Microeconomics, 14e (Parkin)

Chapter 5 Efficiency and Equity

1 Resource Allocation Methods

1) In the United States, resources are most often allocated by
A) market price.
B) command system.
C) lottery.
D) contest.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

2) A contest is a good way to allocate scarce resources when

A) the efforts of the players are hard to monitor directly.
B) the lines of responsibility are clear.
C) the decision being made affects a large number of people.
D) there is no effective way to distinguish among potential users.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

3) The resource allocation method that is used to allocate scarce resources between private
use and government use is
A) first-come, first-served.
B) personal characteristics.
C) majority rule.
D) lottery.
Answer: C
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

1
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4) Which of the following is TRUE?
A) Lotteries work best when a resource can serve just one user at a time in a sequence.
B) A market price always allocates resources better than a command system.
C) In the United States, how tax dollars are allocated among competing uses is an example
of how resources are allocated by majority rule.
D) Force has never played an important role in allocating scarce resources.
Answer: C
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

5) Which of the following is TRUE?

A) When resources are allocated on the basis of personal characteristics, all people who are
willing and able to pay the price get the resource.
B) When the range of activities to be monitored is large and complex, a command system
allocates resources better than a market price.
C) When a market price allocates resources, some people who are willing and able to pay
that price don't get the resource.
D) Force helps support the legal system on which markets function.
Answer: D
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

6) As a method of resource allocation, force

A) is not important.
B) plays a crucial negative role.
C) plays a crucial positive role.
D) plays a crucial role for both good and ill.
Answer: D
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

7) As a method of resource allocation, market price

A) means those who are willing and able to pay get a particular good or service.
B) works well when self-interest must be suppressed.
C) works best inside firms and government departments.
D) is efficient when there is no effective way to distinguish among potential users of a
scarce resource.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

8) Which of the following is TRUE?

A) When a market price allocates resources, all people who are willing and able to pay that
price get the resource.
B) A command system works well when the range of activities to be monitored is large and
complex.
C) When the government decides how to allocate tax dollars among competing uses,
resources are allocated by market prices.
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D) When a manager offers everyone in the company the opportunity to win a prize,
resources are allocated by a lottery.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

9) When allocating resources using market price

A) everyone who is willing and able to pay for a good gets one.
B) everyone who wants a good gets one.
C) everyone who is willing to pay for a good gets one.
D) everyone who is able to pay for a good gets one.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

10) When scarce resources can serve only one user at a time in sequence, which method
works well for allocating the scarce resources?
A) first come, first served
B) lottery
C) contest
D) command system
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

3
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11) Currently kidneys are allocated based on the needs of each perspective recipient, their
blood type, and the urgency of their case. An alternative way to allocate kidneys is to go by
the order in which patients were placed on the waiting list. In that case, the allocation of
resources is made using
A) market price.
B) auction.
C) first-come, first-served.
D) personal characteristics.
Answer: C
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

12) The night before enrollment was to open for the University of Johannesburg a line of
people more than a mile long formed outside the gates. When the gates opened, a
stampede started, and a woman lost her life in her attempt to secure her son a spot at the
university and a chance for a better life. The allocation of resources in this case was made
using
A) market price.
B) auction.
C) first-come, first-served.
D) lottery.
Answer: C
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Revised
AACSB: Reflective thinking

13) Which of the following is TRUE?

A) When a market price allocates resources, everyone who is able to pay the price gets the
resource.
B) A command system works well when the lines of authority and responsibility are clear.
C) When the government decides how to allocate tax dollars among competing uses,
resources are allocated by command.
D) When a manager offers everyone in the company the opportunity to win a prize,
resources are allocated by a market price.
Answer: B
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

4
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14) Alvin Roth of Harvard won the 2012 Nobel Prize in Economics for designing systems
that allocate resources in innovative ways. For example, he designed a system that matches
donated kidneys to recipients waiting for such donations. This system takes into account
the needs of each perspective recipient, their blood type, and the urgency of their case.
This allocation of resources is made using
A) market price.
B) auction.
C) lottery.
D) personal characteristics.
Answer: D
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Revised
AACSB: Reflective thinking

15) Asian women lag far behind the West in their representation in management level
positions. The report by the McKinsley consulting company suggests that there is an
opportunity for companies to recruit under-utilized female talent and do well financially as
a result. (Source: The Economist, July 7, 2012)
The fact that Asian women are currently less likely to be hired as managers is a result of
the allocation system using which of the following methods for hiring?
A) lottery
B) auction
C) first-come, first-served
D) personal characteristics
Answer: D
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

16) Allocating resources by the order of someone in authority is a ________ allocation

method.
A) first-come, first-served
B) market price
C) majority rule
D) command
Answer: D
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

5
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17) Often people trying to withdraw money from their bank must wait in line, which
reflects a ________ allocation method.
A) first-come, first-served
B) market price
C) contest
D) command
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

18) If a person will rent an apartment only to married couples over 30 years old, that
person is allocating resources using a ________ allocation method.
A) first-come, first-served
B) market price
C) personal characteristics
D) command
Answer: C
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

2 Benefit, Cost, and Surplus

1) The value of one more unit of a good or service is the
A) marginal benefit.
B) minimum price that people are willing to pay for another unit of the good or service.
C) marginal cost.
D) opportunity cost of producing one more unit of a good or service.
Answer: A
Topic: Value, Willingness to Pay, and Demand
Skill: Definition
Status: Old
AACSB: Analytical thinking

2) The value of a good is equal to the

A) maximum price you are willing to pay for it.
B) price that you actually pay for it.
C) price you actually pay for it minus the maximum you are willing to pay for it.
D) maximum you are willing to pay for it minus the price you actually pay for it.
Answer: A
Topic: Value, Willingness to Pay, and Demand
Skill: Definition
Status: Old
AACSB: Analytical thinking

3) Marginal benefit is the benefit received from

A) consuming more goods or services.
B) producing the efficient quantity.
C) consuming the efficient quantity.
D) consuming one more unit of a good or service.
Answer: D
Topic: Marginal Benefit
Skill: Definition
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Status: Old
AACSB: Analytical thinking

4) All of the following statements about marginal benefit are correct EXCEPT the marginal
benefit of a good
A) is the benefit a person receives from consuming one more unit of the good or service.
B) is measured as the maximum amount that a person is willing to pay for one more unit of
the good.
C) is equal to zero when resource use is efficient.
D) decreases as the quantity consumed of the good increases.
Answer: C
Topic: Marginal Benefit
Skill: Definition
Status: Old
AACSB: Analytical thinking

5) Sal likes to eat pizza. The ________ is the maximum amount that Sal is willing to pay for
one more piece of pizza.
A) efficient price
B) efficient amount
C) marginal benefit
D) marginal cost
Answer: C
Topic: Marginal Benefit
Skill: Definition
Status: Old
AACSB: Analytical thinking

6) Marginal benefit
A) is the same as the total benefit received from consuming a good.
B) is the maximum amount a person is willing to pay for one more unit of a good.
C) increases as consumption increases.
D) is the difference between total benefit and total cost.
Answer: B
Topic: Marginal Benefit
Skill: Definition
Status: Old
AACSB: Analytical thinking

7
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7) Jane is willing to pay $80 for a pair of shoes. The actual price of the shoes is $50. Her
marginal benefit from the pair of shoes is
A) $80.
B) $30.
C) $50.
D) $1300.
Answer: A
Topic: Marginal Benefit
Skill: Conceptual
Status: Revised
AACSB: Analytical thinking

The table below shows the demand schedules for pizza for Abby and Barry who are the only
buyers in the market.

Abby's quantity Barry's quantity

Price
demanded demanded
(dollars per
(slices per (slices per
slice)
month) month)
2.50 25 50
3.00 20 40
3.50 15 30
4.00 10 20
4.50 5 10
5.00 0 0

8) Based on the table, what is Abby's marginal benefit from the 10th slice of pizza?
A) $4
B) $13
C) $0.50
D) $40
Answer: A
Topic: Marginal Benefit
Skill: Analytical
Status: Old
AACSB: Analytical thinking

9) Based on the table, what is Barry's marginal benefit from the 40th slice of pizza?
A) $3
B) $5.50
C) $0.50
D) $12
Answer: A
Topic: Marginal Benefit
Skill: Analytical
Status: Old
AACSB: Analytical thinking

8
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10) Based on the table, what is the marginal social benefit from the 45th slice of pizza?
A) $3.50
B) $3.25
C) $0.50
D) $9
Answer: A
Topic: Marginal Social Benefit
Skill: Analytical
Status: Old
AACSB: Analytical thinking

11) If you increase your consumption of soda by one additional can a week, your marginal
benefit of this last can is $1.00. The ________ of this last can of soda is $1.00.
A) value
B) price
C) opportunity cost
D) marginal cost
Answer: A
Topic: Value, Willingness to Pay, and Demand
Skill: Analytical
Status: Old
AACSB: Analytical thinking

12) A person will choose to buy a good as long as

A) marginal benefit is at least as great as price.
B) consumer surplus is positive.
C) marginal benefit is positive.
D) consumer surplus is at least as great as price.
Answer: A
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

13) Sam's demand curve for pizza

A) lies above her marginal benefit curve for pizza.
B) lies below her marginal benefit curve for pizza.
C) is the same as her marginal benefit curve for pizza.
D) has one point in common with her marginal benefit curve for pizza.
Answer: C
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

9
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14) The market demand curve
A) can also be the marginal social cost curve.
B) shows the value of a good that consumers must give up to get another unit of a different
good.
C) by itself determines equilibrium prices.
D) can also be the marginal social benefit curve.
Answer: D
Topic: Marginal Benefit and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

15) The market demand curve also is

A) a marginal social cost curve.
B) a marginal social benefit curve.
C) an opportunity cost curve.
D) a consumer surplus curve.
Answer: B
Topic: Marginal Benefit and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

16) The market demand curve for coffee is the same as the
A) marginal social cost curve of coffee.
B) marginal social benefit curve of coffee.
C) opportunity cost curve of coffee.
D) marginal social benefit curve minus the marginal social cost curve of coffee.
Answer: B
Topic: Marginal Benefit and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

17) A market demand curve measures

A) how much a consumer is willing to pay for an additional unit of the good.
B) the marginal social benefit of an additional unit of the good.
C) the marginal social cost of an additional unit of the good.
D) Both answers A and B are correct.
Answer: D
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

10
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18) Moving down along the market demand curve for hot dogs, the as more hot dogs are
consumed the
A) maximum price that people are willing to pay for hot dogs increases.
B) marginal social benefit of hot dogs decreases.
C) marginal social cost of hot dogs increases.
D) consumer surplus of the last hot dog consumed increases.
Answer: B
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

19) The market demand curve is constructed by adding the

A) quantities demanded by each individual at each price.
B) prices that each individual is willing to pay at each quantity.
C) Neither answer A nor answer B is correct.
D) Both answer A and answer B are correct.
Answer: A
Topic: Individual Demand and Market Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

20) A market demand curve is constructed by

A) a horizontal summation of each individual demand curve.
B) averaging each individual demand curve.
C) dividing one individual demand curve by the number of consumers in the market.
D) a vertical summation of each individual demand curve.
Answer: A
Topic: Individual Demand and Market Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

21) A market demand curve can be constructed by

A) adding the prices all consumers will pay for any given quantity.
B) adding the quantities that all consumers buy at each price.
C) adding the quantities that a consumer buys at the highest price.
D) None of the above answers is correct.
Answer: B
Topic: Individual Demand and Market Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

11
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22) The market demand curve for iPads is the ________ of all the individual demand curves
for iPads.
A) horizontal product
B) horizontal sum
C) vertical sum
D) vertical product
Answer: B
Topic: Individual Demand and Market Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

Quantity of streamed movies demanded

Price
(dollars) Alex Lynn Liza
6 2 0 3
5 4 0 6
4 6 1 9
3 8 2 12
2 10 3 15
1 12 4 18

23) Given the individual demands for streamed movies in the above table, and assuming
that these three people are the only ones in the market, which of the following statements
is NOT true about market demand for streamed movies?
A) The market quantity demanded at a price of $5 is 10.
B) The height of the market demand curve at a quantity demanded of 22 is $3.
C) The height of the market demand curve at a quantity demanded of 16 is $5.
D) The market quantity demanded at a price of $2 is 28.
Answer: C
Topic: Individual Demand and Market Demand
Skill: Analytical
Status: Old
AACSB: Analytical thinking

12
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 Quantity of tennis
rackets demanded
Price
(dollars) Jill Jed
60 1 0
50 2 0
40 2 1
30 3 2
20 4 3

24) Jill and Jed have individual demand curves for tennis rackets given in the table above
and are the only two demanders in the market. What is the market quantity demanded at
the price of $30?
A) 2
B) 5
C) 11
D) 18
Answer: B
Topic: Individual Demand and Market Demand
Skill: Analytical
Status: Old
AACSB: Analytical thinking

Bart's Lisa's Homer's

Price
quantity quantity quantity
dollars per
demanded demanded demanded
pound)
(pounds) (pounds) (pounds)
2 9 5 7
3 7 4 6
4 4 2 5
5 1 0 3

25) Homer, Bart, and Lisa are the only consumers in the market for chocolate chip cookies.
Using the information in the above table, what is the market demand for chocolate chip
cookies at $4.00 per pound?
A) 21 pounds
B) 17 pounds
C) 11 pounds
D) 4 pounds
Answer: C
Topic: Individual Demand and Market Demand
Skill: Analytical
Status: Old
AACSB: Analytical thinking

13
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26) Consumer surplus is the ________ summed over the quantity bought.
A) marginal social benefit minus the marginal social cost
B) number of dollars' worth of other goods and services forgone to obtain one more unit of
a good or service
C) value of a good or service minus the price paid for the good or service
D) value of a good or service plus the price paid for the good or service
Answer: C
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

27) ________ is the value of a good minus the price paid for it summed over the quantity
bought.
A) Producer surplus
B) Consumer surplus
C) Surplus
D) Shortage
Answer: B
Topic: Consumer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

28) Consumer surplus is the

A) value of a good expressed in dollars.
B) price of a good expressed in dollars.
C) value of a good minus the price paid for it summed over the quantity bought.
D) value of a good plus the price paid for it summed over the quantity bought.
Answer: C
Topic: Consumer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

29) Consider the market for hot dogs. As long as the marginal benefit of consuming hot
dogs is greater than the price of hot dogs
A) people receive consumer surplus from eating hot dogs.
B) the price of hot dogs will rise.
C) the value of hot dogs will rise.
D) there is no decreasing marginal benefit of eating hot dogs.
Answer: A
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

14
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30) If the price of a pizza increases and the demand curve for pizza does NOT shift, then
the consumer surplus from pizza will
A) increase.
B) decrease.
C) equal the producer surplus if the market produces the efficient quantity of pizza.
D) remain the same.
Answer: B
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

31) A drought in the Midwest over the summer decreased the supply of corn and, as a
result, brought a sharp increase in the price of corn. The increase in the price of corn
A) always increases consumer surplus.
B) always decreases consumer surplus.
C) does not affect consumer surplus because this change reflects only a movement along
the demand curve.
D) increases consumer surplus if demand is elastic and decreases consumer surplus if
demand is inelastic.
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Revised
AACSB: Analytical thinking

32) For many years short wave radios were a way of getting news from faraway places and
in difficult conditions. But as new technologies have spread, the people listening to these
devices has decreased. As new technology creates substitutes for short-wave radios, the
demand for short-wave radios ________ and the consumer surplus from short-wave radios
________.
A) increases; increases
B) decreases; decreases
C) does not change; decreases
D) decreases; does not change
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

15
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33) Nick can purchase each milkshake for $2. For the first milkshake purchased Nick is
willing to pay $4, for the second milkshake $3, for the third milkshake $2 and for the fourth
milkshake $1. What is the value of Nick's consumer surplus for the milkshakes he buys?
A) $2
B) $9
C) $3
D) $10
Answer: C
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

34) A used car was recently priced at $20,000.00. Seeing the car, Bobby thought, "It's nice,
but if I have to pay more than $19,500 for this car, then I would rather do without it." After
negotiations, Bobby purchased the car for $19,250.00. His consumer surplus was equal to
A) $19,500.00.
B) $1,750.00.
C) $250.00.
D) $0.00.
Answer: C
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

35) When the Smiths were shopping for their present home, the asking price from the
previous owner was $250,000.00. The Smiths had decided they would pay no more than
$245,000.00 for the house. After negotiations, the Smiths actually purchased the house for
$239,000.00. They, therefore, enjoyed a consumer surplus of
A) $239,000.00.
B) $5,000.00.
C) $6,000.00.
D) $11,000.00.
Answer: C
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

16
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36) The latest model car in the dealer's showroom has a sticker price of $35,000.00. Fred,
the shopper, has decided that he would pay no more than $32,000.00 for the car. After two
hours of bargaining with the saleswoman, Fred actually purchases the car for $31,000.00.
Fred, therefore, has obtained a consumer surplus of
A) $35,000.00.
B) $32,000.00.
C) $4,000.00.
D) $1,000.00.
Answer: D
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

37) Jane is willing to pay $50 for a pair of shoes. The actual price of the shoes is $30. Her
consumer surplus on this pair of shoes is
A) $20.
B) $50.
C) $30.
D) $80.
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

38) Charlene is willing to pay $5.00 for a sandwich. If Charlene must pay ________ for a
sandwich, she ________.
A) $4.00; does not receive consumer surplus
B) $4.00; receives consumer surplus
C) $6.00; receives consumer surplus
D) $6.00; receives a marginal cost
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

17
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39) Joe is willing to pay $7 for his first slice of pizza and $6 for his second slice of pizza. If
the price is $5, on his two slices of pizza Joe receives a total consumer surplus of
A) $7.
B) $6.
C) $5.
D) $4.
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

40) Jane is willing to pay $4 for the first cup of coffee a day, $2.50 for the second cup, and
$1 for the third cup, after which she won't buy any coffee. The price of a cup of coffee is
$2.40. How many cups of coffee per day will Jane buy?
A) 1
B) 2
C) 3
D) None
Answer: B
Topic: Demand and Marginal Benefit
Skill: Analytical
Status: Old
AACSB: Analytical thinking

