wants to buy or sell a calculator.
Reservation Value Reservation Value

Number of Buyers of Buyers ($) Number of Sellers of Sellers ($)
1 20 1 2
2 17 2 5
3 16 3 6
4 14 4 8
5 12 5 12
6 9 6 15
7 6 7 18
8 2 8 20
8) Refer to the table above. If the market is perfectly competitive, the equilibrium price of calculators is:
A) $2.
B) $6.
C) $12.
D) $20.
Answer: C
Difficulty: Medium
9) Refer to the table above. If the market is perfectly competitive, the equilibrium quantity of calculators
is:
A) 3 units.
B) 5 units.
C) 6 units.
D) 8 units.
Answer: B
Difficulty: Medium
10) Consumer surplus is the:

A) difference between the buyer's reservation value and the price he actually pays.
B) product of a buyer's reservation value and the price he actually pays.
C) sum of a buyer's reservation value and the price he actually pays.
D) ratio of a buyer's reservation value to the price he actually pays.
Answer: A
Difficulty: Easy
Topic: Social Surplus
3
11) Producer surplus is the:
A) sum of a seller's reservation values and the price he finally receives.
B) difference between a seller's reservation value and the price he finally receives.
C) product of a seller's reservation value and the price he finally receives.
D) ratio of a seller's reservation value to the price he finally receives.
Answer: B
Difficulty: Easy
12) If a seller's reservation value for a good is $10 and the price at which the good is sold is $15, his
producer surplus is:
A) $25.
B) $150.
C) $1.5.
D) $5.
Answer: D
Difficulty: Medium
13) If a seller's marginal cost is $25, and the price at which the good is sold is $15, the producer surplus is
________.
A) -$10
B) $10
C) $15
D) $25
Answer: A
Difficulty: Medium
14) If a seller enjoys a producer surplus of $30 when he sells a good for $79, his reservation value for the
good is ________.
A) $30
B) $49
C) $79
D) $109
Answer: B
Difficulty: Medium
4
15) If a buyer's reservation value for a good is $15 and the price at which he purchases the good is $8, his
consumer surplus is:
A) $7.
B) $1.8.
C) -$7.
D) $120.
Answer: A
Difficulty: Medium
16) If a buyer enjoys a consumer surplus of $25 when he purchases a good for $50, his willingness to pay
for the good is ________.
A) $2
B) $25
C) $50
D) $75
Answer: D
Difficulty: Medium
17) When buyers and sellers optimize in a perfectly competitive market, ________.
A) social surplus is maximized
B) social surplus is minimized
C) only consumer surplus is maximized
D) only consumer surplus is minimized
Answer: A
Difficulty: Easy
18) Social surplus is:

A) the product of consumer surplus and producer surplus.
B) the consumer surplus minus producer surplus.
C) the ratio of consumer surplus to producer surplus.
D) the sum of consumer surplus and producer surplus.
Answer: D
Difficulty: Easy
5
19) If the producer surplus in a market for a good is $36 and the consumer surplus in the market for the
same good is $9, the social surplus in the market is ________.
A) $4
B) $27
C) $45
D) $324
Answer: C
Difficulty: Easy
20) Suppose a market has only one seller and only one buyer of a good. The buyer has a reservation value
of $25 and the seller has a reservation value of $15. The market price of the good is determined at $20. If
they trade, the social surplus will be ________.
A) $10
B) $20
C) $40
D) $60
Answer: A
Difficulty: Medium
21) Suppose a market has only one seller and only one buyer of a good in the market. The buyer is willing
to pay $50 for the good and the seller is willing to accept $15. The market price of the good is determined
at $30. If they trade, the social surplus will be ________.
A) $15
B) $35
C) $45
D) $65
Answer: B
Difficulty: Medium
22) For social surplus to be maximized, the ________ buyers are actually making a purchase and the
________ sellers are selling the products.
A) lowest-value; highest-cost
B) highest-value; lowest-cost
C) highest-value; highest-cost
D) lowest-value; lowest-value
Answer: B
Difficulty: Easy
6
23) The total surplus in a market is represented by:
A) the area between the demand curve and the market price line.
B) the area between the supply curve and the market price line.
C) the area between the demand and supply curves and the price axis.
D) the area between the demand curve and the horizontal axis.
Answer: C
Difficulty: Medium
24) Jack is a prospective buyer of a commodity that Jill is offering to sell. Social surplus in this scenario
can be maximized:
A) when only Jack is optimizing.
B) when only Jill is optimizing.
C) when both Jack and Jill are optimizing.
D) when neither Jack nor Jill is optimizing.
Answer: C
Difficulty: Easy
The following table displays the reservation values of buyers and sellers in the market for notebooks,
where each one either wants to buy or sell one notebook.
Reservation Value Reservation Value

Buyers of Buyers ($) Sellers of Sellers ($)
1 7 1 1
2 6 2 2
3 5 3 3
4 4 4 4
5 3 5 5
6 2 6 6
7 1 7 7
25) Refer to the table above. If the market for notebooks is perfectly competitive, the equilibrium price is:
A) $2.
B) $3.
C) $4.
D) $5.
Answer: C
Difficulty: Medium
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26) Refer to the table above. If the market for notebooks is perfectly competitive, the equilibrium quantity
is:
A) 2 units.
B) 3 units.
C) 4 units.
D) 5 units.
Answer: C
Difficulty: Medium
27) Refer to the table above. If the market is perfectly competitive, what is Buyer 3's consumer surplus?
A) $0
B) -$1
C) $1
D) $2
Answer: C
Difficulty: Medium
28) Refer to the table above. What is Seller 3's producer surplus?
A) $1
B) $2
C) $3
D) $4
Answer: A
Difficulty: Medium
29) Refer to the table above. If only the two highest-value buyers and the two least-cost sellers engage in
trade, what is the social surplus?
A) $6
B) $10
C) $12
D) $20
Answer: B
Difficulty: Medium
8
30) Refer to the table above. If the six highest-value buyers and the six least-cost sellers engage in trade,
what is the social surplus?
A) $6
B) $8
C) $10
D) $12
Answer: A
Difficulty: Medium
31) Refer to the table above. When the price is ________ and the quantity is ________, social surplus is
maximized.
A) $8; 5 units
B) $6; 4 units
C) $4; 4 units
D) $2; 8 units
Answer: C
Difficulty: Medium
32) Refer to the table above. Maximum social surplus is:

A) $10.
B) $12.
C) $14.
D) $16.
Answer: B
Difficulty: Medium
9
The following figure illustrates the demand and supply of decorative light bulbs in a perfectly
competitive market.
33) Refer to the figure above. What is the equilibrium price and quantity of the light bulbs?
A) Equilibrium price = $25, Equilibrium quantity = 0 units
B) Equilibrium price = $25, Equilibrium quantity = 15 units
C) Equilibrium price = $15, Equilibrium quantity = 15 units
D) Equilibrium price = $5, Equilibrium quantity = 15 units
Answer: C
Difficulty: Medium
34) Refer to the figure above. What is the consumer surplus in the market?
A) $50
B) $75
C) $100
D) $225
Answer: B
Difficulty: Medium
35) Refer to the figure above. What is the producer surplus in the market?
A) $50
B) $75
C) $150
D) $200
Answer: B
Difficulty: Medium
10
36) Refer to the figure above. What is the social surplus if the market is in equilibrium?
A) $50
B) $75
C) $100
D) $150
Answer: D
Difficulty: Medium
37) Refer to the figure above. What is the maximum possible social surplus?
A) $100
B) $150
C) $225
D) $375
Answer: B
Difficulty: Medium
38) The social surplus in a market is $50. If another economic agent enters the market such that the
marginal cost he incurs is $10 and the marginal benefit he receives from the trade is $5, then which of the
following statements is true?
A) The social surplus will remain the same.
B) The social surplus will increase by $5.
C) The social surplus will decrease by $5.
D) The social surplus will increase by $10.
Answer: C
Difficulty: Medium
39) Which of the following statements is true of competitive market equilibrium?

A) The determination of equilibrium price and quantity is independent of the demand for goods.
B) Social surplus is minimized at the competitive equilibrium.
C) At the competitive equilibrium, there are no unexploited gains from trade.
D) A competitive equilibrium is determined only by a few large sellers in the market.
Answer: C
Difficulty: Easy
Topic: Pareto Efficiency
11
40) In a competitive market equilibrium:
A) social surplus is minimized.
B) all the gains from trade are not realized.
C) there is Pareto efficiency.
D) all the firms earn positive economic profits.
Answer: C
Difficulty: Easy
41) An outcome is Pareto efficient if:

A) an individual can be made better off without making someone else worse off.
B) benefits of the outcome are equally distributed among all the participants.
C) no individual can be made better off without making someone else worse off.
D) costs of the outcome are equally shared by all the participants.
Answer: C
Difficulty: Easy
42) When an outcome is ________, social surplus is ________.

A) Pareto inefficient; maximized
B) Pareto efficient; maximized
C) Pareto efficient; minimized
D) Pareto inefficient; minimized
Answer: B
Difficulty: Easy
43) Which of the following statements is true of a perfectly competitive market?

A) At equilibrium, it is possible to make someone better off without making someone else worse off.
B) The equilibrium price in a competitive market efficiently allocates scarce resources to participants.
C) The equilibrium price is determined by a few large firms in the market.
D) The sum of consumer surplus and producer surplus is not maximized at the equilibrium.
Answer: B
Difficulty: Medium
44) The invisible hand suggests that:

A) individuals working for self-interest will eventually maximize the well-being of society.
B) equilibrium in a competitive market is determined independent of demand and supply.
C) government intervention is necessary to rectify market imperfections.
D) the price mechanism allocates resources only to the people with high income in the country.
Answer: A
Difficulty: Easy
12
45) $100 is to be divided among two individuals—Mary and Jenna. Which of the following allocations is
Pareto efficient?
A) Mary receives $45, and Jenna receives $45.
B) Mary receives $20, and Jenna receives $75.
C) Mary receives $1, and Jenna receives $99.
D) Mary receives $90, and Jenna receives $9.
Answer: C
Difficulty: Medium
46) $20 is to be divided among two individuals—Gary and Jamie. Which of the following allocations is
NOT Pareto efficient?
A) Gary receives $1, and Jamie receives $19.
B) Gary receives $19, and Jamie receives $1.
C) Gary receives $8, and Jamie receives $9.
D) Gary receives $15, and Jamie receives $5.
Answer: C
Difficulty: Medium
47) What does the concept of "invisible hand" imply?

Answer: The "invisible hand" is an idea in economics that suggests that when all assumptions of a
perfectly competitive market are in place, the pursuit of individual self-interest promotes the well-being
of society as a whole, almost as if the individual is led by an invisible hand to do so. Thus, under perfect
competition, when individuals are working to maximize personal profits, they end up promoting social
interests.
Difficulty: Easy
48) Define reservation values. If a buyer of a product has a reservation value of $10, the seller of the
product has a reservation value of $3, and the equilibrium price of the product is determined at $5,
calculate the consumer surplus and the producer surplus.
Answer: A reservation value is the price at which a trading partner is indifferent between making the
trade and not doing so. For a buyer, this is the highest price he is willing to pay for a good or service. For
a seller, it is the lowest price he is willing to accept for a good or service.
Consumer surplus = $10 - $5 = $5
Producer surplus = $5 - $3 = $2
Difficulty: Medium
13
49) The following figure shows the demand and supply of a good. Calculate the social surplus from the
following figure. What is the maximum possible social surplus in this market?
Answer: Social surplus refers to the sum of consumer surplus and producer surplus.
In this figure, consumer surplus = $(1/2 × 4 × 5) = $10.
Producer surplus = $(1/2 × 4 × 5) = $10.
Social surplus = $10 + $10 = $20.
Since, in the figure, market price is determined at the point of intersection of demand and supply, it is a
free market economy that is in equilibrium. Since social surplus is maximized when a market is in
equilibrium, the maximum possible social surplus is $20.
Difficulty: Medium
50) Define a Pareto efficient outcome. Does it ensure equity? Explain with an example.
Answer: An outcome is said to be Pareto efficient outcome if it is not possible to make someone better off
without making someone else worse off. Pareto efficiency does not ensure equity. For example, $100 is
divided between two individuals such that one individual receives $75 and the other individual receives
$25. This allocation is Pareto efficient as it is not possible to make an individual better off without making
the other worse off, but the allocation does not represent equity.
Difficulty: Medium
14
51) The following table displays the reservation values of 10 sellers and 10 buyers in a market for cameras
where each individual wants to buy or sell one camera.
Buyers Value ($) Sellers Value ($)