41) Jane is willing to pay $4 for the first cup of coffee a day, $2.50 for the second cup, and
$1 for the third cup, after which she won't buy any coffee. The price of a cup of coffee is
$2.40. Jane's consumer surplus from the coffee she buys is ________ per day.
A) $1.60
B) $1.70
C) $4.80
D) $6.50
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

18
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42) Consider a market that has linear supply and demand curves, and is in equilibrium. The
area above the price line and below the demand curve is
A) consumer surplus.
B) producer surplus.
C) marginal cost.
D) marginal benefit.
Answer: A
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

43) Four people each have a different willingness to pay for one unit of a good: George will
pay $15, Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price is equal to $9
per unit then the quantity demanded in the market will be ________ and the consumer
surplus for this unit will be ________.
A) 3; $10
B) 3; $37
C) 3; $36
D) 4; $8
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

44) Four people each have a different willingness to pay for one unit of a good: George will
pay $15, Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price decreases from
$9 to $8 then the consumer surplus from this unit will increase by
A) $3.
B) $4.
C) $2.
D) $1.
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

19
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45) The figure above shows Clara's demand for pizza. If the price of a pizza is $15, then
Clara
A) receives no consumer surplus on the 6th pizza she buys.
B) receives a total of $10 of consumer surplus.
C) will buy no pizzas.
D) receives a total of $40 of consumer surplus.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

46) The figure above shows Clara's demand for pizza. The price of a pizza is $15. Which
statement is TRUE?
A) When Clara buys 6 pizzas, she receives $15 of consumer surplus on her 6th pizza.
B) When Clara buys 6 pizzas, she receives a total of $15 of consumer surplus.
C) When Clara buys 6 pizzas, she receives a total of $30 of consumer surplus.
D) When Clara buys 6 pizzas, she receives a total of $45 of consumer surplus.
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

20
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47) The figure above shows Clara's demand for pizza. At a price of $20 of a pizza, the value
of Clara's total consumer surplus for all the pizzas she buys is
A) $40.
B) $30.
C) $20.
D) $4.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

48) The figure above shows Clara's demand for pizza. At a price of $5 of a pizza, the value
of Clara's total consumer surplus for all the pizzas she buys is
A) $5.
B) $10.
C) $25.
D) $125.
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

49) The figure above shows Clara's demand for pizza. If the price of a pizza were to
increase from $15 to $25, Clara's total consumer surplus for all the pizzas she buys would
A) decrease by $40.
B) remain unchanged.
C) decrease by $90.
D) increase by $80.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

21
Copyright © 2023 Pearson Education, Inc.
50) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice
cream is $2 per gallon, then the maximum that Dana is willing to pay for the 8th gallon of
ice cream is
A) $1.
B) $2.
C) $3.
D) $5.
Answer: C
Topic: Value, Willingness to Pay, and Demand
Skill: Graphing
Status: Old
AACSB: Analytical thinking

51) In the above figure, the individual's consumer surplus will be highest if
A) the price of ice cream is $5 per gallon.
B) the price of ice cream is $3 per gallon.
C) the price of ice cream is $2 per gallon.
D) ice cream is free.
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

22
Copyright © 2023 Pearson Education, Inc.
52) The above figure shows Dana's marginal benefit curve for ice cream. If the market
price is $2 per gallon, then Dana's consumer surplus from the 4th gallon of ice cream is
A) $0.
B) $2.
C) $3.
D) $10.
Answer: B
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

53) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice
cream is $2 per gallon, then Dana's consumer surplus from the 4th gallon
A) is greater than her consumer surplus from the 8th gallon.
B) is the same as her consumer surplus from the 8th gallon.
C) is less than her consumer surplus from the 8th gallon.
D) could be greater than, equal to, or less than the consumer surplus from the 8th gallon.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

54) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice
cream is $2 per gallon, then the gallon that gives Dana exactly zero consumer surplus is
A) the 8th gallon.
B) the 12th gallon.
C) the 16th gallon.
D) the 20th gallon.
Answer: B
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

55) The above figure shows Dana's marginal benefit curve for ice cream. If the price of ice
cream is $2 per gallon and Dana is allowed to buy only 8 gallons of ice cream, then her
consumer surplus on the 8th gallon is
A) $1.
B) $2.
C) $3.
D) $8.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

23
Copyright © 2023 Pearson Education, Inc.
56) The figure tells us about the market for red roses. The consumer surplus is ________ a
day.
A) $800
B) $200
C) $1,000
D) $20
Answer: B
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

24
Copyright © 2023 Pearson Education, Inc.
57) The figure illustrates the market for bagels. Initially the market is in equilibrium, Then
the number of bagels produced is cut from 20 to 10 an hour and the price rises to $2.00 per
bagel. Consumer surplus decreases by
A) $5.00 an hour.
B) $2.50 an hour.
C) $7.50 an hour.
D) $0.50 a bagel.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

25
Copyright © 2023 Pearson Education, Inc.
58) In the above figure, what is the total consumer surplus from all the milk bought if the
price of milk is $3.00 per gallon?
A) $16 million
B) $12 million
C) $4 million
D) $2 million
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

26
Copyright © 2023 Pearson Education, Inc.
59) In the figure above, for each taco, the price a consumer is willing to pay is equal to the
A) economy's marginal social cost of producing that taco.
B) consumer's own marginal benefit from consuming that taco.
C) consumer's total consumer surplus.
D) Both answers A and B are correct.
Answer: B
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

60) In the figure above, what is the marginal social benefit of the 3,000,000th taco per
month?
A) $11.00 per taco
B) $8.00 per taco
C) $6.00 per taco
D) None of the above answers is correct.
Answer: A
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

27
Copyright © 2023 Pearson Education, Inc.
61) In the figure above, when the market is in equilibrium, total consumer surplus on all
the tacos bought will be
A) greater than $30 million.
B) less than at any other price.
C) $20 million.
D) less than $15 million.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

62) In the above figure, if the price is $2, then the total consumer surplus is
A) triangle abc.
B) triangle cef.
C) trapezoid adec.
D) trapezoid bdfc.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

28
Copyright © 2023 Pearson Education, Inc.
63) In the figure above, when production is 3 units with a price of $3, the consumer surplus
equals
A) a + b.
B) a + b + f + g.
C) a + b + f + g + h + l.
D) a + b + f + g + h + l + i + m.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

64) Marginal cost is

A) the same as the marginal benefit because producers benefit from the money they receive
when they sell the good.
B) the opportunity cost of producing one more unit.
C) the total opportunity cost of producing all the units of the good.
D) zero at the efficient level of production.
Answer: B
Topic: Marginal Cost
Skill: Definition
Status: Old
AACSB: Analytical thinking

29
Copyright © 2023 Pearson Education, Inc.
65) Marginal cost is best defined as
A) the extra cost of producing one more unit of output.
B) the profit earned from selling one more unit of output.
C) the price received from selling one more unit of output.
D) equal to producer surplus.
Answer: A
Topic: Marginal Cost
Skill: Definition
Status: Old
AACSB: Analytical thinking

66) Marginal cost is the

A) extra benefit that people receive from producing one more unit of a good or service.
B) maximum amount consumers are willing to pay for one more unit of a good or service.
C) opportunity cost of producing one more unit of a good or service.
D) None of the above answers is correct.
Answer: C
Topic: Marginal Cost
Skill: Definition
Status: Old
AACSB: Analytical thinking

67) Which of the following represents the marginal cost of a soda?

I. The opportunity cost of producing another soda.
II. The minimum price someone is willing to pay for another soda.
A) I only
B) II only
C) I and II
D) Neither I nor II
Answer: A
Topic: Marginal Cost
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

68) The minimum supply-price is the same as

A) marginal cost.
B) market price.
C) producer surplus.
D) profit.
Answer: A
Topic: Cost, Minimum-Supply Price, and Supply
Skill: Definition
Status: Old
AACSB: Analytical thinking

30
Copyright © 2023 Pearson Education, Inc.
69) Currently tire producers must receive a price of $50 per tire to produce 5000 tires. If
the supply curve of tires is upward sloping, then to produce one additional tire, tire
producers will need to receive a price of
A) $50.
B) less than $50.
C) more than $50.
D) $0.
Answer: C
Topic: Cost, Minimum-Supply Price, and Supply
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

70) The marginal cost curve

A) shows the maximum price that a producer must receive to induce it to produce a unit of
a good or service.
B) shows the minimum price sellers must receive to produce a unit of a good or service.
C) is the same as the demand curve.
D) shows what buyers are willing to give up to get one more unit of a good or service.
Answer: B
Topic: Cost, Minimum-Supply Price, and Supply
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

71) Which of the following statements about supply curves is CORRECT?

I. A supply curve also can be a marginal cost curve.
II. A supply curve tells the quantity of other goods and services that sellers must give up to
produce another unit of the good.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Topic: Supply Curve
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

31
Copyright © 2023 Pearson Education, Inc.
72) The supply curve for tablets shows the
A) minimum price that consumers are willing to pay if a given quantity of tablets is
available.
B) maximum price that consumers are willing to pay if a given quantity of tablets is
available.
C) maximum price that producers must be offered to get them to produce a given quantity
of tablets.
D) minimum price that producers must be offered to get them to produce a given quantity
of tablets.
Answer: D
Topic: Supply Curve
Skill: Conceptual
Status: Revised
AACSB: Analytical thinking

73) Marginal social cost

A) is the additional cost to the consumer of consuming another unit of a good.
B) is equal to price times quantity sold.
C) decreases as more of a good is produced and, hence, is depicted by a downward sloping
curve.
D) is the opportunity cost of producing one more unit of a good and, hence, is the same as
the supply curve.
Answer: D
Topic: Marginal Cost and Supply
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

74) The market supply curve is also the

A) marginal social cost curve.
B) marginal value curve.
C) marginal social benefit curve.
D) maximum-supply-price curve.
Answer: A
Topic: Supply Curve
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

75) Suppose there are four firms that are each willing to sell one unit of a good. Each firm
has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C
$10, and Firm D $12. If the market price is $11 then the market supply for this good will be
A) 3 units.
B) 4 units.
C) 1 unit.
D) 2 units.
Answer: A
Topic: Market Supply
Skill: Analytical
Status: Old
AACSB: Analytical thinking

32
Copyright © 2023 Pearson Education, Inc.
The table below shows the supply schedules for Fred's Pizza and Johnny's Pizza, the only
sellers of pizza in the market.

Johnny's
Fred's quantity
Price quantity
supplied
(dollars per supplied
(slices per
slice) (slices per
month)
month)
1.50 0 0
2.00 100 150
2.50 200 300
3.00 300 450
3.50 400 600
4.00 500 750

76) Using the table, Fred's marginal cost of the 200th slice of pizza is
A) $2.50.
B) $6.
C) $0.50.
D) $20.
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

77) Using the table, Johnny's marginal cost of the 600th slice of pizza is
A) $3.50.
B) $12.50.
C) zero.
D) $1.50.
Answer: A
Topic: Marginal Cost
Skill: Analytical
Status: Old
AACSB: Analytical thinking

78) Using the table, what is the minimum price that Fred is willing to accept to supply 400
slices of pizza per month?
A) $3.50
B) $2.50
C) $3
D) $4
Answer: A
Topic: Minimum Supply Price
Skill: Analytical
Status: Old
AACSB: Analytical thinking

33
Copyright © 2023 Pearson Education, Inc.
79) Using the table, what is the marginal social cost when the market quantity supplied is
750 slices of pizza per month?
A) $3
B) $7
C) $9
D) $3.50
Answer: A
Topic: Marginal Social Cost
Skill: Analytical
Status: Old
AACSB: Analytical thinking

80) The producer surplus on a unit of a good is the

A) difference between the marginal social benefit and the marginal social cost.
B) number of dollars' worth of other goods and services forgone to produce this unit of the
good.
C) difference between the price of the good and the marginal cost of producing the good.
D) difference between the total cost of the good and the marginal cost.
Answer: C
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

81) Producer surplus is the ________ summed over the quantity sold.
A) value of a good minus the price received for it
B) price received for a good minus the value of the good
C) price received for a good minus its marginal cost
D) marginal cost of making a good minus the price received for it
Answer: C
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

82) Producer surplus is the price received ________ summed over the quantity sold.
A) plus the consumer surplus
B) multiplied by the quantity sold
C) minus its marginal cost of production
D) subtracted from the value of the good
Answer: C
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

34
Copyright © 2023 Pearson Education, Inc.
83) Producer surplus is the
A) cost of the good summed over the quantity sold.
B) demand for a good minus the supply summed over the quantity sold.
C) price of a good minus the marginal cost of producing it summed over the quantity sold.
D) marginal cost of producing it summed over the quantity sold.
Answer: C
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

84) Producer surplus is the difference between the

A) price and the willingness to pay for the good.
B) price and the marginal cost of producing the good summed over the quantity sold.
C) willingness to pay for the good and the marginal cost of producing the good summed
over the quantity sold.
D) marginal benefit of consuming the good and the marginal cost of producing the good
summed over the quantity sold.
Answer: B
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

85) In the market for tablet computers, the producer surplus will decrease if
A) the supply of tablets increases.
B) the price of a tablet decreases.
C) the marginal cost of a tablet decreases.
D) the price of a tablet increases.
Answer: B
Topic: Producer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

86) A severe drought in the midwest of the United States raises the price of corn. For a
farmer in Canada who harvested a normal crop because the farm was not affected directly
by the drought, the increase in the price of corn
A) increases the farmer's producer surplus.
B) decreases the farmer's producer surplus.
C) does not affect the producer surplus because this change is a movement along the
farmer's supply curve and not a shift of the farmer's supply curve.
D) increases producer surplus only if the farmer's supply is completely inelastic.
Answer: A
Topic: Producer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

87) When the Smiths were shopping for their present home, the asking price from the
previous owner was $250,000.00. The Smiths had decided they would pay no more than
$245,000.00 for the house. After negotiations, the Smiths actually purchased the house for
$239,000.00. Therefore, the previous owner earned a producer surplus of
A) $250,000.00.
B) $11,000.00.
C) $5,000.00.
35
Copyright © 2023 Pearson Education, Inc.
D) an amount unknown given the information in the question.
Answer: D
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

88) Stefano has just completed an original oil painting. After considering the costs for
brushes, paint, canvas, and the value of Stefano's labor time, the marginal cost of the
painting is $1,000. Lucky Stefano. One art lover paid him $1,500. How much producer
surplus did Stefano obtain?
A) The amount of producer surplus cannot be determined from the information given.
B) $1,500
C) $1,000
D) $500
Answer: D
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

89) Farmer Jones knows that the marginal cost to produce a bushel of tomatoes is $5 per
bushel. He also knows that a consumer is willing to pay a maximum of $9 for the bushel.
The price of the bushel is $6 and Farmer Jones sells his bushel for $6. On this bushel,
Farmer Jones earns a producer surplus equal to
A) $1.
B) $3.
C) $5.
D) $6.
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

36
Copyright © 2023 Pearson Education, Inc.
90) Considering all costs of production, the marginal cost of producing a hot dog is $1.00.
The price of a hot dog is $1.50. Thus, the producer surplus from this hot dog is
A) $1.50.
B) $1.00.
C) $.50.
D) Zero, because $1.50 is the most anyone would pay for a hot dog.
Answer: C
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

91) Suppose there are four firms that are each willing to sell one unit of a good. Each firm
has a different minimum price that they are willing to sell for: Firm A $6, Firm B $7, Firm C
$10, and Firm D $12. If the market price is $11, then the total producer surplus is
A) $10.
B) $11.
C) $33.
D) $9.
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

37
Copyright © 2023 Pearson Education, Inc.
92) In the above figure, when the price of pretzels is $3.00 per pound, the total producer
surplus from all the pretzels will be
A) zero.
B) greater than at any other price.
C) less than at any other price.
D) the sum of the difference between $3.00 and the marginal cost of all the pounds
produced.
Answer: D
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

38
Copyright © 2023 Pearson Education, Inc.
93) The figure illustrates the market for hot dogs on Big Foot Island. The producer surplus
is
A) $240 an hour.
B) $180 an hour.
C) $1.20 a hot dog.
D) $60 an hour.
Answer: D
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

39
Copyright © 2023 Pearson Education, Inc.
94) In the above figure, the lowest price for which the firm will sell its second ton of wheat
is
A) $25.
B) $50.
C) $75.
D) $100.
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

95) In the above figure, if the market price is $100 per ton, then the firm's producer
surplus on the second ton of wheat is
A) $25.
B) $50.
C) $75.
D) $100.
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

40
Copyright © 2023 Pearson Education, Inc.
96) In the above figure, the second ton of wheat would be produced even though the
producer surplus on it is zero if the price per ton of wheat was
A) $25.
B) $50.
C) $75.
D) $100.
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

97) In the above figure, the marginal cost of the second ton of wheat is
A) $25.
B) $50.
C) $75.
D) none of the above.
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

98) In the above figure, if the market price rises from $100 to $125 per ton of wheat, then
producer surplus
A) decreases.
B) does not change.
C) increases.
D) might increase, decrease, or not change depending on how the demand curve for wheat
shifts.
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

41
Copyright © 2023 Pearson Education, Inc.
99) In the figure above, when production is 3 units with a price of $3, the producer surplus
in this market equals
A) b + g.
B) f + g.
C) a + b + f + g.
D) a + b + f + g + h + i.
Answer: B
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

100) Which of the following statements is FALSE?