1 100 1 5
2 86 2 18
3 74 3 22
4 60 4 26
5 55 5 35
6 50 6 50
7 34 7 65
8 26 8 75
9 12 9 85
10 6 10 100
a) What is the equilibrium price and quantity of cameras?

b) What is the social surplus when four highest-value buyers trade with four lowest-value sellers?
c) What is the social surplus when eight highest-value buyers trade with eight lowest-value sellers?
d) What is the highest possible social surplus in the market? At what quantity does it occur?
Answer:
a) The equilibrium price is determined at $50 and the equilibrium quantity is 6 units. The equilibrium
quantity is 6 units since six buyers are willing to pay at least $50 for a camera, and six sellers are willing
to sell a camera for no less than $50.
b) Social surplus is the sum of consumer surplus and producer surplus. These can be calculated as
shown in the table below.
Consumer Producer
Buyers Value ($) Surplus ($) Sellers Value ($) Surplus ($)
1 100 50 1 5 45
2 86 36 2 18 32
3 74 24 3 22 28
4 60 10 4 26 24
5 55 5 5 35 15
6 50 0 6 50 0
7 34 -16 7 65 -15
8 26 -24 8 75 -25
9 12 -38 9 85 -35
10 6 -44 10 100 -50
Social surplus when the four highest value buyers trade with the four lowest value sellers:
= $(50 + 45 + 36 + 32 + 24 + 28 + 10 + 24) = $249.
c) The social surplus when the eight highest value buyers trade with the eight lowest value sellers:
= 50 + 45 + 36 + 32 + 24 + 28 + 10 + 24 + 5 + 15 - 16 - 15 - 24 - 25 = $189.
15
d) The highest possible social surplus will occur at a quantity of 6 units. The social surplus when six
highest value buyers trade with the six lowest value traders:
= 50 + 45 + 36 + 32 + 24 + 28 + 10 + 24 + 5 + 15 = $269
Difficulty: Hard
7.2 Extending the Reach of the Invisible Hand: From the Individual to the Firm
The following figure shows the marginal cost curves of two profit-maximizing firms—firm A and firm
B—in a perfectly competitive market.
1) Refer to the figure above. Which of the following statements is true?

A) Firm A produces at a lower marginal cost.
B) For a particular market price, firm A will enjoy a greater producer surplus.
C) Firm B will have a higher reservation value than firm A.
D) The profit-maximizing level of output of firm B will be greater than that of firm A at all prices.
Answer: D
Difficulty: Medium
Topic: Extending the Reach of the Invisible Hand: From the Individual to the Firm