A) The value of one more unit of a good is the good's marginal benefit.
B) A good's marginal benefit is the maximum price people are willing to pay for another
unit.
C) The maximum price people are willing to pay for one more unit of a good is its value.
D) None of the above because all the statements are true.
Answer: D
Topic: Marginal Benefit
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

42
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101) The marginal social benefit curve for a product can be the same as the good's
A) marginal cost curve.
B) supply curve.
C) demand curve.
D) consumer surplus curve.
Answer: C
Topic: Marginal Benefit
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

102) Alice is willing to pay $3 for the second slice of pizza she eats. The price she pays is
$2. Alice's consumer surplus for this slice of pizza equals
A) $0.
B) $1.
C) $2.
D) $3.
Answer: B
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

103) Charlie's consumer surplus from the first slice of pizza he buys is greater than the
consumer surplus from the second slice because of
A) decreasing marginal benefits.
B) increasing marginal benefits.
C) decreasing marginal costs.
D) increasing marginal cost.
Answer: A
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

104) The cost of producing one more pizza is the

A) price.
B) marginal benefit.
C) marginal cost.
D) producer surplus.
Answer: C
Topic: Marginal Cost
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

43
Copyright © 2023 Pearson Education, Inc.
105) The market supply curve shows the
A) minimum price suppliers must receive in order to produce another unit of the good.
B) maximum price suppliers must receive in order to produce another unit of the good.
C) amount of producer surplus suppliers receive.
D) profit that suppliers receive from producing another unit of the good.
Answer: A
Topic: Marginal Cost
Skill: Definition
Status: Old
AACSB: Analytical thinking

106) The producer surplus from a good is equal to the

A) maximum amount a consumer is willing to pay for the good minus the price that actually
must be paid summed over the quantity sold.
B) actual price of the good minus the maximum amount a consumer is willing to pay for the
good.
C) opportunity cost of producing the good minus its price summed over the quantity sold.
D) price of the good minus its opportunity cost of production summed over the quantity
sold.
Answer: D
Topic: Producer Surplus
Skill: Definition
Status: Old
AACSB: Analytical thinking

44
Copyright © 2023 Pearson Education, Inc.
 Quantity Quantity
demanded supplied
Price (millions of (millions of
(dollars per pizzas per pizzas per
pizza) week) week)
10 30 18
11 29 19
12 28 20
13 27 21
14 26 22
15 25 23
16 24 24
17 23 25
18 22 26
19 21 27
20 20 28
21 19 29
22 18 30

107) The table shows the demand and supply schedules for pizza. The marginal social
benefit (MSB) of the 19th pizza is equal to ________ and if the price is equal to the
equilibrium price, then the consumer surplus from this pizza is equal to ________ dollars.
A) 21, 21
B) 5, 5
C) 21, 5
D) None of the above answers are correct.
Answer: C
Topic: Marginal Social Benefit
Skill: Analytical
AACSB: Analytical thinking

108) The table shows the demand and supply schedules for pizza. The marginal social cost
(MSC) of the 22nd pizza is equal to ________ and if the price is equal to the equilibrium
price, then the producer surplus from this pizza is equal to ________ dollars.
A) 2, 2
B) 14, 2
C) 4, 18
D) None of the above answers are correct.
Answer: B
Topic: Marginal Social Cost
Skill: Analytical
AACSB: Analytical thinking

45
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109) The table shows the demand and supply schedules for pizza. The allocatively efficient
quantity of pizza is ________ million pizzas per week, where the marginal social cost (MSC)
is equal to ________ dollars per pizza and the marginal social benefit is equal to ________
dollars per pizza.
A) 18, 15, 17
B) 27, 15, 17
C) 27, 17, 17
D) 24, 16, 16
Answer: D
Topic: Allocative Efficiency
Skill: Analytical
AACSB: Analytical thinking

110) The table shows the demand and supply schedules for pizza. If 20 million pizzas per
week are produced, the total surplus from the 20 millionth pizza per week produced is
equal to ________ dollars per pizza.
A) 20
B) 12
C) 8
D) None of the above answers are correct.
Answer: C
Topic: Allocative Efficiency
Skill: Analytical
AACSB: Analytical thinking

111) The table shows the demand and supply schedules for pizza. The price is equal to the
equilibrium price. The consumer surplus of the 22 millionth pizza per week is equal to
________ and the producer surplus of the 23 million pizza per week is equal to ________.
A) 2, 1
B) 1, 2
C) 2, 3
D) None of the above answers are correct.
Answer: A
Topic: Consumer Surplus and Producer Surplus
Skill: Analytical
AACSB: Analytical thinking

3 Is the Competitive Market Efficient?

1) Total surplus is defined as
A) consumer surplus + producer surplus.
B) consumer surplus - producer surplus.
C) another word for profit.
D) another word for total revenue.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

2) A market is allocatively efficient if

A) the sum of the consumer surplus and the producer surplus has been maximized.
B) consumer surplus has been maximized.
C) producer surplus has been maximized.
D) profit has been maximized.
Answer: A
46
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Topic: Efficiency and Inefficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

3) If resources are used efficiently, then

A) marginal social cost is minimized.
B) consumer surplus plus producer surplus is maximized.
C) consumer surplus equals producer surplus.
D) producer surplus is maximized.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

4) Suppose a country produces only bikes and clothing. The country achieves an efficient
allocation of resources when
A) it can't produce any more bikes unless it gives up clothing.
B) it produces equal amount of bikes and clothes.
C) the marginal social benefit of producing a bike equals the marginal social cost of
producing a bike.
D) the prices charged for the goods are as low as possible.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

5) Resource use is efficient when

A) marginal social benefit exceeds marginal social cost.
B) marginal social cost is decreasing.
C) marginal social benefit equals marginal social cost.
D) marginal social benefit is increasing.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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6) Allocative efficiency occurs when
A) marginal social cost exceeds marginal social benefit.
B) marginal social benefit exceeds marginal social cost.
C) marginal social benefit equals marginal social cost.
D) total social benefit exceeds total social cost.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

7) Which of the following statements is TRUE?

A) At the efficient quantity, marginal social benefit equals marginal social cost.
B) Marginal social cost increases as the quantity produced decreases.
C) Marginal social benefit decreases as the quantity consumed decreases.
D) If marginal social benefit exceeds marginal social cost by as much as possible,
production is efficient.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

8) Resource use is efficient when production is such that marginal social benefit is
A) greater than marginal social cost.
B) equal to marginal social cost.
C) less than marginal social cost.
D) at its maximum value.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

9) In the competitive market for balloon rides, marginal social cost equals marginal social
benefit when 3,000 balloon rides a day are taken and the price of a ride is $130. Which of
the following statements is TRUE?
A) There is a free-rider problem.
B) Too many rides are available.
C) Too few rides are available and the price of a balloon ride is too high.
D) The efficient quantity of balloon rides is 3,000 a day.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

48
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10) It is efficient to produce an additional shirt if the
A) marginal social benefit of producing the shirt is greater than zero.
B) marginal social benefit of producing the shirt is zero.
C) marginal social benefit of producing the shirt is greater than the marginal social cost of
producing it.
D) total social benefit from producing shirts is maximized.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

11) When 2,000 hamburgers per day are produced, the marginal social benefit is $1.50 and
the marginal social cost is $1.00. And when 7,500 hamburgers per day are produced, the
marginal social benefit is $1.00 and the marginal social cost is $1.50. The efficient
production quantity of hamburgers is ________ a day.
A) more than 7,500
B) 7,500
C) between 2,000 and 7,500
D) 2,000
Answer: C
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

12) In the market for SUVs, 500,000 SUVs a month are available. The value people place on
the 500,000th SUV a month is less than the marginal social cost of producing it. Resource
use
A) is efficient.
B) is inefficient.
C) would be more efficient if people firms would produce more SUVs.
D) would be more efficient if people would buy more SUVs.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

13) At the current level of output, the marginal social benefit from a slice of pizza is less
than the marginal social cost of producing a slice of pizza. Resources will be used more
efficiently if ________ slices of pizza are produced and ________ other goods are produced.
A) fewer; fewer
B) more; fewer
C) more; more
D) fewer; more
Answer: D
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

14) At the current level of output, the marginal social benefit of pizza exceeds the marginal
social cost of pizza. Compared to the allocatively efficient quantity, we are producing too
________ pizza and too ________ of other goods.
A) much; little
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B) much; much
C) little; little
D) little; much
Answer: D
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

15) At the current level of output, the marginal social cost of sandwiches exceeds the
marginal social benefit of sandwiches. Compared to the allocatively efficient quantity we
are producing too ________ sandwiches and too ________ of other goods.
A) many; little
B) many; much
C) few; little
D) few; much
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

16) At the current level of output, the marginal social cost of tennis balls is greater than
the marginal social benefit. Then
A) more than the efficient quantity of tennis balls is being produced.
B) there is excess demand for tennis balls.
C) firms producing tennis balls must be earning negative profit.
D) too few tennis balls are being produced.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

50
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17) When the amount of output is such that marginal social benefit exceeds marginal social
cost, then to reach the efficient quantity
A) production should be increased.
B) production should be decreased.
C) production should remain constant.
D) More information is needed to determine if production should be increased, decreased,
or not changed.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

18) At the quantity of 200 bushels of apples, the marginal social benefit of a bushel of
apples is $100 and the marginal social cost is $50. To produce the efficient quantity of
apples
A) more apples should be produced.
B) fewer apples should be produced.
C) there should be no change in the amount of apples produced.
D) More information on the willingness of consumers to purchase apples is needed to
determine the efficient level of apples.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

19) At the current quantity of pizza, the marginal social benefit is greater than the marginal
social cost. Then
A) the number of pizzas produced is efficient.
B) more pizzas must be produced to reach the efficient level.
C) fewer pizzas must be produced to reach the efficient level.
D) revenue for pizza producers is maximized.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

51
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20) At the current quantity of table saws, the marginal social cost is more than the
marginal social benefit. Then
A) production of table saws should be decreased to reach the efficient level.
B) production of table saws should be increased to reach the efficient level.
C) production of table saws is currently at the efficient level.
D) producer surplus will be larger than consumer surplus.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

21) At the quantity of 1000 tacos, the marginal social benefit of a taco is $.50 and the
marginal social cost is $.60. To produce the efficient quantity of tacos
A) more tacos should be produced.
B) fewer tacos should be produced
C) there should be no change in the amount of tacos produced.
D) More information on production costs is needed to determine the efficient level of tacos.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

22) If the marginal cost of producing hair styling decreases, then the efficient quantity of
hair stylings to produce
A) depends on the marginal benefit.
B) remains the same.
C) decreases.
D) increases.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

52
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 Marginal social Marginal
Quantity benefit social cost
(Pizza per (dollars per (dollars per
week) pizza) pizza)
1 24 16
2 22 18
3 20 20
4 18 22
5 16 24

23) The schedules in the table give the marginal social benefit and marginal social cost of a
pizza. If there are no external benefits or external costs, the efficient number of pizzas to
produce is ________ a week.
A) 1
B) 3
C) 5
D) any number less than 3
Answer: B
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

24) The schedules in the table give the marginal social benefit and marginal social cost of a
pizza. At the efficient quantity, the minimum supply-price of a pizza is ________ and the
value of a pizza is ________.
A) $16; $24
B) $16; $20
C) $20; $16
D) $20; $20
Answer: D
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

25) The schedules in the table give the marginal social benefit and marginal social cost of a
pizza. If the marginal cost of producing a pizza increases by $4, then the efficient number
of pizzas is ________ a week.
A) 1
B) 2
C) 5
D) 4
Answer: B
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

53
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26) The schedules in the table give the marginal social benefit and marginal social cost of a
pizza. If the number of pizzas produced is cut to 2 a week, then the
A) minimum supply-price of the second pizza is $18.
B) price is $18 a pizza.
C) opportunity cost of the second pizza is $22.
D) value of the second pizza is $20.
Answer: A
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

27) When the competitive market is using its resources efficiently, the
A) total amount of consumer surplus is maximized.
B) total amount of producer surplus is maximized.
C) sum of the total amount of consumer surplus plus the total amount of producer surplus
is maximized.
D) sum of the total amount of consumer surplus plus the total amount of producer surplus
equals zero.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

28) When a market is in equilibrium, the total amount of consumer surplus must be ________
the total amount of producer surplus.
A) larger than
B) equal to
C) less than
D) None of the above answers are correct.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

29) When the efficient quantity of output is produced

A) the marginal social benefit of the last unit produced is equal to the marginal social cost
of the last unit produced.
B) the sum of consumer surplus and producer surplus is maximized.
C) resources are used in the activities in which they are most highly valued.
D) All of the above answers are correct.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

54
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30) If the market for roller blades is at a competitive equilibrium, and there are no external
costs or benefits, then
A) marginal social benefit is equal to marginal social cost.
B) the sum of consumer surplus and producer surplus is maximized.
C) resources are being used efficiently.
D) All of the above answers are correct.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

31) If the marginal cost of producing every quantity decreases, all the following occur
EXCEPT
A) minimum supply price does not change.
B) the marginal social benefit of the last unit bought changes.
C) the consumer surplus increases.
D) the efficient quantity increases.
Answer: A
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

55
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 Price Quantity Quantity
(cents per demanded supplied
brownie) (per day) (per day)
0 1,800 0
10 1,600 100
20 1,400 200
30 1,200 300
40 1,000 400
50 800 500
60 600 600
70 400 700
80 200 800
90 0 900

32) In the above table, what is the maximum price that consumers are willing to pay for the
200th brownie?
A) 0
B) 20¢
C) 60¢
D) 80¢
Answer: D
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

33) In the above table, what is the minimum price that producers must be offered to
produce the 200th brownie?
A) 0
B) 20¢
C) 60¢
D) 80¢
Answer: B
Topic: Cost, Minimum-Supply Price, and Supply
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

34) In the above table, when 200 brownies are produced

A) marginal social benefit is greater than marginal social cost, and resource use is efficient.
B) marginal social benefit is greater than marginal social cost, and there is a deadweight
loss.
C) marginal social benefit equals marginal social cost, and resource use is efficient.
D) marginal social benefit is less than marginal social cost, and there is a deadweight loss.
Answer: B
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

35) In the above table, the efficient quantity of brownies is produced when the price of a
brownie is equal to
A) 0.
B) 40¢.
C) 60¢.

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D) 80¢.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

Quantity Quantity
Price supplied demanded
(dollars) (marginal (marginal
social cost) social benefit)
0 0 31
1 4 28
2 8 24
3 12 20
4 16 16
5 20 12
6 24 8
7 28 4
8 32 0

36) Based on the above table, which of the following is the efficient quantity of output?
A) 31
B) 16
C) 32
D) None of the above answers is correct.
Answer: B
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

57
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 Price
Quantity Quantity
(dollars per
demanded supplied
can)
0.30 1000 100
0.40 900 300
0.50 750 400
0.60 600 600
0.70 400 800
0.80 200 1000
0.90 100 1200
1.00 50 1400

37) The above table gives the market demand and market supply schedules for soda. What
is the maximum price consumers are willing to pay for the 400th can of soda?
A) $0.80 per can
B) $0.70 per can
C) $0.60 per can
D) $0.50 per can
Answer: B
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

38) The above table gives the market demand and market supply schedules for soda. What
is the minimum price that producers are willing to accept for the 400th can of soda?
A) $0.40 per can
B) $0.50 per can
C) $0.60 per can
D) $0.70 per can
Answer: B
Topic: Cost, Minimum-Supply Price, and Supply
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

39) The above table gives the market demand and market supply schedules for soda. There
are no external benefits or external costs. What is the efficient quantity of soda?
A) 1400
B) 1000
C) 600
D) It is impossible to determine the efficient quantity without more information.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

58
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40) The figure illustrates the market for haircuts. Curve A is the ________ curve, and curve
B is the ________ curve.
A) marginal social cost; marginal social benefit
B) total social cost; total social benefit
C) opportunity cost; opportunity benefit
D) marginal social benefit; marginal social cost
Answer: A
Topic: Marginal Benefit and Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

59
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41) In the above figure, when the quantity equals 400 pretzels
A) consumers are willing to pay $2 for the 400th pretzel.
B) producers are willing to supply 400 pretzels for $3.
C) producers are willing to supply 400 pretzels for $2.
D) the marginal benefit is greater than the marginal cost.
Answer: A
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

42) The above figure shows that the maximum amount a person is willing to pay for the
400th pretzel
A) is greater than the marginal social cost of the 400th pretzel.
B) is less than the marginal social benefit of the 400th pretzel.
C) and the marginal social benefit of the 400th pretzel are both $2.
D) is greater than the marginal social benefit of the 200th pretzel.
Answer: C
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

60
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43) In the above figure, what is the marginal social benefit of the four-hundredth pretzel?
A) $0
B) $2.00
C) $3.00
D) $4.00
Answer: B
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

44) In the above figure, what is the marginal social cost to the economy of producing the
four-hundredth pretzel?
A) $0
B) $2.00
C) $4.00
D) None of the above answers are correct.
Answer: C
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

45) In the above figure, what is the efficient quantity of pretzels to produce each day?
A) one hundred
B) two hundred
C) three hundred
D) four hundred
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

46) In the above figure, what is the efficient quantity of hot dogs to produce?
A) 2 thousand per day
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B) 4 thousand per day
C) 6 thousand per day
D) The efficient quantity cannot be determined without knowing the PPF for this economy.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

62
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47) In the above figure
A) marginal social cost equals marginal social benefit when 300,000 purses are produced.
B) 500,000 purses should be sold for $50 each for an efficient outcome.
C) it is impossible to determine the efficient quantity of purses.
D) None of the above answers is correct.
Answer: A
Topic: An Efficient Market
Skill: Graphing
Status: Old
AACSB: Analytical thinking

48) In the above figure, if the market produces the efficient amount of purses, then
consumer surplus equals triangle
A) abc.
B) bcd.
C) adc.
D) cgf.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

63
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49) In the above figure, the total consumer surplus at the efficient level of output is
A) $4.5 million.
B) $9.0 million.
C) $2.5 million.
D) $8.5 million.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

50) In the above figure, if the market produces the efficient amount of purses then
producer surplus equals triangle
A) abc.
B) bcd.
C) adc.
D) dce.
Answer: B
Topic: An Efficient Market
Skill: Graphing
Status: Old
AACSB: Analytical thinking

51) In the above figure, if the market produces the efficient amount of purses then
producer surplus equals
A) triangle bcd.
B) triangle adc.
C) rectangle bcde.
D) trapezoid adec.
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

52) In the above figure, the total producer surplus at the efficient level of output is
A) $4.5 million.
B) $9.0 million.
C) $2.5 million.
D) $3.0 million.
Answer: D
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

64
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53) In the above figure, 300,000 purses per month is
A) the efficient amount to produce because consumer surplus is maximized.
B) the efficient amount to produce because the sum of consumer surplus and producer
surplus is maximized.
C) an inefficient amount to produce because consumer surplus is not maximized.
D) an inefficient amount to produce because the sum of consumer surplus and producer
surplus is not maximized.
Answer: B
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

54) In the above figure, 300,000 purses per month is

A) the efficient amount to produce because at 300,000 purses marginal social benefit
equals marginal social cost.
B) the efficient amount to produce because at 300,000 purses marginal social benefit is
greater than marginal social cost.
C) an inefficient amount to produce because at 300,000 purses marginal social benefit
equals marginal social cost.
D) an inefficient amount to produce because producing 500,000 purses sets the marginal
social benefit equal to zero.
Answer: A
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

65
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55) The above figure illustrates the marginal social benefit and marginal social cost for
chicken sandwiches. If the quantity is decreased from 6 to 3 and the price increases from
$3 to $4, consumer surplus will decrease by
A) $1.50.
B) $2.00.
C) $3.00.
D) $4.50.
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

66
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56) In the above figure, suppose the quantity produced is 40. Then
A) the marginal social cost of the 40th unit is $1.
B) the willingness to pay for the 40th unit is $2, the equilibrium price.
C) production is not efficient because MSB > MSC.
D) production is not efficient because MSC>MSB.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

57) In the above figure, at the equilibrium price and quantity, consumer surplus is
A) $90.
B) $60.
C) $45.
D) $30.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

67
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58) In the above figure, at the equilibrium price and quantity, producer surplus is
A) $90.
B) $60.
C) $45.
D) $30.
Answer: D
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

59) Adam Smith argued that each person in a competitive market is led to promote the
A) efficient use of society's resources, because each person's intention is to make society
better off.
B) efficient use of society's resources, even though it is no person's intention to make
society better off.
C) inefficient use of society's resources, even though each person's intention is to make
society better off.
D) inefficient use of society's resources, because it is no person's intention to make society
better off.
Answer: B
Topic: The Invisible Hand
Skill: Definition
Status: Old
AACSB: Analytical thinking

60) At the efficient level of production

A) producer surplus must be greater than consumer surplus.
B) consumer surplus must be greater than producer surplus.
C) there is no deadweight loss.
D) the market price is greater than the monopoly price.
Answer: C
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

61) Underproduction of a good ________ create a deadweight loss and overproduction of a

good ________ create a deadweight loss.
A) will; will
B) will; will not
C) will not; will
D) will not; will not
Answer: A
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

68
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62) If there are no external costs or benefits, no price or quantity regulations, no taxes or
subsidies, and the good is not a public good or a common resource, then efficiency is
A) achieved when a monopoly produces the good.
B) achieved when the good is produced in a competitive market.
C) achieved when the amount of output exceeds the amount produced in a competitive
market.
D) unrelated to the amount produced in a competitive market.
Answer: B
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

63) A firm that is the only seller of a product and is in sole control of a market has a
A) monopoly.
B) quantity regulations.
C) subsidy.
D) public good.
Answer: A
Topic: Obstacles to Efficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

64) A public good can be consumed by

A) only one person who does not have to pay for it.
B) only one person who has to pay for it.
C) everyone simultaneously, as long as they pay for it.
D) everyone simultaneously, even if they do not pay for it.
Answer: D
Topic: Obstacles to Efficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

65) Among the sources of economic inefficiency are all of the following EXCEPT
A) price regulations.
B) rapid technological change.
C) monopoly.
D) taxes and subsidies.
Answer: B
Topic: Obstacles to Efficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

69
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66) Among the sources of economic inefficiency are all of the following EXCEPT
A) subsidies.
B) taxes.
C) competition.
D) external costs.
Answer: C
Topic: Obstacles to Efficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

67) Which of the following can prevent markets from reaching efficiency?
I. decreasing marginal benefit
II. taxes
III. quantity regulations that limit the quantity that may be produced
A) I and II
B) I and III
C) II and III
D) I, II and III
Answer: C
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

68) Which of the following can prevent markets from reaching the efficient level of
production?
I. a monopoly
II. taxes
III. the product is a public good
A) I and II
B) II
C) II and III
D) I, II and III
Answer: D
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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69) Which of the following can prevent markets from reaching efficiency?
I. price regulations that cap the price that may be charged
II. increasing marginal cost
III. monopoly
A) I only
B) I and II
C) II and III
D) I and III
Answer: D
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

70) Suppose a tax is imposed on a good. This will

A) increase the price paid by the buyer and decrease the price received by the seller.
B) increase the price paid by the buyer but leave the price received by the seller
unchanged.
C) decrease the price received by the seller but leave the price received by the buyer
unchanged.
D) increase the price received by the seller and decrease the price paid by the buyer.
Answer: A
Topic: Obstacles to Efficiency
Skill: Definition
Status: Old
AACSB: Analytical thinking

71) Which of the following is a CORRECT statement?

A) Producer surplus is an external benefit.
B) Consumer surplus is an external benefit.
C) A government subsidy paid to a producer is an external benefit.
D) None of the above statements are correct.
Answer: D
Topic: Obstacles to Efficiency, Externalities
Skill: Definition
Status: Old
AACSB: Analytical thinking

72) A cost borne not by the producer but by other people is called ________ cost.
A) an unregulated
B) an external
C) a consumer
D) a non-production
Answer: B
Topic: Obstacles to Efficiency, Externalities
Skill: Definition
Status: Old
AACSB: Analytical thinking

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73) If there is an external cost from making paper, an unregulated competitive market
produces
A) less than the efficient quantity.
B) the efficient quantity.
C) more than the efficient quantity.
D) a quantity that could be greater than, the same as, or less than the efficient amount.
Answer: C
Topic: Obstacles to Efficiency, Externalities
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

74) An external benefit is a benefit that

A) is enjoyed by someone other than the buyer of a good.
B) always equals external cost.
C) experiences increasing marginal returns.
D) is greatest at the equilibrium point.
Answer: A
Topic: Obstacles to Efficiency, Externalities
Skill: Definition
Status: Old
AACSB: Analytical thinking

75) The pollution created when coal is burned by utilities to generate electricity is an
example of
A) a marginal benefit to coal producers.
B) a welfare cost.
C) an external cost.
D) a cost paid by the utilities.
Answer: C
Topic: Obstacles to Efficiency, Externalities
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

76) The supplier of your ________ is most likely a monopoly.

A) shoes
B) toothpaste
C) textbooks
D) home electricity
Answer: D
Topic: Obstacles to Efficiency, Monopoly
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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77) Which of the following conditions could lead to an inefficient quantity of pretzels being
produced?
A) the existence of many producers of pretzels
B) the existence of many consumers of pretzels
C) the existence of a single producer and seller of pretzels
D) All of the above conditions could cause the actual quantity of pretzels to be an inefficient
quantity.
Answer: C
Topic: Obstacles to Efficiency, Monopoly
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

78) If the market for diamonds is a monopoly, then

A) there is an inefficient amount of resources allocated to the diamond market.
B) the prices of diamonds are too low.
C) diamond production is at the amount where the marginal social benefit equals the
marginal social cost.
D) the diamond market is efficient.
Answer: A
Topic: Obstacles to Efficiency, Monopoly
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

79) If the government subsidizes the production of a good

A) an efficient outcome for producers occurs.
B) overproduction relative to the efficient quantity occurs.
C) a deadweight loss is created.
D) Both answers B and C are correct.
Answer: D
Topic: Obstacles to Efficiency, Subsidy
Skill: Definition
Status: Old
AACSB: Analytical thinking

80) Competitive markets will generally produce

A) too much of a public good.
B) too little of a public good.
C) the efficient amount of a public good.
D) the efficient amount of a public good in the short run, but not in the long run.
Answer: B
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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81) Underproduction compared to the efficient amount implies that for the last unit
produced
A) marginal social benefit exceeds marginal social cost.
B) marginal social benefit equals marginal social cost.
C) marginal social cost exceeds marginal social benefit.
D) the deadweight loss is zero.
Answer: A
Topic: Underproduction
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

82) If the government restricts the selling of corn so that the quantity is less than the
equilibrium quantity, then the policy
I. creates a deadweight loss.
II. decreases total surplus.
A) Only I is correct.
B) Only II is correct.
C) Both I and II are correct.
D) Neither I nor II is correct.
Answer: C
Topic: Underproduction
Skill: Analytical
Status: Old
AACSB: Analytical thinking

83) Overproduction compared to the efficient amount implies that for the last unit
produced
A) marginal social benefit exceeds marginal social cost.
B) marginal social benefit equals marginal social cost.
C) marginal social cost exceeds marginal social benefit.
D) the deadweight loss is zero.
Answer: C
Topic: Overproduction
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

74
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84) If the quantity of corn is such that the marginal cost of corn is greater than the
marginal benefit of corn, then
I. there is a deadweight loss.
II. more than the efficient quantity of corn is produced.
A) Only I is correct.
B) Only II is correct.
C) Both I and II are correct.
D) Neither I nor II is correct.
Answer: C
Topic: Overproduction
Skill: Analytical
Status: Old
AACSB: Analytical thinking

85) The decrease in consumer surplus and producer surplus that results from an inefficient
level of production is called the
A) external cost.
B) external benefit.
C) deadweight loss.
D) big tradeoff.
Answer: C
Topic: Deadweight Loss
Skill: Definition
Status: Old
AACSB: Analytical thinking

86) Deadweight loss is

A) not a social loss.
B) made up of a loss of only consumer surplus.
C) made up of a loss of only producer surplus.
D) made up of a loss of both consumer surplus and producer surplus.
Answer: D
Topic: Deadweight Loss
Skill: Definition
Status: Old
AACSB: Analytical thinking

87) Deadweight loss can be the result of

A) overproduction, but not underproduction.
B) underproduction, but not overproduction.
C) both overproduction and underproduction.
D) neither overproduction, nor underproduction.
Answer: C
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

88) Deadweight loss is the decrease in ________ from producing an inefficient amount of a
product.
A) only consumer surplus
B) only producer surplus
C) consumer surplus and producer surplus
D) profit
Answer: C
Topic: Deadweight Loss
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Skill: Definition
Status: Old
AACSB: Analytical thinking

89) When a deadweight loss occurs in a market, we can be certain that

A) taxes have been imposed in a market.
B) the market is a monopoly.
C) there underproduction in the market.
D) the entire society experiences a loss.
Answer: D
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

90) By reducing its output compared to a competitive market, a monopoly leads to

A) a more efficient use of resources.
B) external benefits.
C) external costs.
D) a deadweight loss.
Answer: D
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

91) The reduction in consumer and producer surplus that results from underproduction is
called
A) an internal cost.
B) a deadweight loss.
C) a quantity loss.
D) None of the above answers is correct.
Answer: B
Topic: Deadweight Loss
Skill: Definition
Status: Old
AACSB: Analytical thinking

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92) The figure illustrates the market for bagels. If the number of bagels is cut from 20 to 10
an hour, the deadweight loss is
A) $0.50 a bagel.
B) -$5.00 an hour.
C) $0 an hour.
D) $5.00 an hour.
Answer: D
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

93) The figure illustrates the market for bagels. If the number of bagels is increased from
20 to 30 an hour, consumer surplus plus producer surplus ________ and deadweight loss is
________.
A) decreases; negative
B) decreases; positive
C) increases; positive
D) increases; negative
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

77
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94) In the above figure, the efficient quantity of magazines to produce per day is
A) 0, because that is where the marginal social benefit exceeds the marginal social cost by
as much as possible.
B) more than 0 and less than 300,000 magazines.
C) 300,000 magazines.
D) more than 300,000 magazines.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

95) In the above figure, when the efficient quantity is produced the marginal social cost of
the last magazine is
A) $1.
B) $3.
C) $5.
D) some amount not given in the above three answers.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

78
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96) In the above figure, when the efficient quantity is produced the marginal social benefit
of the last magazine is
A) $1.
B) $3.
C) $5.
D) some amount not given in the above three answers.
Answer: B
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

97) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. What is the marginal social benefit from the 100th
pound of chocolate each day?
A) $1.50 per pound
B) $1.00 per pound
C) $0.50 per pound
D) None of the above answers is correct.
Answer: A
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

79
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98) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. What is the marginal social cost of producing the 250th
pound of chocolate each day?
A) $625.00 per pound
B) $2.50 per pound
C) $1.00 per pound
D) $0.50 per pound
Answer: B
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

99) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. What is the efficient quantity of chocolate to produce
each day?
A) zero
B) 100 pounds
C) 150 pounds
D) 250 pounds
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

100) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. When the marginal social benefit is equal to the
marginal social cost of chocolate in Kaffenia
A) either 100 pounds or 250 pounds can be produced each day.
B) no chocolate is produced.
C) 150 pounds will be produced each day.
D) any quantity up to 150 pounds will be efficient.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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101) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. There is no external benefit nor external cost. The
demand curve for chocolate is the same as the
A) marginal social cost curve of chocolate.
B) marginal social benefit curve of chocolate.
C) opportunity cost curve of chocolate.
D) marginal social benefit curve minus the marginal social cost curve of chocolate.
Answer: B
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

102) The above figure shows the marginal social benefit and marginal social cost curves of
chocolate in the nation of Kaffenia. At Kaffenia's efficient quantity of chocolate
A) total consumer surplus is zero.
B) total producer surplus is zero.
C) the sum of consumer surplus and producer surplus is zero.
D) the sum of consumer surplus and producer surplus is maximized.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

81
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103) The above figure shows the competitive market for turkey. The consumer surplus for
the 300 millionth pound of turkey is
A) $2.00 per pound.
B) $225 million.
C) $0.80 per pound.
D) $0.50 per pound.
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

104) The above figure shows the competitive market for turkey. The producer surplus for
the 300 millionth pound of turkey is
A) $1.20 per pound.
B) $135 million.
C) $0.30 per pound.
D) $0.80 per pound.
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

82
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105) At the competitive market outcome in the above figure, the
A) consumer surplus on the last pound of turkey consumed is equal to zero.
B) total consumer surplus from turkey consumption is $400 million.
C) deadweight loss from turkey consumption is equal to zero.
D) All of the above answers are correct.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

106) At the competitive market outcome in the above figure, the

A) producer surplus is equal to $480 million.
B) total producer surplus from turkey sales is zero.
C) sum of consumer and producer surpluses from turkey is $640 million.
D) All of the above answers are correct.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

107) In the above figure, if output were restricted to 300 million pounds of turkey, then
A) the marginal social benefit would exceed the marginal social cost on the last pound of
turkey traded by $0.80.
B) there would be a deadweight loss of $40 million.
C) there would be inefficient underproduction of turkey.
D) All of the above answers are correct.
Answer: D
Topic: Underproduction
Skill: Analytical
Status: Old
AACSB: Analytical thinking

108) In the above figure, the deadweight loss is zero if output is

A) 0 units.
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B) 10 units.
C) 20 units.
D) 30 units.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

109) In the above figure, of the quantities listed below, for which is the total deadweight
loss the largest?
A) 0 units
B) 10 units
C) 20 units
D) 30 units
Answer: A
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

84
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110) In the above figure, as output increases from 0 units to 10 units to 20 units to 30
units, the deadweight loss
A) falls.
B) falls at first, then rises.
C) rises.
D) rises at first, then falls.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

111) In the above figure, if output is 30 units, then the total deadweight loss is
A) $5.
B) $10.
C) $20.
D) $60.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

112) In the above figure, if output is 10 units, then the total deadweight loss is
A) $5.
B) $10.
C) $20.
D) $60.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

113) In the above figure, suppose that the government sets a limit to production at 10 units
of output and the price rises to $4. In comparison to a competitive market the consumer
surplus would fall by
A) $0.
B) $10.
C) $15.
D) $20.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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114) In the above figure, suppose that the government sets a limit that may be produced of
10 units of output and the price rises to $4. In comparison to a competitive market the
producer surplus would rise by
A) $0.
B) $5.
C) $15.
D) $20.
Answer: B
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

115) In the above figure, suppose that the government sets a limit that may be produced of
10 units of output and the price rises to $4. The total deadweight loss would be
A) $0.
B) $10.
C) $15.
D) $20.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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116) In the above figure, at the efficient quantity of tacos
A) total consumer surplus is zero.
B) total producer surplus is zero.
C) the sum of consumer surplus and producer surplus is maximized.
D) Both answers A and B are correct.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

117) In the above figure, if five million tacos per month are produced and consumed, that is
A) better than producing and consuming four million tacos because more is always better
than less.
B) more than the efficient quantity because the marginal social benefit exceeds the
marginal social cost.
C) more than the efficient quantity because the marginal social cost exceeds the marginal
social benefit.
D) less than the efficient quantity because the opportunity cost exceeds the marginal social
benefit.
Answer: C
Topic: Overproduction
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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118) Using the above figure, which of the following quantities of tacos has the largest
deadweight loss?
A) 3 million tacos
B) 4 million tacos
C) 7 million tacos
D) The deadweight losses associated with the three quantities given above are all equal.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

119) The figure above shows the market for coffee. If 10 million pounds of coffee a month
are available, the ________ price that consumers are willing to pay for the last pound is
________.
A) maximum; $2.00
B) maximum; $3.50
C) minimum; $2.00
D) minimum; $3.50
Answer: B
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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120) The figure above shows the market for coffee. If 30 pound of coffee a month are
available, the ________ price that consumers are willing to pay for the last pound is ________.
A) maximum; $4.00
B) minimum; $4.00
C) maximum; $2.50
D) minimum; $2.50
Answer: C
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

121) The figure above shows the market for coffee. The ________ price that producers must
be offered to get them to produce 10 million pounds of coffee per month is ________.
A) maximum; $2.00
B) maximum; $3.50
C) minimum; $2.00
D) minimum; $3.50
Answer: C
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

122) The figure above shows the market for coffee. The ________ price that producers must
be offered to get them to produce 30 million pounds of coffee per month is ________.
A) maximum; $2.50
B) minimum; $2.50
C) maximum; $4.00
D) minimum; $4.00
Answer: D
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

123) The figure above shows the market for coffee. When the efficient quantity of coffee is
produced, the marginal social benefit from the last pound is
A) $1.00.
B) $2.50.
C) $3.00.
D) $4.00.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