A) Firm B produces at a higher marginal cost than firm A.
B) At a given market price, firm A will enjoy a greater producer surplus.
C) Firm A will have a higher reservation value for the good than firm B.
D) Firm B will produce a lower quantity than firm A at all prices.
Answer: C
Difficulty: Medium
16
3) If firms in a competitive industry independently operate to maximize profits, the ________ are
eventually equalized across the firms.
A) total costs
B) marginal costs
C) profits
D) revenues
Answer: B
Difficulty: Medium
4) When two firms in a perfectly competitive market seek to maximize profit in the long run, they
eventually end up:
A) producing at a suboptimal level.
B) minimizing total cost of production.
C) earning the same level of profits.
D) producing the same level of output.
Answer: B
Difficulty: Medium
5) If price is greater than the average variable cost, a profit-maximizing firm should:
A) contract production until price is equal to marginal cost.
B) expand production until price is equal to marginal cost.
C) contract production until total revenue is equal to total cost.
D) expand production until total revenue is equal to total cost.
Answer: B
Difficulty: Easy
6) If a firm faces an average total cost of $100 and sells its product for $115, how much profit does it make
when it sells 20 units of the product?
A) $200
B) $115
C) $300
D) $800
Answer: C
Difficulty: Medium
17
The following figure shows the marginal cost curve and the average total cost curve of a firm operating in
a perfectly competitive industry.
7) Refer to the figure above. What price does the firm face in the market?
A) $2
B) $4
C) $6
D) $8
Answer: D
Difficulty: Medium
8) Refer to the figure above. At what level of output does the firm maximize profits?
A) 0 units
B) 10 units
C) 20 units
D) 30 units
Answer: D
Difficulty: Medium
18
9) Refer to the figure above. What is the revenue of the firm when it sells the profit-maximizing level of
output?
A) $40
B) $160
C) $180
D) $240
Answer: D
Difficulty: Medium
10) Refer to the figure above. What is the total cost of the firm when it produces the profit-maximizing
level of output?
A) $60
B) $120
C) $180
D) $240
Answer: C
Difficulty: Medium
A) The firm maximizes profits if it produces 10 units of the good.
B) If the market price is $10, the firm will suffer losses.
C) If the market price is $2, the firm will make profits.
D) The firm makes maximum profits if it produces 30 units.
Answer: D
Difficulty: Medium
12) Refer to the figure above. What is the maximum profit that the firm can make?
A) $30
B) $60
C) $90
D) $180
Answer: B
Difficulty: Medium
19
Scenario: There are two firms producing ball point pens in a perfectly competitive industry. The market
price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the
marginal cost curves of both the firms.
13) Refer to the scenario above. If both the firms are optimizing, which of the following statements will be
true?
A) Firm B will produce more than Firm A.
B) Firm A will produce more than Firm B.
C) Both firms will produce the same quantity.
D) The quantity produced by both firms will depend on the demand for pens and not the marginal costs.
Answer: B
Difficulty: Medium
14) Refer to the scenario above. The average total cost of Firm A when it produces 100 pens is $3, and the
average total cost of Firm B when it produces 50 pens is $7. At these levels of production, which of the
following statements is true?
A) Both firms incur losses.
B) Firm A incurs a loss but Firm B makes a profit.
C) Firm B incurs a loss but Firm A makes a profit.
D) Both firms make profits.
Answer: C
Difficulty: Medium
15) Refer to the scenario above. If the government enforces a ban on Firm B, and asks Firm A to carry out
all the production:
A) Firm A's marginal cost is likely to decrease, but its average cost is likely to increase.
B) Firm A's marginal cost and average cost are likely to decrease.
C) Firm A's marginal cost is likely to increase, but its average cost is likely to decrease.
D) Firm A's marginal cost and average cost are likely to increase.
Answer: D
Difficulty: Medium
20
16) Refer to the scenario above. If the government removes the ban on Firm B and both Firm A and firm B
aim at maximizing profits:
A) marginal cost of Firm A will be greater than the marginal cost of Firm B eventually.
B) marginal cost of Firm B will be greater than the marginal cost of Firm A eventually.
C) marginal cost of both firms will be equalized eventually.
D) the difference in the marginal cost of both firms will increase eventually.
Answer: C
Difficulty: Medium
17) Refer to the scenario above. If both firms operate to maximize profits:
A) total cost of production is minimized.
B) total combined profits are minimized.
C) marginal cost of both firms are minimized.
D) marginal cost of both firms are maximized.
Answer: A
Difficulty: Medium
18) Refer to the scenario above. If both firms operate without government intervention:
A) total costs are maximized.
B) total profits are maximized.
C) marginal revenues of both the firms are maximized.
D) marginal revenues of both the firms are minimized.
Answer: B
Difficulty: Medium
19) Refer to the scenario above. Which of the following statements is true?
A) If the government restricts one of the firms to operate in the market, social surplus increases.
B) No government intervention is required to reach the optimal outcome.
C) At the optimal level of production, total costs of production are maximized.
D) Even though both firms have different marginal costs, the optimal quantity produced will be the same
for both firms.
Answer: B
Difficulty: Medium
21
20) Which of the following statements is true?
A) Total cost of production in a perfectly competitive market can be minimized only when marginal cost
across firms in the market are different.
B) When a competitive market is allowed to operate efficiently, firms end up producing goods using the
least amount of scarce resources.
C) Under a perfectly competitive framework, a ruling authority is essentially required to dictate goals for
the betterment of society.
D) A firm interested in maximizing profits in a perfectly competitive market will produce output at a
level where marginal revenue is equal to the price and greater than the marginal cost.
Answer: B
Difficulty: Medium
21) What role does the invisible hand play when two firms are producing in the same competitive
industry?
Answer: When two firms are producing in the same competitive industry, the managers of both firms
will be interested in maximizing individual profits. Although both firms function independently for their
own objectives, the total cost of production will be minimized and the total profits across the two firms
will be maximized. This happens because both firms produce where marginal cost is equal to price and
eventually marginal cost across the firms are equalized. Since both firms are manufacturing at their least
cost output levels, total cost of production is minimized and social surplus is maximized.
Difficulty: Easy
22
22) The following figure illustrates the marginal cost (MC) curves of two firms operating in the same
industry. The marginal cost of Firm B is higher than the marginal cost of Firm A.
a) What is the optimal output of each firm if the market price is $15?
b) The government decides to shut down Firm B as it has a higher marginal cost than Firm A. If it does
so, and asks Firm A to produce the combined output of firms A and B, will production be efficient?
Explain your answer.
c) How does the invisible hand work in such an industry?
Answer:
a) The optimal output of each firm is determined at the point where price is equal to marginal cost, and
marginal cost is rising. Hence, optimal output for Firm A is 40 units and optimal output for Firm B is 20
units.
b) If the Government decides to suspend operations at Firm B and asks Firm A to carry out all the
production, efficiency will be lost. Total production when both firms are producing equals 60 units. Now,
if Firm B is stopped from producing and Firm A is asked to carry out the total production, it has to
produce 20 more units. The marginal cost of Firm A when it produces 60 units of the good is $35, which is
much higher than the price, and therefore it is definitely not the least-cost level of output for Firm A.
Moreover, initially Firm A was producing 40 units where ATC is below the price line. When the
government suspends operations at Firm B, Firm A has to produce the total market output and it is
forced to produce at a point where the ATC lies above the price line. Hence, Firm A which was making
profits when operating along with Firm B, will suffer losses when producing 60 units of the good alone.
c) The invisible hand will work by moving production of both firms to such levels where marginal costs
of both firms are equalized. This happens because managers of both firms will want to produce at a level
where price is equal to marginal cost. At that level of output both firms are producing the least-cost level
of output and hence total cost of production across the two firms is also minimized. When managers of
both firms work for their self-interest, they end up minimizing total costs and maximizing total profits of
the two plants combined. Thus, both firms will end up producing goods using the least amount of scarce
resources.
Difficulty: Hard
23
7.3 Extending the Reach of the Invisible Hand: Allocation of Resources Across
Industries
1) Positive economic profits in a perfectly competitive market imply that:

A) producers are earning more than their opportunity cost.
B) existing firms are likely to leave the market.
C) cost of production is equalized across producers.
D) government intervention is required to stabilize the market.
Answer: A
Difficulty: Easy
Topic: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries
2) The entry of new firms into a perfectly competitive market will cause:
A) both the equilibrium price and quantity to increase.
B) both the equilibrium price and quantity to decrease.
C) the equilibrium price to increase but the equilibrium quantity to decrease.
D) the equilibrium price to decrease but the equilibrium quantity to increase.
Answer: D
Difficulty: Easy
3) The entry of new firms into a perfectly competitive market will cause:
A) an increase in the profitability of existing firms.
B) a decrease in the profitability of existing firms.
C) an inward shift of the demand curve of the good being produced by the firms.
D) an outward shift of the demand curve of the good being produced by the firms.
Answer: B
Difficulty: Medium
4) In a perfectly competitive market, if market price is higher than the average total cost of production,
________.
A) firms will incur losses in the long run
B) firms will make profits in the long run
C) new firms will enter the industry
D) firms will exit the industry
Answer: C
Difficulty: Medium
5) The incentive for new firms to enter into a perfectly competitive market is primarily the:
A) large number of existing firms in the market.
B) positive profits earned by the existing firms in the market.
C) high level of government intervention in the market.
D) large number of buyers in the market.
Answer: B
Difficulty: Easy
24
6) Which of the following suggests that a competitive firm earns zero economic profits?
A) P = MC > ATC
B) P > MC = ATC
C) P = MC = ATC
D) P > MC > ATC
Answer: C
Difficulty: Easy
7) When positive economic profits exist in an industry:

A) the market price of the good produced by the industry is lesser than the average total cost of the
industry.
B) resources flow from less productive uses to that particular industry.
C) there is an exit of firms from the industry.
D) the market price of the good produced by the industry is less than the marginal cost faced by the
industry.
Answer: B
Difficulty: Easy

A) In a competitive market, the invisible hand encourages the movement of resources from more
productive uses to less productive uses.
B) In a competitive market, firms in the long run tend to earn positive economic profits.
C) Competitive equilibrium provides incentives for entrepreneurs to shift their resources from
unprofitable industries to profitable ones.
D) At the competitive equilibrium, production occurs at the point of maximum average total cost.
Answer: C
Difficulty: Easy
9) Which of the following statements is true of perfect competition?