124) The figure above shows the market for coffee. When the efficient quantity of coffee is
produced, the marginal social cost of the last pound is
A) $2.50.
B) $3.50.
C) $3.00.
D) $2.00.
Answer: C
Topic: Efficiency and Inefficiency
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Skill: Graphing
Status: Old
AACSB: Analytical thinking

125) The figure above shows the market for coffee. If the efficient quantity of coffee is
produced, the consumer surplus is
A) $10 million.
B) $20 million.
C) $60 million.
D) zero.
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

126) The figure above shows the market for coffee. If more coffee plantations are planted in
Brazil and Vietnam so that the supply of coffee increases, the efficient quantity of coffee
will ________ and the consumer surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: A
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

127) The figure above shows the market for coffee. If the efficient quantity of coffee is
produced, the producer surplus is
A) $10 million.
B) $20 million.
C) $60 million.
D) zero.
Answer: B
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

128) The figure above shows the market for coffee. Coffee is a normal good. If consumers'
incomes fall, the efficient quantity of coffee will ________ and the producer surplus will
________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

129) The figure above shows the market for coffee. If one firm owns all the coffee outlets
and sells 10 million pounds of coffee a month
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A) the market is efficient because the marginal social benefit from coffee exceeds its
marginal social cost.
B) the market is efficient because the total social benefit from coffee exceed the total social
cost.
C) there is a deadweight loss because the marginal social benefit from the last pound of
coffee exceeds its marginal social cost.
D) there is a deadweight loss because the marginal social cost of the last pound of coffee
exceeds its marginal social benefit.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

130) The figure above shows the market for coffee. If one firm owns all the coffee outlets
and sells 10 million pounds of coffee a month, the deadweight loss is
A) zero.
B) $7.5 million.
C) $15 million.
D) $10 million
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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131) The figure above shows the market for coffee. If the government pays the coffee
producers a subsidy and production increases to 30 million pounds per day, the market is
A) efficient because the marginal social benefit from the last pound of coffee exceeds its
marginal social cost.
B) efficient because the total social benefit from coffee exceed the total social cost.
C) inefficient because the marginal social benefit from the last pound of coffee exceeds its
marginal social cost.
D) inefficient because the marginal social cost of the last pound of coffee exceeds its
marginal social benefit.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

132) The figure above shows the market for coffee If the government pays the coffee
producers a subsidy and production increases to 30 million pounds per day, the deadweight
loss is
A) zero.
B) $7.5 million.
C) $15 million.
D) $10 million.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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133) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. There is no external benefit. What is the marginal
benefit to the citizen of Kaffenia who consumes the 100th dozen doughnuts each day?
A) $10.00 per dozen
B) $8.00 per dozen
C) $6.00 per dozen
D) $4.00 per dozen
Answer: A
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

134) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. What is the marginal social cost to the economy of
Kaffenia of producing the 100th dozen doughnuts each day?
A) $10.00 per dozen
B) $8.00 per dozen
C) $6.00 per dozen
D) $4.00 per dozen
Answer: D
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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135) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. What is the marginal social benefit from the 300th
dozen doughnuts each day?
A) $10.00 per dozen
B) $8.00 per dozen
C) $6.00 per dozen
D) $4.00 per dozen
Answer: D
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

136) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. What is the marginal social cost to the economy of
Kaffenia of producing the 300th dozen doughnuts each day?
A) $10.00 per dozen
B) $8.00 per dozen
C) $6.00 per dozen
D) $4.00 per dozen
Answer: B
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

137) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. What is the marginal social cost of producing the
200th dozen doughnuts each day?
A) $10.00 per dozen
B) $8.00 per dozen
C) $6.00 per dozen
D) $4.00 per dozen
Answer: C
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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138) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. What is the efficient quantity of doughnuts to produce
each day?
A) 100 dozen
B) 200 dozen
C) 300 dozen
D) 500 dozen
Answer: B
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

139) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. When the marginal social benefit of the last dozen
doughnuts is equal to the marginal social cost
A) the efficient quantity is being produced and consumed.
B) 200 dozen doughnuts are produced and consumed each day.
C) an increase in production and consumption would increase efficiency.
D) Both answers A and B are correct.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

140) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. At Kaffenia's efficient quantity of doughnuts
A) total consumer surplus is zero.
B) total producer surplus is zero.
C) consumer surplus exceeds producer surplus by the greatest possible amount.
D) the sum of consumer surplus and producer surplus is maximized.
Answer: D
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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141) The above figure shows the marginal social benefit and marginal social cost curves of
doughnuts in the nation of Kaffenia. Which of the following would lead the quantity of
doughnuts in Kaffenia to differ from the efficient quantity?
A) The existence of many producers and sellers of doughnuts.
B) The existence of just one producer and seller of doughnuts.
C) Damage to the environment from the disposal of oil used to cook the doughnuts.
D) Both answers B and C are correct.
Answer: D
Topic: Obstacles to Efficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

142) The figure above shows the market for milk. If 100 gallons of milk a day are available,
the ________ price that consumers are willing to pay for the last gallon is ________.
A) maximum; $2.50
B) minimum; $3.00
C) maximum; $4.00
D) minimum; $4.00
Answer: C
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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143) The figure above shows the market for milk. If 250 gallons of milk a day are available,
the ________ price that consumers are willing to pay for the last gallon is ________.
A) maximum; $2.50
B) minimum; $2.50
C) maximum; $3.25
D) minimum; $3.25
Answer: A
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

144) The figure above shows the market for milk. The ________ price that producers must be
offered to get them to produce 100 gallons of milk per day is ________.
A) maximum; $2.50
B) minimum; $3.00
C) maximum; $4.00
D) minimum; $2.50
Answer: D
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

145) The figure above shows the market for milk. The ________ price that producers must be
offered to get them to produce 250 gallons of milk per day is ________.
A) maximum; $3.25
B) minimum; $3.25
C) maximum; $2.50
D) minimum; $2.50
Answer: B
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

146) The figure above shows the market for milk. When the efficient quantity of milk is
produced, the marginal social benefit from the last gallon is
A) $2.00.
B) $2.50.
C) $3.00.
D) $3.50.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

147) The figure above shows the market for milk. When the efficient quantity of milk is
produced, the marginal social cost of the last gallon is
A) $3.50.
B) $3.00.
C) $2.50.
D) $2.00.
Answer: B
Topic: Efficiency and Inefficiency
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Skill: Graphing
Status: Old
AACSB: Analytical thinking

148) The figure above shows the market for milk. If the efficient quantity of milk is
produced, the consumer surplus is
A) $100.
B) $400.
C) $200.
D) $600.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

149) The figure above shows the market for milk. If a drought lowers the productivity of
dairy cows so that they give less milk, then the efficient quantity of milk ________ and the
consumer surplus ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

150) The figure above shows the market for milk. If the efficient quantity of milk is
produced, the producer surplus is
A) $100.
B) $400.
C) $200.
D) $600.
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

151) The figure above shows the market for milk. If the population increases, then the
efficient quantity of milk ________ and the producer surplus ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

152) The figure above shows the market for milk. If the government pays the milk
producers a subsidy and production increases to 300 gallons per day
A) the market is efficient because the marginal social benefit from the last gallon of milk
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exceeds its marginal social cost.
B) the market is efficient because the total social benefit from milk exceed the total social
cost.
C) there is a deadweight loss because the marginal social benefit from the last gallon of
milk exceeds its marginal social cost.
D) there is a deadweight loss because the marginal social cost of the last gallon of milk
exceeds its marginal social benefit.
Answer: D
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

153) The figure above shows the market for milk. If one firm owns all the milk outlets in the
city and sells 100 gallons of milk
A) the market is efficient because the marginal social benefit from the last gallon of milk
exceeds its marginal social cost.
B) the market is efficient because the total social benefit from milk exceed the total social
cost.
C) there is a deadweight loss because the marginal social benefit from the last gallon of
milk exceeds its marginal social cost.
D) there is a deadweight loss because the marginal social cost of the last gallon of milk
exceeds its marginal social benefit.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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154) The figure above shows the market for milk. If the government pays the milk
producers a subsidy and production increases to 300 gallons per day
A) the deadweight loss is $100.
B) the deadweight loss is $75.
C) the deadweight loss is $50.
D) there is no deadweight loss.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

155) The figure above shows the market for milk. If one firm owns all the milk outlets in the
city and sells 100 gallons of milk
A) the deadweight loss is $100.
B) the deadweight loss is $75.
C) the deadweight loss is $50.
D) there is no deadweight loss.
Answer: B
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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156) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. Producing and consuming the efficient quantity of coffee in
Kaffenia means that
A) the marginal social cost of the last pound of coffee is at the lowest possible value.
B) the marginal social benefit of the last pound of coffee is at its highest possible value.
C) to produce more coffee, the marginal social benefit of an additional pound of coffee is
less than its marginal social cost.
D) All of the above are correct.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

157) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. When marginal social benefit is equal to the marginal social
cost of coffee in Kaffenia
A) three hundred pounds per day will be produced and consumed.
B) the efficient quantity of coffee is being produced and consumed.
C) any decrease in coffee consumption or production would result in a deadweight loss.
D) All of the above are correct.
Answer: D
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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158) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. There is no external benefit. What is the marginal benefit to
the citizen of Kaffenia who consumes the four hundredth pound of coffee each day?
A) $1.00 per pound
B) $2.00 per pound
C) $3.00 per pound
D) $4.00 per pound
Answer: B
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

159) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. There is no external cost. What is the marginal cost to the
economy of Kaffenia of producing the four hundredth pound of coffee each day?
A) $.50 per pound
B) $1.00 per pound
C) $2.00 per pound
D) $4.00 per pound
Answer: D
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Analytical thinking

160) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. What is the efficient quantity of coffee to produce each
day?
A) one hundred pounds
B) two hundred pounds
C) three hundred pounds
D) four hundred pounds
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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161) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. When 400 pounds of coffee are produced and consumed in
Kaffenia each day, that is
A) more efficient than when 300 pounds are produced and consumed because more is
always better than less.
B) inefficient because the marginal social benefit exceeds the marginal social cost.
C) inefficient because the marginal social cost of the 400th pound exceeds its marginal
social benefit.
D) inefficient because the opportunity cost of producing more coffee exceeds its marginal
social benefit.
Answer: C
Topic: Efficiency and Inefficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

162) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. For a consumer, the price they are willing to pay for each
additional pound of coffee is
A) always less than the economy's marginal social cost of producing that additional pound.
B) equal to their own marginal benefit from consuming that additional pound.
C) equal to their consumer surplus.
D) Both answers B and C are correct.
Answer: B
Topic: Value, Price, and Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

163) The above figure shows the marginal social benefit and marginal social cost curves of
coffee in the nation of Kaffenia. Which of the following would result in the quantity of coffee
in Kaffenia differing from the efficient quantity?
A) The existence of a single producer and seller of coffee.
B) The existence of many producers and sellers of coffee.
C) Damage to the environment from fumes emitted by coffee beans.
D) Both answers A and C are correct.
Answer: D
Topic: Obstacles to Efficiency
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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164) In the above figure, when the efficient quantity of gloves is produced, the total
consumer surplus is
A) $3,000.
B) $15,000.
C) $22,500.
D) $45,000.
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

165) In the above figure, when the efficient quantity of gloves is produced, the total
producer surplus is
A) $3,000.
B) $15,000.
C) $22,500.
D) $45,000.
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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166) In the above figure, if the production of gloves was restricted to 2,000 a day, then the
deadweight loss would equal
A) $0, because 2,000 gloves per day is an efficient quantity of gloves to produce.
B) $2,000.
C) $5,000.
D) $10,000.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

167) What is the efficient quantity of snowboards in the above figure?

A) 0
B) 100
C) 200
D) 500
Answer: B
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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168) What area in the above figure is the consumer surplus at the efficient quantity?
A) A
B) A + B + C
C) F
D) D + E + F
Answer: B
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

169) In the above figure, what is the amount of consumer surplus at the efficient quantity?
A) $0
B) $1,000
C) $2,000
D) $4,000
Answer: C
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

170) What area in the above figure is the producer surplus at the efficient quantity?
A) A
B) A + B + C
C) F
D) D + E + F
Answer: D
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

171) In the above figure, what is the amount of producer surplus at the efficient quantity?
A) $0
B) $1,000
C) $2,000
D) $4,000
Answer: C
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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172) Which area in the above figure is the deadweight loss if 100 snowboards are
produced?
A) A + B + C
B) D + E + F
C) C + E
D) There is no deadweight loss when 100 snowboards are produced.
Answer: C
Topic: Underproduction
Skill: Graphing
Status: Old
AACSB: Analytical thinking

173) In the above figure, a price of $1.25 and a quantity of 5 million gallons of milk per day
maximizes the
A) amount of consumer surplus.
B) amount of producer surplus.
C) sum of consumer surplus and producer surplus.
D) All of the above answers are correct.
Answer: C
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

174) In the above figure, the efficient quantity of milk is

A) 10 million gallons per day.
B) 5 million gallons per day.
C) zero gallons per day.
D) None of the above because all of the quantities are efficient.
Answer: B
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

175) In the above figure, if the price is $1.25 per gallon of milk and 5 million gallons are
produced and consumed, then the consumer surplus is ________ and the producer surplus is

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________.
A) $3.125 million; $3.125 million
B) $12.5 million; $12.5 million
C) $6.25 million; $6.25 million
D) None of the above answers are correct.
Answer: A
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

176) In the above figure suppose there is only one milk producer who chooses to restrict
milk production to two million gallons per day. What is the size of the deadweight loss?
(Hint: It is equal to the triangular area of consumer and producer surplus that is lost
because of the reduction in output.)
A) $12.5 million
B) $6.25 million
C) $2.25 million
D) none of the above
Answer: C
Topic: Underproduction
Skill: Graphing
Status: Old
AACSB: Analytical thinking

177) In the above figure, suppose the government subsidizes the production of milk so that
milk production increases to 8 million gallons per day. What is the size of the deadweight
loss? (Hint: It is equal to the triangular area of negative consumer and producer surplus
that results when output exceeds the efficient level.)
A) $12.5 million
B) $6.25 million
C) $4.50 million
D) $2.25 million
Answer: D
Topic: Overproduction
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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The figure shows the competitive market for milk.

178) In the figure above, when the market is in equilibrium, what is the total surplus?
A) $1,000
B) $800
C) $200
D) $1,600
Answer: A
Topic: Efficiency of Competitive Markets
Skill: Graphing
Status: Old
AACSB: Analytical thinking

179) In the figure above, when the quantity of milk produced is 300 gallons per day, what is
the deadweight loss?
A) $62.50
B) $125
C) $200
D) $937.50
Answer: A
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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180) In the figure above, when the quantity of milk produced is 600 gallons per day, what is
the deadweight loss?
A) $250
B) $125
C) $500
D) $50
Answer: A
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

181) The figure above shows the market for umbrellas in Sunville. What is the marginal
social benefit that Sunville consumers receive from the 200th umbrella bought?
A) $23.33
B) $30.00
C) $26.67
D) $50.00
Answer: D
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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182) The figure above shows the market for umbrellas in Sunville. When the market for
umbrellas in Sunville is in equilibrium, what is the consumer surplus?
A) $30
B) $9,000
C) $18,000
D) $16,000
Answer: B
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

183) The figure above shows the market for umbrellas in Sunville. When the market for
umbrellas in Sunville is in equilibrium, what is the total deadweight loss?
A) $2,000
B) $800
C) $0
D) 600 umbrellas
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

184) The figure above shows the market for umbrellas in Sunville. When the market for
umbrellas in Sunville is in equilibrium, what is the producer surplus?
A) $3,000
B) $1,000
C) $10
D) $600
Answer: A
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Analytical thinking

185) The figure above shows the market for umbrellas in Sunville. When the market for
umbrellas in Sunville is in equilibrium, what is the total surplus?
A) $0
B) $12,000
C) $24,000
D) $16,000
Answer: B
Topic: Efficiency of Perfect Competition
Skill: Graphing
Status: Old
AACSB: Analytical thinking

186) The figure above shows the market for umbrellas in Sunville. Suppose the quantity of
umbrellas currently traded in Sunville is 199 per day. If one more umbrella is sold, the total
surplus in Sunville will
A) decrease by $26.67.
B) increase by $26.67.
C) increase by $50.00.
D) not change.
Answer: B
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Topic: Efficiency of Perfect Competition
Skill: Graphing
Status: Old
AACSB: Analytical thinking

187) The figure above shows the market for umbrellas in Sunville. Suppose one firm owns
all umbrella stores in Sunville and charges $40 per umbrella. In this situation, the market
for umbrellas is
A) efficient, with no deadweight loss but also no surplus.
B) inefficient, with a deadweight loss of $2,666.67.
C) inefficient, with a deadweight loss of $1,333.33.
D) efficient, generating a total surplus of more than $10,000.
Answer: C
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

188) A deadweight loss is created

A) only if the last unit produced has a marginal social benefit greater than its marginal
social cost.
B) only if the last unit produced has a marginal social cost greater than its marginal social
benefit.
C) only if the last unit produced has a marginal social benefit equal to its marginal social
cost.
D) if for the last unit produced, marginal social cost is greater than its marginal social
benefit or if its marginal social benefit is greater than its marginal social cost.
Answer: D
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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 Price
Quantity Quantity
(dollars per
demanded supplied
umbrella)
0 90 0
10 80 0
20 40 40
30 20 80
40 0 120

189) In the table above, if there are 80 umbrellas produced, the deadweight loss from the
80th umbrella is
A) $10.
B) $20.
C) $30.
D) $40.
Answer: B
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

190) In the table above, the deadweight loss is zero when ________ umbrellas are produced
and sold.
A) 20
B) 40
C) 60
D) 80
Answer: B
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

191) Suppose the marginal cost of producing a good falls so that the marginal social cost
curve shifts downward. Then the efficient quantity to produce of that product
A) increases.
B) does not change.
C) decreases.
D) could increase, stay the same, or decrease.
Answer: A
Topic: Efficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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192) Suppose consumers decide they value a product more highly than before. Then the
efficient quantity to produce of that product
A) increases.
B) does not change.
C) decreases.
D) perhaps changes, but without more information the direction of the change cannot be
told.
Answer: A
Topic: Efficiency
Skill: Analytical
Status: Old
AACSB: Analytical thinking

193) In the figure above, if the quantity is restricted to 2, then the deadweight loss in this
market equals
A) b + g.
B) c + d.
C) e + k.
D) h + i.
Answer: A
Topic: Deadweight Loss
Skill: Graphing
Status: Old
AACSB: Analytical thinking

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194) A deadweight loss
A) is possible only if the good is underproduced but is not possible if the good is
overproduced.
B) subtracts only from producer surplus.
C) is a loss to consumers and a gain to producers.
D) is a loss inflicted on the entire society.
Answer: D
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

195) Which of these is NOT a potential source of inefficiency?

A) external benefits
B) increasing marginal costs
C) monopoly
D) subsidies
Answer: B
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

4 Is the Competitive Market Fair?

1) Using the "It's not fair if the result isn't fair" principle of fairness, an income tax
designed to transfer wealth from the rich to the poor
A) increases efficiency and equity.
B) increases efficiency and does not affect equity.
C) decreases efficiency and increases equity.
D) decreases efficiency and equity.
Answer: C
Topic: Fairness and Efficiency
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

2) The principle that states that we should strive to achieve the greatest happiness for the
greatest number is called
A) the big tradeoff.
B) the symmetry principle.
C) utilitarianism.
D) efficiency.
Answer: C
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

3) According to Utilitarian principles first discussed in the nineteenth century, fairness

implies
A) equality of income.
B) equality of opportunity.
C) winner takes all.
D) maximizing consumption.
Answer: A
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Topic: Utilitarianism
Skill: Graphing
Status: Old
AACSB: Analytical thinking

4) Utilitarianism is a principle whose goal is

A) the greatest happiness for the greatest number.
B) the greatest pay for the greatest number.
C) equal pay for equal work.
D) equal happiness for all workers.
Answer: A
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

5) Which of the following CORRECTLY defines utilitarianism?

A) Cost will increase if production increases.
B) The difference between what a consumer is willing to pay and what actually has to be
paid.
C) Society should strive to achieve the greatest good for the greatest number.
D) Equality will not result in efficient outcomes.
Answer: C
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

6) Utilitarianism is the idea that only

A) competition brings efficiency.
B) efficiency brings equality.
C) income equality is fair.
D) efficiency is fair.
Answer: C
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

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7) Utilitarianism argues that
A) Only equality brings efficiency.
B) There is a tradeoff between equality and efficiency.
C) The result is fair if the rules are fair.
D) The competitive market is fair.
Answer: A
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

8) Which of the following ideas describes the concept of "utilitarianism"?

I. Utilitarianism gained popularity in the 1930s.
II. Utilitarians believed that a society should use only competitive markets to allocate
resources.
III. Utilitarians claimed that taking money from rich people and giving it to poorer people
would make the economy more fair.
A) III only
B) II only
C) I and II
D) I, II and III
Answer: A
Topic: Utilitarianism
Skill: Definition
Status: Old
AACSB: Analytical thinking

9) Adam makes $25,000 per year and Bob makes $45,000 a year, and they both have the
same marginal benefit curve. According to the utilitarian view, if a dollar is transferred
from Bob to Adam, then
A) the change in Adam's marginal benefit plus the change in Bob's marginal benefit is
negative.
B) Adam's marginal benefit increases by more than Bob's marginal benefit decreases.
C) the change in Adam's marginal benefit plus the change in Bob's marginal benefit equals
zero.
D) Adam's marginal benefit decreases by more than Bob's marginal benefit increases.
Answer: B
Topic: Utilitarianism
Skill: Analytical
Status: Old
AACSB: Analytical thinking

10) Utilitarianism is based on the argument that

A) the greater a person's income, the smaller is the marginal benefit of a dollar.
B) by transferring a dollar from a millionaire to a poor person, more is lost than gained.
C) taxing people's income from employment makes them work less.
D) a dollar taken from a rich person does not end up as a dollar in the hands of a poorer
person.
Answer: A
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

11) One of the problems associated with the utilitarianism is that it does NOT recognize
that
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A) taxing those with higher incomes results in less work effort.
B) each individual receives a different marginal benefit from a dollar's worth of income.
C) equity is achieved when there is no poor and no rich.
D) similar individuals should be treated the same.
Answer: A
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

12) One problem with the concept of utilitarianism is that

A) there is a cost to transferring income from the rich to the poor.
B) there are increasing marginal costs.
C) there are decreasing marginal benefits.
D) markets cannot adjust to income redistribution.
Answer: A
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

13) One problem with the utilitarian principle is that it ignores

A) increasing marginal costs.
B) decreasing marginal benefits.
C) the costs of making income transfers.
D) poor people.
Answer: C
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

14) The big tradeoff is a tradeoff between

A) efficiency and fairness.
B) consumer surplus and producer surplus.
C) taxes and subsidies.
D) price ceilings and price floors.
Answer: A
Topic: The Big Tradeoff
Skill: Definition
Status: Old
AACSB: Analytical thinking

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15) Which of the following arguments support the proposition that society should accept at
least some income inequality?
A) Income redistribution will require taxation, causing inefficiently low levels of labor
supply and saving, thus decreasing the size of the economic pie.
B) Administrative costs associated with income redistribution imply that low-income people
receive less than $1 for each dollar taken from high-income people.
C) Income redistribution programs divert skilled labor and capital to tax compliance
activities and away from production of goods and services that people value.
D) All of the above answers are correct because all support the proposition that society
should accept some income inequality.
Answer: D
Topic: The Big Tradeoff
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

16) Suppose the government considers placing a tax on business profits o that businesses
decrease their production and generate a deadweight loss. Revenues from the tax would be
used to boost the incomes of the poor. The decision to levy the tax implies that in this case,
the government
A) values people but not business.
B) values efficiency more than its view of fairness.
C) profits from taxes.
D) values its view of fairness more than efficiency.
Answer: D
Topic: The Big Tradeoff
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

17) A modified version of utilitarianism proposed by John Rawls states that

A) the distribution of the economic pie is fair if the rules are fair.
B) the distribution of the economic pie is fair if it achieves the greatest happiness for the
greatest number of people.
C) the fair distribution of the economic pie is the one that makes the poorest person as well
off as possible.
D) goods may be transferred from one person to another only by voluntary exchange.
Answer: C
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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18) According to John Rawls, the fair distribution of income is the one that
A) makes the poorest person as well off as possible.
B) makes the average person as well off as possible.
C) results in equal income for all society members.
D) is based on fair rules.
Answer: A
Topic: John Rawls
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

19) The requirement that people in similar situations be treated similarly is called
A) the big tradeoff.
B) the symmetry principle.
C) utilitarianism.
D) efficiency.
Answer: B
Topic: Symmetry Principle
Skill: Definition
Status: Old
AACSB: Analytical thinking

20) The symmetry principle states that

A) the poorest person must be made as well off as possible.
B) income should be transferred from the rich to the poor up to the point of complete
equality.
C) resources should be common property.
D) people in similar situations must be treated similarly.
Answer: D
Topic: Symmetry Principle
Skill: Definition
Status: Old
AACSB: Analytical thinking

21) The symmetry principle is the requirement that

A) people in similar situations be treated similarly.
B) Society's income be distributed symmetrically among its members.
C) the poorest 20 percent of households should receive the same total income as the
richest 10 percent of households.
D) the average person be made as well off as possible.
Answer: A
Topic: Symmetry Principle
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

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22) The symmetry principle in economics means that
A) all individuals must have similar outcomes.
B) all similar individuals must be treated similarly.
C) individuals must have opposite outcomes.
D) similar individuals must have similar outcomes.
Answer: B
Topic: Symmetry Principle
Skill: Definition
Status: Old
AACSB: Analytical thinking

23) Which of the following is inconsistent with Robert Nozick's view of fairness as
expressed in his book Anarchy, State, and Utopia?
A) Everything that is valuable must be owned by individuals and that the state must ensure
that theft is prevented.
B) The only legitimate way a person can acquire property is to buy it.
C) The requirement that all people should have equal outcomes.
D) None of the above answers is correct because all the answers express thoughts
consistent with Nozick's view.
Answer: C
Topic: It's Not Fair If the Rules Aren't Fair
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

24) Robert Nozick asserts that fairness and efficiency result if

A) there are price ceilings in the market.
B) there are external benefits and external costs in the market.
C) voluntary exchange occurs.
D) public goods are provided by government.
Answer: C
Topic: It's Not Fair If the Rules Aren't Fair
Skill: Definition
Status: Old
AACSB: Analytical thinking

25) Competitive markets with no external costs or benefits and no government price
ceilings, floors, taxes or subsidies ________ efficient. According to the "It's not fair if the
rules aren't fair" idea of fairness, competitive markets ________ fair.
A) are; are
B) are; are not
C) are not; are
D) are not; are not
Answer: A
Topic: It's Not Fair If the Rules Aren't Fair
Skill: Analytical
Status: Old
AACSB: Analytical thinking

26) Susan thinks the only fair outcome is one in which she has three slices of pizza a week.
Susan is using a(n) ________ concept of fairness.
A) "it's not fair if the result isn't fair"
B) "it's not fair if the rules aren't fair"
C) "big tradeoff"
D) "Novak principle"
Answer: A
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Topic: Fair Results
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

27) The assertion that if resources are allocated efficiently, they also are allocated fairly is
made by
A) all utilitarians.
B) John Rawls, who proposed making the poorest as well off as possible.
C) Robert Nozick, who believes that equality of opportunity is fair.
D) all economists who understand the big tradeoff.
Answer: C
Topic: Fair Rules
Skill: Conceptual
Status: Old
AACSB: Analytical thinking

5 News Based Questions

1) American Idol is a popular television program where contestants compete to win a $1
million record deal. To determine the winner, fans either dial the number or send a text
message indicating their favorite contestant. The contestant with the highest number of
texts and phone calls wins. What is the scarce resource in this example?
A) $1 million record deal
B) television ratings
C) phone calls and text messages
D) fans
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

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2) American Idol is a popular television program where contestants compete to win a $1
million record deal. To determine the winner, fans either dial the number or send a text
message indicating their favorite contestant. The contestant with the highest number of
texts and phone calls wins. How is the scarce resource in this example allocated?
A) majority rule
B) command
C) contest
D) personal characteristics
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

3) Colorado State University allocates 10,000 tickets for each home game to students at no
cost. Students are required to stand in line and prove they are a full time student to receive
a free ticket. How is the scarce resource in this example allocated?
A) first-come, first-served
B) market price
C) contest
D) lottery
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

4) Colorado State University allocates 10,000 tickets for each home game to students at no
cost. Students are required to stand in line and prove they are a full time student to receive
a free ticket. Community members can purchase season tickets or tickets to an individual
game. How are football tickets allocated to community members?
A) market price
B) command
C) first-come, first-served
D) personal characteristics
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

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5) At the beginning of World War II, a rationing system was established in the United
States. Ration stamps or cards were issued for a variety of commodities such as canned
milk and gasoline. Canned milk was only available to babies and small children. In this
example, canned milk was allocated through
A) personal characteristics.
B) market price.
C) majority rule.
D) first-come, first-served.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

6) At the beginning of World War II, a rationing system was established in the United
States. Ration stamps or cards were issued for a variety of commodities such as canned
milk and gasoline. To receive a gasoline ration card, a person had to certify a need for gas.
The ration cards ranged from the most limited A card which only allowed 3 to 4 gallons per
week to the most generous X card, which allowed the carrier to buy an unlimited amount of
gasoline. A government entity, the War Price and Rationing Board, decided who received
and A or an X card. Gasoline cards were allocated through
A) command.
B) market price.
C) majority rule.
D) force.
Answer: A
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

7) The Wii was a wildly popular home video game console released by Nintendo. The Wii
system was first available in the United States in November, 2006 and sold more than 30
million units as of August 2010. The Wii retails for $199. Suppose Ahmed was willing to pay
$230, Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. Who will
purchase a Wii?
A) Ahmed and Bodie
B) Ahmed
C) Lana
D) Ahmed, Bodie, and Lana
Answer: A
Topic: Marginal Benefit and Demand
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

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8) The Wii is a wildly popular home video game console released by Nintendo. The Wii
system was first available in the U.S. in November, 2006 and has sold more than 30 million
units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230,
Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. What is the value of
Ahmed's consumer surplus?
A) $31
B) $280
C) $249
D) No consumer surplus is generated because Ahmed will not buy the Wii.
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

9) The Wii is a wildly popular home video game console released by Nintendo. The Wii
system was first available in the U.S. in November, 2006 and has sold more than 30 million
units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230,
Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. What is the value of
Lana's consumer surplus?
A) No consumer surplus is generated because Lana will not buy the Wii.
B) $249
C) $225
D) $24
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

10) The Wii is a wildly popular home video game console released by Nintendo. The Wii
system was first available in the U.S. in November, 2006 and has sold more than 30 million
units as of August 2010. The Wii retails for $199. Suppose Ahmed is willing to pay $230,
Lana is willing to pay $175, and Bodie is willing to pay $300 for a Wii. If these three are the
only consumers in the market, what is the value of the market consumer surplus?
A) $132
B) $855
C) $630
D) $498
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

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11) Fitness is a magazine for women about health and exercise. Fitness offers year
subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and
each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is
willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. Who
will subscribe to the magazine?
A) Ania, Mandy, and Chloe
B) Jess, Ania, Mandy, and Chloe
C) Jess, Ania, and Chloe
D) Mandy and Chloe
Answer: A
Topic: Marginal Benefit and Demand
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

12) Fitness is a magazine for women about health and exercise. Fitness offers year
subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and
each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is
willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What
is the value of Ania's consumer surplus?
A) $4
B) $16
C) $12
D) $6
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

13) Fitness is a magazine for women about health and exercise. Fitness offers year
subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and
each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is
willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What
is the value of Chloe's consumer surplus?
A) $0
B) $12
C) $10
D) Chloe will not purchase the magazine.
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

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14) Fitness is a magazine for women about health and exercise. Fitness offers year
subscriptions for $12 on their website. Jess, Ania, Mandy, and Chloe exercise together and
each enjoy reading Fitness. Jess is willing to pay $10, Ania is willing to pay $16, Mandy is
willing to pay $24, and Chloe is willing to pay $12 for a subscription to the magazine. What
is the value of market consumer surplus?
A) $16
B) $52
C) $40
D) $12
Answer: A
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

15) The annual Great Sofa Round-up is a collaborative event between Colorado State
University and the City of Fort Collins aims to help students and neighbors get rid of
unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on
the day of the Round-up, your friends take their couches to the main parking lot on campus
where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell
her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just
wants to get rid of his couch and he is willing to give it away for free. At the Round-up,
potential buyers think that all the couches available are basically the same and they are
willing to buy a couch for $50. Who will sell their couch?
A) Raj, Emily, Nara, and Sergio
B) Raj, Nara, and Sergio
C) Emily, Nara, and Sergio
D) Emily
Answer: A
Topic: Marginal Cost and Supply
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

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16) The annual Great Sofa Round-up is a collaborative event between Colorado State
University and the City of Fort Collins aims to help students and neighbors get rid of
unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on
the day of the Round-up, your friends take their couches to the main parking lot on campus
where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell
her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just
wants to get rid of his couch and he is willing to give it away for free. At the Round-up,
potential buyers think that all the couches available are basically the same and they are
willing to buy a couch for $50. What is the value of Nara's producer surplus?
A) $30
B) $50
C) $20
D) $10
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

17) The annual Great Sofa Round-up is a collaborative event between Colorado State
University and the City of Fort Collins aims to help students and neighbors get rid of
unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on
the day of the Round-up, your friends take their couches to the main parking lot on campus
where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell
her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just
wants to get rid of his couch and he is willing to give it away for free. At the Round-up,
potential buyers think that all the couches available are basically the same and they are
willing to buy a couch for $50. What is the value of the market producer surplus?
A) $100
B) $200
C) $120
D) $50
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

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18) The annual Great Sofa Round-up is a collaborative event between Colorado State
University and the City of Fort Collins aims to help students and neighbors get rid of
unwanted furniture, while giving people in need access to inexpensive sofas. Suppose on
the day of the Round-up, your friends take their couches to the main parking lot on campus
where the Round-up is held. Raj will not sell his couch for less than $30, Emily will not sell
her couch for less than $50, Nara will not sell her couch for less than $20, Sergio just
wants to get rid of his couch and he is willing to give it away for free. At the Round-up,
potential buyers think that all the couches available are basically the same and they are
willing to buy a couch for $25. Who will sell their couch and what is the value of the market
producer surplus?
A) Nara and Sergio; $30
B) Nara and Sergio; $5
C) Raj and Emily; $30
D) Emily, Nara, and Sergio; $25
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

19) Hummel is a line of figurines based on the artistic style of German nun Maria
Innocentia Hummel and have become a collector's item. The Hummel figurines are almost
uniformly "cute." Lukas, Felix, Anya, and Hannah sell Hummel figurines through the
internet. Their willingness to sell price for one figurine is: Lukas $240, Felix $180, Anya
$150, Hannah $130. Suppose the price of a Hummel figurine is $150, what is Felix's
producer surplus?
A) Felix would not sell his figurine.
B) $180
C) $150
D) $30
Answer: A
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Application of knowledge

20) Hummel is a line of figurines based on the artistic style of German nun Maria
Innocentia Hummel and have become a collector's item. The Hummel figurines are almost
uniformly "cute." Lukas, Felix, Anya, and Hannah sell Hummel figurines through the
internet. Their willingness to sell price for one figurine is: Lukas $240, Felix $180, Anya
$150, Hannah $130. Suppose the price of a Hummel figurine is $150, who will sell their
figurine?
A) Anya and Hannah
B) Lukas, Felix, and Anya
C) Felix, Anya, and Hannah
D) Hannah
Answer: A
Topic: Marginal Cost and Supply
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