A) The outcome in perfectly competitive market is Pareto inefficient.
B) The total value of production across a perfectly competitive industry is maximized.
C) Firms under perfect competition produce at a point where price is greater than marginal cost.
D) Consumers in a competitive market purchase at a point where marginal utility is greater than price.
Answer: B
Difficulty: Easy
25
A) Production in a perfectly competitive market is efficient because resources in the market leave those
sectors in which price cannot cover their costs of production and enter those sectors where price can
cover their costs of production.
B) Production in a perfectly competitive market is suboptimal because absence of free entry and exit of
firms allows firms to specialize in only one particular industry.
C) Production in a perfectly competitive market is Pareto inefficient because the government or a central
planner carefully analyzes the needs and requirements of the society and instructs firms on what to
produce and in what quantity.
D) Production in a perfectly competitive market is Pareto efficient because the government or a central
planner carefully analyzes the needs and requirements of the society and instructs firms on what to
produce and in what quantity.
Answer: A
Difficulty: Easy
11) A market economy produces the optimal amount of each good at least cost where:
A) P > ATC.
B) P = ATC.
C) P > AVC.
D) P = MR.
Answer: B
Difficulty: Easy
12) In a perfectly competitive market, if market price is lower than the average total cost of production:
A) new firms will enter the market.
B) existing firms will leave the market.
C) all existing firms will earn positive economic profits.
D) all existing firms will earn zero economic profits.
Answer: B
Difficulty: Easy
13) When existing firms leave a perfectly competitive industry, ________.

A) the equilibrium price decreases, while the equilibrium quantity increases
B) the equilibrium price increases, while the equilibrium quantity decreases
C) both the equilibrium price and quantity increase
D) both the equilibrium price and quantity decrease
Answer: B
Difficulty: Easy
26
14) When existing firms leave a perfectly competitive market, it causes:
A) an increase in the profitability of existing firms.
B) a decrease in the profitability of existing firms.
C) an outward shift in the demand curve of the good being produced by the firms.
D) an inward shift in the demand curve of the good being produced by the firms.
Answer: A
Difficulty: Easy
15) When sellers in a perfectly competitive market attempt to maximize their own profits, they:
A) eventually end up minimizing the value of total production.
B) earn positive economic profits even in the long run.
C) move scarce resources to their highest possible use.
D) eventually divert resources toward their lower valued uses.
Answer: C
Difficulty: Easy
16) If restrictions on entry and exit of firms are introduced in free markets, ________.
A) all existing firms earn equal profits in the long run
B) existing firms incur equal losses in the long run
C) the market allocates resources efficiently
D) resources in the market are not allocated efficiently
Answer: D
Difficulty: Medium
17) What are the key functions of equilibrium price in a perfectly competitive market?
Answer: There are three key functions of equilibrium price in a perfectly competitive market. These are:
a) Equilibrium price efficiently allocates scarce resources to market participants.
b) Equilibrium price efficiently allocates the production of goods within an industry.
c) Equilibrium price efficiently allocates scarce resources across industries.
Difficulty: Easy
18) How do perfectly competitive markets allow for the movement of resources from less productive
industries to more productive industries?
Answer: Perfectly competitive markets are characterized by free entry and exit of firms. Whenever firms
in a particular industry are seen to earn positive economic profits, other firms are attracted to the
industry. Thus, the firms that are entering the profit-making industry bring resources from other
industries where they were not fully utilized. Similarly, when an industry is making losses, some firms
move out of the industry. This allows for the movement of resources from the less productive, loss-
making industry to other industries.
Difficulty: Medium
27
19) What is likely to happen to the allocation of resources if there is a sudden increase in the demand for a
good produced by a perfectly competitive industry?
Answer: If there is an increase in the demand for a good produced by a perfectly competitive industry,
the equilibrium price in the industry will increase and the existing firms will earn higher profits. This will
act as an incentive for newer firms to enter the industry. As such, resources and firms will move into the
industry because of the sudden increase in the demand for this good.
Difficulty: Medium
20) Suppose the firms in a perfectly competitive industry are earning positive economic profits. How will
this positive profit affect the flow of resources into the industry? How will the equilibrium quantity and
price change in the industry because of the profits?
Answer: A perfectly competitive market is characterized by free entry and exit of firms in the long run.
Profits earned by firms in an industry are the rationale behind the entry and exit of firms in that industry.
If firms in a particular industry are earning positive economic profits, it will act as an incentive for newer
firms to enter that industry. Among the firms that are entering the industry, some would be new firms
and some would be firms which are exiting from other industries. In a perfectly competitive framework,
firms exit an industry when the industry suffers losses. Guided by profits, some firms exit loss-making
industries to participate in the profit-making industries. Hence, the invisible hand guides resources from
other industries to the profit-making industry without requiring any intervention from any authority.
Resources are thus put to their best uses through the functioning of the invisible hand.
When new firms enter the industry, the supply curve of the industry will shift rightward without any
change in demand. An increase in supply, without any change in demand, will lead to a higher
equilibrium quantity available at a lower equilibrium price.
Difficulty: Medium
7.4 Prices Guide the Invisible Hand
1) Which of the following statements is true of market prices in a perfectly competitive market?
A) Market prices are determined by the government.
B) Market prices allow for efficient allocation of scarce resources.
C) Market prices are not stable and fluctuate widely.
D) Market prices do not act as incentives for buyers.
Answer: B
Difficulty: Easy
Topic: Prices Guide the Invisible Hand
2) The invisible hand is mostly guided by:

A) costs of production.
B) quantity of goods and services sold.
C) market prices.
D) government intervention.
Answer: C
Difficulty: Easy
28
3) Without any restrictions in a perfectly competitive market, if there is a sudden outward shift in the
demand for a good:
A) sellers of the good will increase the supply of the good at the same price.
B) sellers of the good will increase the quantity of the good supplied in the market.
C) sellers of the good will decrease the supply of the good at the same price.
D) sellers of the good will decrease the quantity supplied.
Answer: B
Difficulty: Medium
4) A price control is:

A) a market determined equilibrium price.
B) a non-market price imposition.
C) the price at which quantity demanded equals quantity supplied.
D) the price that maximizes social surplus.
Answer: B
Difficulty: Easy
5) If prices are held below the equilibrium price:

A) there exists a surplus in the market.
B) there exists a shortage in the market.
C) social surplus is maximized.
D) all firms earn positive economic profits.
Answer: B
Difficulty: Easy
6) If prices are held above the equilibrium price:

A) social surplus is maximized.
B) all firms incur losses.
C) there exists a surplus in the market.
D) there exists a shortage in the market.
Answer: C
Difficulty: Easy
7) With an increase in the demand for a good, if prices are not allowed to increase:
A) social surplus will be maintained at maximum.
B) there will be no incentive for firms to increase the quantity supplied of the good.
C) a surplus will occur in the market.
D) there will be an increase in overall efficiency in the market.
Answer: B
Difficulty: Easy
29
The following figure shows the demand and supply curves for a good. The initial demand curve is D 1 is
S. Later, due to an external shock, the demand curve shifts to D 2.
8) Refer to the figure above. What is the initial equilibrium price of the good?
A) $20
B) $40
C) $60
D) $80
Answer: C
Difficulty: Medium
9) Refer to the figure above. What is the initial equilibrium quantity of the good?
A) 20 units
B) 30 units
C) 35 units
D) 50 units
Answer: A
Difficulty: Medium
10) Refer to the figure above. What is the equilibrium price after the demand curve shifts to D2?
A) $20
B) $40
C) $60
D) $80
Answer: D
Difficulty: Medium
30
11) Refer to the figure above. What is the equilibrium quantity after the demand curve shifts to D2?
A) 20 units
B) 30 units
C) 35 units
D) 50 units
Answer: B
Difficulty: Medium
12) Refer to the figure above. After the demand curve shifts to D2, if the price is held below the new
equilibrium, then:
A) the quantity demanded will equal the quantity supplied.
B) the quantity demanded will be greater than the quantity supplied.
C) the quantity demanded will be lesser than the quantity supplied.
D) there will be zero deadweight loss.
Answer: B
Difficulty: Medium
13) Which of the following is likely to happen if the government imposes a price control at $60, when the
demand curve shifts to D2?
A) There will be a shortage of 15 units of the good in the market.
B) There will be a surplus of 15 units of the good in the market.
C) There will be a shortage of 10 units of the good in the market.
D) There will be a surplus of 10 units of the good in the market.
Answer: A
Difficulty: Medium

A) Price controls strengthen the functioning of the invisible hand.
B) Price controls weaken the functioning of the invisible hand.
C) Price controls always benefit buyers and make sellers worse off.
D) Price controls always benefit sellers and make buyers worse off.
Answer: B
Difficulty: Medium
31
15) Which of the following statements differentiates between a shortage and a surplus?
A) A shortage occurs when price is held at the equilibrium price, but a surplus occurs when price is held
above the equilibrium price.
B) A shortage occurs when price is held below the equilibrium price, but a surplus occurs when price is
held at the equilibrium price.
C) A shortage occurs when quantity supplied exceeds quantity demanded, whereas a surplus occurs
when quantity demanded exceeds quantity supplied.
D) A shortage occurs when quantity demanded exceeds quantity supplied, whereas a surplus occurs
when quantity supplied exceeds quantity demanded.
Answer: D
Difficulty: Easy
The following figure illustrates the demand and supply curves for a good.
16) Refer to the figure above. What is the equilibrium price and quantity of the good?
A) Equilibrium price = $40, equilibrium quantity = 20 units
B) Equilibrium price = $60, equilibrium quantity = 10 units
C) Equilibrium price = $60, equilibrium quantity = 20 units
D) Equilibrium price = $80, equilibrium quantity = 30 units
Answer: C
Difficulty: Medium
32
17) Refer to the figure above. Which of the following is likely to happen if a price control below the
equilibrium price is imposed?
A) Quantity supplied will exceed quantity demanded.
B) Quantity demanded will exceed quantity supplied.
C) Consumer surplus will decrease.
D) Producer surplus will increase.
Answer: B
Difficulty: Medium
18) Refer to the figure above. Which of the following is likely to happen if a price control of $40 is
imposed?
A) There will be a surplus of 10 units in the market.
B) There will be a shortage of 10 units in the market.
C) There will be a surplus of 20 units in the market.
D) There will be a shortage of 20 units in the market.
Answer: D
Difficulty: Medium
19) Refer to the figure above. Which of the following is likely to happen if a price control above the
equilibrium price is imposed?
A) Quantity demanded will exceed quantity supplied.
B) Quantity supplied will exceed quantity demanded.
C) Consumer surplus will increase.
D) Producer surplus will decrease.
Answer: B
Difficulty: Medium
20) Refer to the figure above. Which of the following is likely to happen if a price control of $80 is
imposed in the market?
A) There will be a surplus of 25 units in the market.
B) There will be a shortage of 25 units in the market.
C) There will be a surplus of 10 units in the market.
D) There will be a shortage of 10 units in the market.
Answer: A
Difficulty: Medium
33
21) The decrease in social surplus from a market distortion is referred to as:
A) deadweight loss.
B) market loss.
C) revenue loss.
D) Pareto loss.
Answer: A
Difficulty: Easy
Topic: Deadweight Loss
The following graph shows the demand and supply curves for bottled water.
22) Refer to the figure above. What is the equilibrium price of bottled water?
A) $4
B) $8
C) $12
D) $18
Answer: C
Difficulty: Medium
23) Refer to the figure above. What is the equilibrium quantity of bottled water?
A) 10 units
B) 20 units
C) 30 units
D) 40 units
Answer: B
Difficulty: Medium
34
24) Refer to the figure above. What is the consumer surplus in the market?
A) $60
B) $90
C) $120
D) $160
Answer: C
Difficulty: Medium
25) Refer to the figure above. What is the producer surplus in the market?
A) $20
B) $40
C) $60
D) $80
Answer: D
Difficulty: Medium
26) Refer to the figure above. If a price control is imposed at $8, what is the new consumer surplus in the
market?
A) $115
B) $125
C) $130
D) $175
Answer: C
Difficulty: Hard
27) Refer to the figure above. If a price control is imposed at $8, what is the new producer surplus in the
market?
A) $20
B) $40
C) $60
D) $80
Answer: A
Difficulty: Hard
35
28) Refer to the figure above. If a price control is imposed at $8, what is the gain in consumer surplus?
A) $5
B) $10
C) $15
D) $20
Answer: B
Difficulty: Hard
29) Refer to the figure above. If a price control is imposed at $8, what is the loss in producer surplus?
A) $30
B) $60
C) $90
D) $120
Answer: B
Difficulty: Hard
30) Refer to the figure above. If a price control is imposed at $8, what is the deadweight loss?
A) $10
B) $50
C) $65
D) $85
Answer: B
Difficulty: Hard
31) Which of the following best describes a command economy?