21) In May 2008, Switzerland co-hosted the international soccer tournament Euro 2008. At
that time, the Swiss potato industry association had been warning there could be a fry
shortage because there was a potato shortage. The shortage meant that in the French fry
market
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A) the price for French fries would be higher.
B) the price for French fries would be lower.
C) if the efficient quantity of fries is produced, total surplus would be minimized.
D) if the inefficient quantity of fries is produced, total surplus would be maximized.
Answer: A
Topic: Allocatively Efficient Use of Resources
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

22) Bill Gates is the world's second richest person whose net worth is estimated at $54
billion. The idea that Bill Gates marginal utility for his 54 billionth dollar is less than
someone else's 1000th dollar is the
A) "Utilitarian" principle.
B) "Big Tradeoff" principle.
C) "Make the Poorest as Well Off as Possible" principle.
D) "Equity" principle.
Answer: A
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

23) Meat at the supermarket has contributed to increase in food prices in 2010, and high
feed and fuel prices mean that steak will likely cost a lot more this fall. The price of feed
has increased 50 percent and hay has doubled from two years ago. Based on this
information, which of the following is TRUE in the market for beef?
A) Consumer surplus will decrease.
B) Producer surplus will increase.
C) Equilibrium price will decrease.
D) Equilibrium quantity will increase.
Answer: A
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

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24) Meat at the supermarket has contributed to increase in food prices in 2010, and high
feed and fuel prices mean that steak will likely cost a lot more this fall. The price of feed
has increased 50 percent and hay has doubled from two years ago. Based on this
information, which of the following is NOT true in the market for beef?
A) The consumer surplus will decrease.
B) The equilibrium quantity will increase.
C) The total surplus will decrease.
D) The equilibrium price will increase.
Answer: B
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Application of knowledge

6 Essay Questions
1) What is allocative efficiency?
Answer: Allocative efficiency is a situation when it is not possible to produce more of one
good without giving up the production of some other good that is valued more highly.
Topic: Allocative Efficiency
Skill: Graphing
Status: Old
AACSB: Written and oral communication

2) What is the relationship between the marginal social benefit of milk and marginal social
cost of milk when the efficient quantity of milk is produced?
Answer: The marginal social benefit of milk equals its marginal social cost.
Topic: Allocative Efficiency
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

3) Is the marginal benefit someone receives from a good or service the same as the price
the person pays? Explain your answer.
Answer: Generally the marginal benefit of a good or service is different than the price that
is paid. The marginal benefit is the maximum amount a consumer is willing to pay for a
good or service. Typically the consumer can buy the good or service for a price less than
the maximum. (Indeed, the difference between the maximum price the consumer is willing
to pay and the price actually paid is the consumer surplus.) However, it might be the case
that the price precisely equals the maximum the consumer is willing to pay. In this case
alone, the marginal benefit equals the price. (And in this case, the amount of the consumer
surplus equals zero.)
Topic: Marginal Benefit
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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4) "A demand curve is the same as a marginal cost curve." Is this statement correct or
incorrect? Explain your answer.
Answer: The statement is incorrect. A demand curve is a marginal benefit curve not a
marginal cost curve. A demand curve is a marginal benefit curve because it can be used to
find the maximum price people are willing to pay for a given quantity, that is, the marginal
benefit of the given quantity.
Topic: Marginal Benefit Curve
Skill: Graphing
Status: Old
AACSB: Written and oral communication

5) What is the relationship between the marginal social benefit curve and the market
demand curve. Explain.
Answer: The market demand curve is also the marginal social benefit curve. The market
demand curve shows the maximum price that consumers are willing to pay to buy another
unit of the good. Marginal social benefit is the value of one more unit of a good, which
equals the maximum price that people are willing to pay to get it. So the market demand
curve is the marginal social benefit curve.
Topic: Value, Willingness to Pay, and Demand
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

6) Which curve is the same as the market demand curve? Why are the curves the same?
Answer: The market demand curve is the same as the marginal social benefit curve. For
any quantity, the demand curve shows the dollar value of other goods and services a
consumer is willing to forgo to get another unit of the good. (This amount is the maximum
price the consumer is willing to pay and equals the price from the demand curve vertically
above each quantity.) But the amount of other goods and services the consumer is willing
to forgo is the marginal social benefit of the good. Hence along the market demand curve
the price associated with each quantity of the good is the same as the marginal social
benefit of that quantity. (So that, for instance, the price associated with the 3rd quantity is
the same as the marginal social benefit of the 3rd unit.) Therefore the market demand
curve is the same as the marginal social benefit curve.
Topic: Marginal Benefit Curve
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

7) What is consumer surplus?

Answer: Consumer surplus equals the difference between the marginal benefit of a unit of
a good and the price paid for it, summed over the quantity purchased. The total consumer
surplus in a market equals the area under the market demand curve and above the price.
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Written and oral communication

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8) A new car in the dealer's showroom had a sticker price of $35,900. Sally liked the car
but decided she would pay no more than $32,000 for it, otherwise she would do without it.
After haggling with the dealer, she purchased the car for $31,500. Did she gain any
consumers surplus? If so, how much? If not, why not?
Answer: Yes. Consumer surplus is the difference between the highest price a consumer is
willing to pay (that is, the value of the good) minus the actual price paid. Sally gained a
consumer surplus of $500.00.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Written and oral communication

9) If the demand for a good does NOT change, how will an increase in the price of that
good affect the consumer surplus from it?
Answer: The consumer surplus equals the difference between the value of the good and its
price. If the demand for a good does not change, then the value of that good does not
change. Hence an increase in the price decreases the consumer surplus from that good.
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

10) What is the marginal cost of a good?

Answer: The marginal cost of a good is the opportunity cost of producing one more unit of
it. The key is that the marginal cost refers to the cost of one additional unit, not to the total
cost of producing all the units.
Topic: Marginal Cost
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

11) What other curve is the same as the market supply curve? Why are the curves the
same?
Answer: The market supply curve is the same as the marginal social cost curve. The
marginal social cost is the cost of producing one more unit of a good. For any quantity, the
market supply curve shows the minimum price for which a producer is willing to produce
another unit of the good. (This price is equal to the price on the supply curve that is
vertically above each quantity.) A producer is willing to produce a unit of the good if the
price covers all costs of the producing that unit, that is, if the price equals the cost of
producing the unit. The cost of producing the unit is the marginal social cost. Hence along
the market supply curve, the price associated with each quantity is equal to the marginal
social cost of each quantity. Therefore the market supply curve is the same as the marginal
social cost curve.
Topic: Marginal Cost Curve
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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12) What is producer surplus?
Answer: Producer surplus is the price of a good received minus the marginal cost of
producing it, summed over the quantity sold.
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Written and oral communication

13) "If the price of a ticket to Sea World exceeds the marginal cost of the ticket by $13, a
producer surplus exists for Sea World." Is this statement true or false?
Answer: The statement is true. Anytime the price exceeds the marginal cost, there is a
producer surplus. In this case, the producer surplus is $13.
Topic: Producer Surplus
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

14) What is the significance of the concepts "consumer surplus" and "producer surplus"?
Answer: Each is a measure of economic welfare or well-being. The more consumer surplus
a buyer can gain from a transaction, the greater is consumer welfare. The more producer
surplus a seller can gain from a transaction, the greater is producer welfare. Total surplus
is equal to the sum of consumer and producer surplus.
Topic: Consumer and Producer Surplus
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

15) Can both producer surplus and consumer surplus exist at the same time in a particular
market?
Answer: Yes. The actual price can be above the seller's marginal cost and below the
buyer's maximum purchase price. So, buyer and seller can both earn a surplus on the same
transaction.
Topic: Consumer and Producer Surplus
Skill: Analytical
Status: Old
AACSB: Written and oral communication

16) "If the marginal social benefit of a car exceeds the marginal social cost of a car, we are
producing too many cars." True or false? Explain.
Answer: False. If the marginal social benefit of a car exceeds the marginal social cost of a
car, we can gain value by producing another car and we are losing value by not producing
it. If the marginal social benefit exceeds the marginal social cost, producing another car
yields a benefit that exceeds the cost of producing the car. So we are producing too few
cars.
Topic: Allocative Efficiency
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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17) When less than the efficient amount of a good is produced, how does the marginal
social benefit of the last unit produced compare to its marginal social cost?
Answer: When less than the efficient amount of a good is produced, the marginal social
benefit of the last unit produced exceeds its marginal social cost. The fact that the marginal
social benefit exceeds the marginal social cost indicates that producing additional units of
the good will move the amount of production closer to the efficient quantity.
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

18) Why is a competitive market efficient?

Answer: Efficiency is attained when production is such that the marginal social benefit
equals the marginal social cost. When a competitive market is at equilibrium, the quantity
demanded equals the quantity supplied, that is, the demand and supply curves cross. But
the marginal social benefit curve is the same as the demand curve and the marginal social
cost curve is the same as the supply curve. Thus equilibrium occurs at the point where the
marginal social benefit curve crosses the marginal social cost curve. As a result, so the
marginal social benefit equals the marginal social cost and hence the market is efficient.
Topic: Efficiency of Competitive Markets
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

19) When economists refer to "the invisible hand," what do they mean?
Answer: In his book, Wealth of Nations, Adam Smith wrote that a participant in a
competitive market is "led by an invisible hand to promote an end which was no part of his
intention." Market participants act in their own self-interest, attempting to maximize their
own well-being, yet, in the process, the result is an efficient use of resources. This result
occurs because the market forces of supply and demand invisibly guide resources to their
highest valued uses.
Topic: Invisible Hand
Skill: Graphing
Status: Old
AACSB: Written and oral communication

20) Explain how the invisible hand delivers an efficient market outcome.
Answer: The invisible hand concepts claims that people, acting in their own self interest,
send resources to be used at their highest value. As a result, resources are efficiently used
to produce the output of goods and services that people most highly value. With this
outcome, producer and consumer surplus are maximized.
Topic: Invisible Hand
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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21) "If there is an inefficient level of nursing care in South America, a deadweight loss
exists." Is this statement true or false?
Answer: The statement is true. Anytime there is an inefficient level of production, a
deadweight loss exists.
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

22) What are some of the potential obstacles that can prevent a market from reaching the
efficient outcome? Briefly define each obstacle.
Answer: With one exception, the obstacles basically fall into two camps: Obstacles that
occur because the government does not intervene in the market and obstacles that occur
because the government does intervene in the market. In the first group are the issues of
externalities, public goods, common resources, high transactions costs, and monopoly. An
external cost or benefit occurs when a cost or benefit from production falls upon someone
other than the producer or when a cost or benefit from consumption falls upon someone
other than the demander. A public good is a good or service that can be consumed
simultaneously by everyone even if they didn't pay for the good or service. Public goods
create the free rider problem, in which people consume the good without paying for it. A
common resource is a resource that no one owns and that everyone can use. Finally, a
monopoly occurs when a single producer controls the market by being the only producer.
In the case of an externality, public good, or monopoly, government intervention has the
possibility of increasing the market's efficiency.
A second set of obstacles occur when a market is otherwise efficient but nonetheless the
government intervenes in the market. The second group is comprised of price and quantity
regulations as well as taxes and subsidies. Price regulations might prevent the market from
reaching its equilibrium. Quantity regulations, such as quotas, are direct limits on the
amount of a good that a firm can produce. Because this quantity will usually be less than
the quantity the market would produce, the quota is inefficient. Taxes increase the price
paid by the buyer and decrease the price received by the seller. Subsidies have the
opposite effect, decreasing the price paid by the buyer and increasing the price received by
the seller.
The last obstacle that can prevent a market from reaching efficiency is high transactions
costs. If the costs of using a market are too high, then a market will not exist.
Topic: Obstacles to Efficiency
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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23) Explain the difference between the "fair rules" and the "fair results" guidelines for
competitive market fairness.
Answer: Economists do not agree on how to judge whether an outcome is fair. Some
believe that an outcome is not fair if the results are not fair. Consider how incomes are
distributed by the labor market. Because income is not distributed equally, one group of
economists believes that the labor market is not a fair market. To make the outcome (and
results) fair, these economists believe that income should be redistributed by the
government.
Other economists are not concerned with fair results. They aren't concerned with the
unequal distribution of income as long as the rules to earn income are fair. As long as there
is voluntary exchange and property rights are enforced, this group of economists believes
the market outcome is fair.
Topic: Is the Competitive Market Fair?
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

24) What are the two views of fairness? How does each view redistribution of income from
the rich to the poor?
Answer: One view is that "it's not fair if the result isn't fair." This view requires that
income should be redistributed from the rich to the poor in order to create a fair result.
Another view is that "it's not fair if the rules aren't fair." This view requires that private
property may be transferred only under voluntary exchange, so redistribution of income is
not fair unless it is voluntary.
Topic: Is the Competitive Market Fair?
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

25) How can a person argue that health care services in America are provided efficiently,
but not fairly?
Answer: The assertion that the health market is efficient implies that competitive market
forces determine the level and quality of health care. Where the demand for and supply of
health care intersects, the marginal social benefit and marginal social cost of health care
are equal. This equality means that the people who are demanding health care are willing
and able to pay the price, and the price itself is equal to the marginal social cost of
providing health care.
However, at that market price there are many people who cannot afford health care. These
people, probably the poor and uninsured, are left to go to clinics, crowd emergency rooms,
or else do without basic health care needs because of their lack of ability to pay the market
price. This outcome could easily violate the "it's not fair if the result isn't fair" view of
fairness. Thus observers who assert that the U.S. health care system might be efficient but
isn't fair are using the "results" view of fairness.
Topic: Fair Results
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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26) Often politicians assert that a price, such as the price of gasoline or the rent for an
apartment, is too high and that it is unfair for these prices to be so high. If these products
are traded in competitive markets, what fairness rule are politicians using? Why?
Answer: The fairness rule is one of "It's not fair if the results aren't fair." The claim that
the prices are too high to be fair is a claim that buyers are being unfairly harmed by having
to pay such high prices. The assertion that people are harmed because the price is too high
is looking at the results of the process because if the price had been lower, the assertion of
unfairness would not have been made.
Topic: Fair Results
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

27) What approach to fairness argues in favor of government policies that redistribute
income so that there is more equality of income?
Answer: The general approach to fairness that argues in favor of government
redistribution is a "fair results approach," that is, an approach that argues "it isn't fair
unless the results are fair." Utilitarianism is the principle that states that a society should
strive for "the greatest happiness for the greatest number of people." Utilitarians argued
that complete equality of income was the only income distribution that met their
requirement so Utilitarians asserted that government policies to redistribute income are
necessary for fairness.
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

28) Explain the utilitarianism principle. How is it deficient?

Answer: Utilitarianism is a principle that states that we should strive to achieve the
greatest happiness for the greatest number. In order to do this, income must be
redistributed from the rich to the poor until there is complete equality between all people.
The rationale is that everyone has the same basic wants and a similar capacity to enjoy life.
Also, the greater a person's income, the smaller is the marginal benefit of a dollar. By
transferring money from the rich to the poor, more is gained than is lost and the two
people added together are better off.
The deficiency is that the principle ignores the costs of making income transfers. Income
can be redistributed through taxation. However, taxing people's income from employment
makes them work less which results in the quantity of labor being less than the efficient
quantity. Taxing people's income from capital induces them to save less. It results in the
quantity of capital being less than the efficient quantity. With smaller quantities of both
labor and capital, the quantity of goods and services produced is less than the efficient
quantity.
In addition, not all of the increase in taxes collected would be transferred to the poor. Some
of the tax collection would be used to cover administrative costs.
Topic: Utilitarianism
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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29) What is the "big tradeoff"?
Answer: The "big tradeoff" is the tradeoff between efficiency and fairness. The idea is that
if the government redistributes income so that it is more equally shared, output decreases
so that it is less than the efficient amount. Output shrinks because such redistribution
blunts people's incentives to work. Hence redistributing income so that everyone has the
same amount of income might end up insuring that everyone's incomes are smaller than if
less redistribution is pursued.
Topic: Big Tradeoff
Skill: Graphing
Status: Old
AACSB: Written and oral communication

30) Why do societies face a tradeoff between the size of the economic pie and the degree of
equality with which it is shared?
Answer: A person's share of the economic pie is determined by his or her income. To
increase the degree of equality, income must be redistributed away from richer people and
towards poorer people. Income is transferred from the rich to the poor by means of taxes.
Taxes discourage work and saving. Because people work less, the nation's output
decreases When saving decreases, so does investment in capital, which also decreases the
nation's output. Thus taxes that redistribute income in order to make for a more equal
income distribution decrease the nation's output, that is, shrink the economic pie.
Topic: Big Tradeoff
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

31) Why does the problem of the big tradeoff arise when the government engages in the
process of redistributing income using taxes and transfers?
Answer: There are two reasons why the big tradeoff problem arises. First, in the process of
transferring income from the people who have to those who do not have, an administrative
cost is incurred by society. The result is that $1 taxed is not $1 transferred. Hence the
effort to make incomes more equal decreases the average income. Second, taxing people's
income is a disincentive to work, while taxing people's savings is a disincentive to
accumulate capital. As a result, people work less and save less, both of which decrease the
amount of goods and services produced and decrease people's income. Hence once again
the effort to make incomes more equal decreases the average income.
Topic: Big Tradeoff
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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32) Explain the modified version of utilitarianism proposed in the book entitled "A Theory
of Justice," by the philosopher John Rawls and its relationship to the "big tradeoff."
Answer: Rawls was aware that extensive redistribution of income could decrease the
average income, which is the tradeoff captured by the "big tradeoff." Thus perfect equality
of income might result in everyone having lower income than would otherwise be the case.
To overcome this issue, according to John Rawls, the fairest distribution of the economic
pie is the one that provides the poorest person the largest income possible. Hence less
redistribution will take place than if perfect equality was the goal. As a result, average
income will decrease less and the poorest person would be better off.
Topic: John Rawls
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

33) Explain the principle "Make the poorest as well off as possible." Who proposed it?
Answer: This principle was proposed by John Rawls. According to this principle, taking all
the costs of income transfer into account, the fair distribution of the economic pie is one
that makes the poorest person as well off as possible. The incomes of rich people should be
taxed, and after paying the costs of administering the tax and transfer system, what is left
should be transferred to the poor. But the taxes must not be so high that they make the
economic pie shrink to the point at which the poorest person ends up with a smaller piece.
The goal is to make the piece enjoyed by the poorest person as big as possible.
Topic: John Rawls
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