A) An economy which is characterized by barter trade of goods and services
B) An economy where strong controls are imposed by the ruling authority
C) An economy in which resources are allocated through the price mechanism.
D) An economy in which there are a few privately owned firms
Answer: B
Difficulty: Easy
Topic: The Command Economy
36
A) Command economies do a better job at maximizing social welfare in comparison to market economies.
B) Incentive problem and coordination problem lead to lower efficiency in market economies.
C) Central planners in command economies have to make decisions that prices would have automatically
made in market economies.
D) Bringing economic agents together to trade is easier in command economies in comparison to market
economies.
Answer: C
Difficulty: Medium
33) ________ is the market value of final goods and services produced in a country in a given period of
time?
A) Gross national product
B) Gross domestic product
C) Net national product
D) Net domestic product
Answer: B
Difficulty: Easy
34) Historical evidence suggests that:

A) command economies perform better than free economies in the long run.
B) free economies perform better than command economies in the long run.
C) social surplus is maximized in a command economy.
D) social surplus is minimized in a free economy.
Answer: B
Difficulty: Easy
35) The problem of bringing economic agents together to trade is referred to as the:
A) incentive problem.
B) coordination problem.
C) correspondence problem.
D) scarcity problem.
Answer: B
Difficulty: Easy
Topic: The Central Planner
36) When the maximizing actions of two economic agents are not aligned, these agents face a(n):
A) coordination problem.
B) incentive problem.
C) correspondence problem.
D) objective problem.
Answer: B
Difficulty: Easy
37
37) Which of the following is a characteristic of command economies?
A) Rewards to economic agents are based on market prices.
B) Coordination of economic agents is automatic.
C) It is difficult to incentivize economic agents.
D) The invisible hand functions without any restraint.
Answer: C
Difficulty: Easy
38) What is the economic variable that guides the invisible hand?
Answer: The invisible hand is guided by the market price. Market prices act as the most important piece
of information, leading the right buyers to buy and the right sellers to sell; no more, no less. It ensures
that self-interest and social interest are perfectly aligned. It also allows economic agents to make optimal
decisions.
Difficulty: Easy
39) What are price controls? How do they affect a market?

Answer: Price controls are non-market price impositions. When price controls hold, the incentives that
equilibrium prices provide to buyers and sellers are eliminated. If a price control is imposed above the
equilibrium price of a good, the quantity supplied of the good exceeds the quantity demanded of the
good. This represents a surplus in the market. If a price control is imposed below the equilibrium price of
a good, the quantity demanded of the good exceeds the quantity supplied of the good. This results in a
shortage in the market.
Difficulty: Easy
40) Why is it likely that a market economy will perform better than a command economy?
Answer: Difficulties like the coordination problem and the incentive problem suggest that the reason for
the fall of the most of the planned economies is that the central planner does not fully understand
consumer wants and the production capabilities of every sector of the economy and it is difficult to
incentivize workers if prices are not utilized. Since any individual knows only a small fraction of all that
is known collectively, it is impossible to replicate the work of the invisible hand. Therefore, a market
economy is likely to perform better than a command economy.
Difficulty: Medium
41) Differentiate between coordination problem and incentive problem.

Answer: Coordination problem refers to the problem of bringing economic agents together to trade,
whereas incentive problem refers to the problem of aligning the interests of economic agents. These
problems can occur in a command economy.
Difficulty: Easy
38
42) a) Is the invisible hand likely to work better in a market with price controls or without price controls?
Explain your answer.
b) The following figure illustrates the demand and supply curves in the market for watches. Calculate
the shortage or surplus in the market when the price is first held at $20 and then at $40.
Answer:
a) In a perfectly competitive market, market prices align self-interest and social interest. Market prices
act as the most important piece of information, leading the right buyers to buy and the right sellers to sell.
Prices also allow entrepreneurs to allocate the production of goods within the same industry and also
across industries. Hence, it is the market price that guides the invisible hand. When prices are allowed to
move freely, social surplus is maximized in a perfectly competitive market. For example, if the demand
for a commodity increases in the market of a particular region, prices go up, which encourages new firms
to enter the market. But if some ruling authority does not allow the price to change according to the
market conditions, and fixes it, the invisible hand will cease to operate. Price controls are such non-
market price impositions, and they limit the functioning of the invisible hand.
b) The equilibrium price in the figure is $30, as given by the point of intersection between the demand
and the supply curves. If the price is fixed at $40, quantity supplied is 60 units, whereas quantity
demanded is 10 units. Hence, there is a surplus of 50 units in the market. On the other hand, if the price is
fixed at $20, quantity demanded is 60 units, and quantity supplied is 20 units. There will be a shortage of
40 units in the market.
Difficulty: Medium
39
43) Consider the two economies of Lithasia and Barylia. Economic agents in Lithasia have coordination
and incentive problems, while in Barylia social surplus is maximized. Which economic system does each
of these economies most likely to have? Explain your answer.
Answer: A coordination problem refers to the problem of bringing agents together to trade and an
incentive problem refers to the problem of aligning the interests of economic agents. Since, Lithasia is
seen to have both of these problems, it is most likely to be a command economy. On the other hand,
Barylia is characterized by maximum social surplus. It is likely to be a free market economy.
Difficulty: Medium
7.5 Equity and Efficiency

A) The command system is remarkable at providing price signals that guides resources in a way that
maximizes social surplus.
B) Market economies minimize waste and provide incentives to all market participants to promote their
own interests.
C) Coordination of different economic agents and bringing them together to trade is a central problem of
a free market economy.
D) The broader interests of societies are met more often under a command system in comparison to a
market system.
Answer: B
Difficulty: Easy
Topic: Equity and Efficiency
2) ________ is concerned with the distribution of resources across society.

A) Social surplus
B) Equity
C) Efficiency
D) Utility
Answer: B
Difficulty: Easy

A) Social planners are only concerned with efficiency and not equity.
B) Social planners are only concerned with equity and not efficiency.
C) To some, efficiency means an even distribution of goods across society.
D) To some, equity means an even distribution of goods across society.
Answer: D
Difficulty: Easy
40
A) Maximum social surplus implies equity.
B) Pareto efficiency implies equity.
C) Taxation causes redistribution of wealth among the members in a society.
D) Market prices act as signals that result in equal distribution of income and wealth in the society.
Answer: C
Difficulty: Medium
5) The basic idea behind an auction is that:

A) buyers want to buy from the sellers with the lowest ask prices, and sellers want to sell to buyers with
the highest bid prices.
B) buyers want to buy from the sellers with the highest ask prices, and sellers want to sell to buyers with
the highest bid prices.
C) buyers want to buy from the sellers with the highest ask prices, and sellers want to sell to buyers with
the lowest bid prices.
D) buyers want to buy from the sellers with the lowest ask prices, and sellers want to sell to buyers with
the lowest bid prices.
Answer: A
Difficulty: Easy
Topic: Evidence-Based Economics
6) A double oral auction is an auction in which:

A) sellers post asks and buyers post offers one after the other.
B) sellers post asks and buyers post bids simultaneously.
C) the highest bidders post their bids at the same time.
D) bidding starts from the lowest price to the highest price.
Answer: B
Difficulty: Easy
7) A bilateral negotiation is a bargaining mechanism in which:

A) a third party or an authority intervenes and decides the prices of the products traded in a market.
B) a single seller and a single buyer confront one another with bids and asks.
C) multiple buyers bargain with a single seller to determine the trading price.
D) multiple sellers bargain with a single buyer to determine the trading price.
Answer: B
Difficulty: Easy
41
A) In case of auctions and bilateral negotiations, prices tend to approach the competitive equilibrium.
B) Bilateral negotiations allow a single buyer and a single seller to privately negotiate with bids and asks.
C) In auctions, buyers prefer buying from sellers with the highest ask prices.
D) In auctions, sellers prefer selling to buyers with the lowest bid prices.
Answer: B
Difficulty: Medium
9) Are the concepts of equity and efficiency different? Why or why not?
Answer: Yes, the concepts of equity and efficiency are different. An economy is said to be efficient when
waste of resources is eliminated and social surplus is maximized. Thus, efficiency relates to making the
societal pie as large as possible. Conversely, equity focusses on the distributive aspect of resources across
society. Hence, equity is more concerned with how the pie is allocated to various economic agents.
Difficulty: Easy
10) Differentiate between double oral auctions and bilateral negotiations.

Answer: A double oral auction is an auction mechanism where sellers post asks and buyers post offers
simultaneously, while a bilateral negotiation is a bargaining mechanism in which a single seller and a
single buyer confront one another with bid and asks.
Difficulty: Easy
42
11) Imagine an economy where the government allocates resources among its citizens. Recently, the
government divided $1,000 among ten citizens. The amount each citizen received is displayed in the table
below.
Citizen Amount Received ($)

1 100
2 150
3 50
4 10
5 90
6 200
7 10
8 190
9 20
10 180
a) The government claims that this is an efficient allocation. Do you agree?

b) Social workers in the economy criticized the government on the basis of this allocation. What could be
the grounds for such criticism?
Answer:
a) Yes, the allocation made by the government is efficient. The sum of the amounts received by the ten
individuals equals $1,000. Therefore, the pool of resources has been completely distributed among the ten
citizens. It is no longer possible to make someone better off without making someone else worse off. This
kind of efficiency is referred to as Pareto efficiency, and the government is correct in making a claim of
efficiently in allocating the resource.
b) Social workers could have criticized the government even though the allocation is efficient. This is
because an efficient allocation does not necessarily imply equity. Equity is concerned with the
distribution of resources across society. In other words, equity means an even distribution of goods
across society. The government's allocation can be criticized on the ground that the distribution is
unequal.
Difficulty: Hard
43

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Economics 1st Edition Acemoglu Test

7.1 Perfect Competition and Efficiency

2) Reservation value of a buyer reflects her ________.

4) Reservation value of a seller reflects her ________.

Reservation Value Reservation Value

10) Consumer surplus is the:

18) Social surplus is:

Reservation Value Reservation Value

32) Refer to the table above. Maximum social surplus is:

39) Which of the following statements is true of competitive market equilibrium?

41) An outcome is Pareto efficient if:

42) When an outcome is ________, social surplus is ________.

43) Which of the following statements is true of a perfectly competitive market?

44) The invisible hand suggests that:

47) What does the concept of "invisible hand" imply?

Buyers Value ($) Sellers Value ($)

a) What is the equilibrium price and quantity of cameras?

1) Refer to the figure above. Which of the following statements is true?

2) Refer to the figure above. Which of the following statements is true?

1) Positive economic profits in a perfectly competitive market imply that:

7) When positive economic profits exist in an industry:

8) Which of the following statements is true?

9) Which of the following statements is true of perfect competition?

13) When existing firms leave a perfectly competitive industry, ________.

7.4 Prices Guide the Invisible Hand

2) The invisible hand is mostly guided by:

4) A price control is:

5) If prices are held below the equilibrium price:

6) If prices are held above the equilibrium price:

14) Which of the following statements is true?

31) Which of the following best describes a command economy?

34) Historical evidence suggests that:

39) What are price controls? How do they affect a market?

41) Differentiate between coordination problem and incentive problem.

7.5 Equity and Efficiency

1) Which of the following statements is true?

2) ________ is concerned with the distribution of resources across society.

3) Which of the following statements is true?

5) The basic idea behind an auction is that:

6) A double oral auction is an auction in which:

7) A bilateral negotiation is a bargaining mechanism in which:

10) Differentiate between double oral auctions and bilateral negotiations.

Citizen Amount Received ($)

a) The government claims that this is an efficient allocation. Do you agree?

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42) When an outcome is , social surplus is .