34) Bill Gates is a founder of Microsoft and the world's richest individual. Suppose
Microsoft sells more software and Mr. Gates acquires another billion dollars in wealth.
Simultaneously, suppose a burglar whose income is well below average broke into Bill
Gates' house and stole a million dollars' worth of antiques. Using the "it's not fair if the
rules aren't fair" approach to fairness, is Mr. Gates' acquisition of additional wealth fair? Is
the (poor) thief's acquisition fair?
Answer: In order for Mr. Gates to become richer, Microsoft had to convince consumers to
buy their products. The consumers' choices were voluntary. That is, the consumer engaged
in a voluntary transaction with Microsoft and, as a result, Mr. Gates gained wealth. (And
the consumers gained the software.) Because the exchange was voluntary, it is a fair
exchange according to the "it's not fair if the rules aren't fair" approach. The burglar,
however, did not engage in a voluntary transaction with Mr. Gates. Mr. Gates suffered an
involuntary transaction with the burglar. Involuntary transactions violate the symmetry
principle and hence the thievery is not fair according to the "rules" approach. Notice that
the fairness has nothing to do with the incomes of Mr. Gates and the burglar; instead,
fairness hinges on whether the transaction was voluntary.
Topic: Fair Rules
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

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35) According to the "fair rules" view of fairness, are taxes fair? Explain.
Answer: Taxes are unfair according to the fair rules view because they are an involuntary
transfer of private property. While most economists and most people support fair taxation,
there is little agreement on what constitutes a fair tax.
Topic: Fair Rules
Skill: Conceptual
Status: Old
AACSB: Written and oral communication

7 Numeric and Graphing Questions

1) The figure shows the demand curve for hotel rooms at a local resort.
a) If the hotel charges $120 per night, how many rooms will they rent?
b) If there are only 40 rooms available, how much are customers willing to pay for a room?
c) If 60 rooms are available, how much are customers willing to pay?
d) What do the dollars in your answer to part (c) represent?
Answer:
a) At $120 a night, the hotel will rent 20 rooms.
b) If 40 rooms are available, customers are willing to pay $90 per room.
c) If 60 rooms are available, customers are willing to pay $60 per room.
d) The $60 represents the dollars' worth of other goods and services that customers are
willing to forgo to get one more night in a hotel room.
Topic: Willingness To Pay
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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2) Jenn is willing to pay $75 for a purse and the purse's price is $60. What is Jenn's
consumer surplus?
Answer: The consumer surplus equals the difference between the marginal benefit of the
good and the price actually paid. Jenn is willing to pay $75 for the purse, so its marginal
benefit to her is $75. However, she only must pay $60, so Jenn has a consumer surplus of
$75 - $60 = $15.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

3) Jason needs help getting ready for the next test in his economics course and would like
to hire Maria, an economics tutor to help him. Jason is willing to pay $30 for the first hour
of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the fifth.
The equilibrium price for tutoring is $15 per hour. For how many hours of tutoring will
Jason hire Maria? Why this amount of hours? What is Jason's consumer surplus, if any, from
the tutoring? What is Maria's consumer surplus from the tutoring?
Answer: Jason will hire Maria for 4 hours of tutoring. At $15 per hour, the marginal benefit
to Jason of the first 4 hours exceeds the price. But the marginal benefit from the fifth hour
is less than the price and so Jason will not hire Maria for 5 hours. Jason's total consumer
surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from
the third plus $0 from the fourth. Maria has no consumer surplus in this market because
she is the producer not the consumer.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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4) The figure above shows the demand curve for DVDs. Use it to illustrate the consumer
surplus if the price of a DVD is $15.
Answer:

The consumer surplus is the area under the marginal benefit curve and above the price and
is illustrated in the figure above.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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5) The figure above shows the market demand curve for pizza.
a) What is the marginal social benefit of the 20th pizza?
b) What is the maximum price a consumer is willing to pay for the 20th pizza?
c) If the price of a pizza is $6, what is the consumer surplus of the 20th pizza?
d) If the price of a pizza is $10, what is the consumer surplus?
e) If the price of a pizza is $6, what is the consumer surplus?
Answer:
a) The marginal social benefit of the 20th pizza is $10.
b) The maximum price a consumer is willing to pay for the 20th pizza is $10.
c) If the price of a pizza is $6, the consumer surplus of the 20th pizza is $4.
d) If the price of a pizza is $10, the consumer surplus is $40.
e) If the price of a pizza is $6, the consumer surplus is $160.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

6) The figure above shows Cindy's demand for CDs per year.
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a) What is Cindy's total consumer surplus if the price of a CD is $12?
b) What is Cindy's total consumer surplus if the price of a CD is $9?
c) What happens to Cindy's consumer surplus when the price of a CD falls?
Answer:
a) Her consumer surplus when the price of a CD is $12 equals $15, the area of the triangle
under the demand curve and above the price.
b) Her consumer surplus when the price of a CD is $9 equals $60, the area of the triangle
under the demand curve and above the price.
c) As the price of a CD falls, Cindy's consumer surplus increases. This result reflects the
observation that consumers are better off when prices are lower.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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7) The diagram above depicts the market demand for, and market price of, buckets of raw
oysters in Orlando.
a) What is the consumer surplus of the person who buys the 100th bucket of oysters?
b) What is the consumer surplus of the person who buys the 200th bucket of oysters?
c) What is the consumer surplus of the person who buys the 300th bucket of oysters?
d) What is the consumer surplus in the market?
Answer:
a) The consumer surplus of the person who buys the 100th bucket of oysters is $6.
b) The consumer surplus of the person who buys the 200th bucket of oysters is $3.
c) The consumer surplus of the person who buys the 300th bucket of oysters is $0.
d) The consumer surplus in the market is $1,350.
Topic: Consumer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

8) Maria helps tutor students taking economics. The equilibrium price for tutoring is $15
per hour. Maria has determined her opportunity cost per hour to be $6 for the first, $9 for
the second, $12 for the third, $15 for the fourth, and $18 for the fifth. How many hours will
Maria tutor? Why this amount of hours? What, if any, is Maria's producer surplus?
Answer: Maria will tutor for 4 hours. For all of the first 4 hours of tutoring, Maria's
marginal cost of tutoring is less than or equal to the price she receives from tutoring. Maria
will not tutor the fifth hour because for this hour her marginal cost exceeds the price.
Maria makes a producer of surplus of $18, the sum of $9 on the first hour plus $6 on the
second hour plus $3 on the third hour plus $0 on the fourth hour.
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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9) The figure above shows the market supply curve for pizzas.
a) What is the marginal social cost of the 20th pizza?
b) What is the minimum supply price of the 20th pizza?
c) If the price is $6 per pizza, what is the producer surplus for the 20th pizza?
d) If the price is $6 per pizza, what is the total producer surplus?
e) If the price is $8 per pizza, what is the total producer surplus?
f) If the price is $10 per pizza, what is the total producer surplus?
Answer:
a) The marginal cost of the 20th pizza is $6.
b) The minimum supply price of the 20th pizza is $6.
c) If the price is $6 per pizza, the producer surplus for the 20th pizza is zero.
d) If the price is $6 per pizza, the total producer surplus is $20.
e) If the price is $8 per pizza, the total producer surplus is $80.
f) If the price is $10 per pizza, the total producer surplus is $180.
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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10) Jason hires Maria to tutor him in economics. Jason is willing to pay $30 for the first
hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for the
fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12 for
the third, $15 for the fourth, and $18 for the fifth. What will be the equilibrium quantity of
hours tutored and the equilibrium price? Explain why this quantity and price is the
equilibrium. What is Jason's consumer surplus and what is Maria's producer surplus?
Answer: The equilibrium quantity will be 4 hours of tutoring and the equilibrium price will
be $15 per hour. The equilibrium quantity will be 4 hours of tutoring because for any of
these first 4 hours, the marginal social benefit (to Jason) exceeds or is equal to the
marginal social cost (to Maria). The price will be $15 per hour because that is the
maximum price Jason is willing to pay for the fourth hour of tutoring and $15 is the
minimum price Maria will accept for the fourth hour of tutoring. Jason's total consumer
surplus is $30, the sum of $15 from the first hour plus $10 from the second plus $5 from
the third plus $0 from the fourth. Maria makes a producer surplus of $18, the sum of $9 on
the first hour plus $6 on the second hour plus $3 on the third hour plus $0 on the fourth
hour.
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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 Quantity Quantity
Price
demanded supplied
(dollars per loaf)
(loaves per day) (loaves per day)
0.60 240 0
0.80 200 80
1.00 160 160
1.20 120 240
1.40 80 320
1.60 40 400
1.80 0 480

11) The table above gives the demand and supply schedules for bread. Assume that the
only people who benefit from bread are the people who consume it and the only people who
bear the cost of bread are the people who produce it.
a) What is the maximum price that consumers are willing to pay for the 80th loaf of bread?
b) What is the minimum price that producers are willing to accept to produce 200 loaves
of bread?
c) What is the efficient quantity of bread?
d) If the market is efficient, what is the consumer surplus?
e) If the market is efficient, what is the producer surplus?
f) If one firm owns all the bread outlets and sells 120 loaves per day, what is the
deadweight loss (if any)?

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Answer:
a) The demand curve shows consumers' willingness to pay. If 80 loaves of bread are
available, consumers are willing to pay $1.40 for the last loaf.
b) The supply curve shows the minimum supply price. The minimum price that will get
producers to produce 200 loaves of bread is $1.10 per loaf.
c) The efficient quantity of bread is 160 loaves per day. When 160 loaves per day are
produced, the marginal social benefit ($1.00) equals the marginal social cost.

d) The figure above will help answer the question. If the market is efficient, 160 loaves of
bread are sold and bought at $1.00 per loaf. Consumer surplus is the value that consumers
receive minus the price they pay summed over the quantity bought. Thus consumer surplus
is the area of the indicated triangle, which equals 1/2 × ($1.80 - $1.00) × 160 = $64.
e) Producer surplus is the price of bread minus the marginal cost of producing it, summed
over the quantity sold. Thus producer surplus is the area of the indicated triangle, which
equals 1/2 × ($1.00 - $0.60) × 160 = $32.

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f) The efficient quantity of bread is 160 loaves per day because when 160 loaves per day
are produced, the marginal social benefit, $1.00, equals the marginal social cost, $1.00. If
120 loaves per day are sold, the marginal benefit exceeds the marginal cost and therefore
this level of output is not efficient. As the figure above shows, the deadweight loss is the
area of the triangle and equals 1/2 × ($1.20 - $0.90) × (160 - 120), which is $6.
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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12) The figure above shows the market for pizza.
a) If the price of a slice of pizza is $3, what is the consumer surplus of the 50th slice?
b) If the price of a slice of pizza is $3, what is the producer surplus of the 50th slice?
c) What is the efficient quantity? What is the equilibrium quantity? What is the deadweight
loss when the equilibrium quantity is produced?
Answer:
a) Consumer surplus is the distance between the demand curve and the price of $3 when
50 slices are consumed. That difference is $4, the marginal social benefit, minus $3 or $1.
b) Producer surplus is the distance between the supply curve and the market price when
50 slices are produced. That difference is $3 minus $2, the marginal social cost, or $1.
c) The efficient quantity is 100 slices because that is the quantity for which the marginal
social benefit equals the marginal social cost. The equilibrium quantity is 100 slices,
because that is the quantity for which the quantity demanded equals the quantity supplied.
There is no deadweight loss at the equilibrium quantity because it is the same as the
efficient quantity.
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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13) The figure above shows the market for hot dogs.
a) What is the maximum price consumers are willing to pay for the 25th hot dog?
b) What is the efficient quantity?
c) Suppose that the production was limited to 25 hot dogs. In the figure, indicate the
amount of the deadweight loss.
Answer:
a) Consumers are willing to pay a maximum of $4 for the 25th hot dog.
b) The efficient quantity of hot dogs is 75 hot dogs because that is the quantity for which
the marginal social benefit equals the marginal social cost.

c) The deadweight loss is indicated in the figure above.

Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

14) The figure above shows the market supply and market demand curves for pizza. If the
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market is at its equilibrium, what area in the graph above represents:
a) consumer surplus?
b) producer surplus?
Answer:
a) AFB
b) BFC
Topic: Efficiency of Competitive Markets
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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15) Jason wants to hire Maria to tutor him in economics. Jason is willing to pay $30 for the
first hour of tutoring, $25 for the second, $20 for the third, $15 for the fourth, and $10 for
the fifth. Maria has an opportunity cost per hour of $6 for the first, $9 for the second, $12
for the third, $15 for the fourth, and $18 for the fifth. The initial equilibrium price for
tutoring is $15 an hour and hence Maria tutors Jason for 4 hours. Now, Maria realizes that
she is the only economics tutor because all the other tutors have graduated. Because she is
the only tutor, she has a monopoly and, as a monopolist, Maria decides to charge a price of
$25 instead of $15 an hour.
a) At the price of $25 an hour, how many hours will Maria tutor Jason?
b) At the initial equilibrium price of $15 an hour, what was Jason's total consumer surplus
and Maria's total producer surplus?
c) At the price of $25 an hour, what is Jason's total consumer surplus and Maria's total
producer surplus?
d) How does the sum of Jason's consumer surplus plus Maria's producer surplus compare
at the initial equilibrium price of $15 an hour (part b) and at the new price of $25 an hour
(part c)? Comment on any difference.
Answer:
a) Maria will tutor Jason for 2 hours.
b) At the initial price of $15, Jason's total consumer surplus was $30, the sum of $15 from
the first hour plus $10 from the second plus $5 from the third plus $0 from the fourth.
Maria made a producer surplus of $18, the sum of $9 on the first hour plus $6 on the
second hour plus $3 on the third hour plus $0 on the fourth hour.
c) At the new price of $25 an hour, Jason's total consumer surplus is $5, the consumer
surplus from the first hour. Maria makes a producer surplus of $35, the sum of $19 on the
first hour plus $16 on the second hour.
d) When the price was $15 an hour, the sum of the consumer and producer surpluses was
$48. When the price is $25, the sum of the consumer and producer surpluses is $40. The $8
difference between the initial situation and the situation in which Maria is a monopolist is
the deadweight loss.
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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16) The figure above shows the market supply and market demand for pizza.
a) What is the efficient quantity of pizzas?
b) If 70,000 pizzas are produced, what area represents the deadweight loss?
c) Why does the deadweight loss in part (b) occur?
d) If 20,000 pizzas are produced, what area represents the deadweight loss?
e) Why does the deadweight loss in part (d) occur?
Answer:
a) 40,000 pizzas is the efficient quantity.
b) If 70,000 pizzas are produced, the deadweight loss is area C.
c) The deadweight loss occurs because we are producing some pizzas, specifically pizzas
40,001 through 70,000, for which the marginal social cost is greater than the marginal
social benefit.
d) If 20,000 pizzas are produced, the deadweight loss is area B.
e) The deadweight loss occurs because we are not producing some pizzas, namely pizzas
20,001 through 40,000, for which the marginal social benefit is greater than the marginal
social cost.
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

8 True or False
1) Command system allocates resources by the order of someone in authority.
Answer: TRUE
Topic: Resource Allocation Methods
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

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2) The value of one more unit of a good or service is its marginal benefit.
Answer: TRUE
Topic: Marginal Benefit
Skill: Graphing
Status: Old
AACSB: Reflective thinking

3) The opportunity cost to the consumer of purchasing and consuming one more unit of a
good is called the marginal benefit.
Answer: FALSE
Topic: Marginal Benefit
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

4) The opportunity cost to the firm of producing one more unit of output is also called
marginal cost.
Answer: TRUE
Topic: Marginal Cost
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

5) If the marginal social benefit of pizza exceeds the marginal social cost of pizza, the
economy is producing the efficient quantity of pizza.
Answer: FALSE
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Reflective thinking

6) If the marginal social cost exceeds the marginal social benefit for the last pair of shoes
produced, then the economy is producing more than the efficient amount.
Answer: TRUE
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Reflective thinking

7) If the marginal social benefit exceeds the marginal social cost of producing the next
kilowatt hour of electricity, then it is efficient to produce as many kilowatt hours as
possible.
Answer: FALSE
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Reflective thinking

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8) If the marginal social cost of a television exceeds the marginal social benefit of a
television, it would increase society's total surplus to decrease production of televisions.
Answer: TRUE
Topic: Efficiency and Inefficiency
Skill: Analytical
Status: Old
AACSB: Reflective thinking

9) As long as production is such that marginal social benefit is greater than marginal social
cost, an efficient outcome occurs.
Answer: FALSE
Topic: Efficiency and Inefficiency
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

10) Consumer surplus is the value of a good minus the cost of producing it, summed over
the quantity bought.
Answer: FALSE
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Reflective thinking

11) Buyers receive a consumer surplus when the price exceeds the marginal benefit.
Answer: FALSE
Topic: Consumer Surplus
Skill: Graphing
Status: Old
AACSB: Reflective thinking

12) Consumers don't always have to pay the maximum price they are willing to pay.
Answer: TRUE
Topic: Consumer Surplus
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

13) Marginal cost is the minimum price that producers must receive to induce them to
produce another unit of a good or service.
Answer: TRUE
Topic: Marginal Cost
Skill: Graphing
Status: Old
AACSB: Reflective thinking

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14) The producer surplus on a unit of output is the difference between the market price
and the opportunity cost of producing it.
Answer: TRUE
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Reflective thinking

15) Producer surplus is the price of a good minus the opportunity cost of producing it,
summed over the quantity produced.
Answer: TRUE
Topic: Producer Surplus
Skill: Graphing
Status: Old
AACSB: Reflective thinking

16) If the hot dog vendors at Yankee Stadium are earning a producer surplus on each hot
dog they sell, then baseball fans cannot be gaining any consumer surplus on the hot dogs
they buy.
Answer: FALSE
Topic: Producer Surplus
Skill: Analytical
Status: Old
AACSB: Reflective thinking

17) Although the efficient quantity to produce of any good is located where marginal social
benefit and marginal social cost are equal, there will usually be other quantities where the
sum of consumer and producer surplus are greater.
Answer: FALSE
Topic: An Efficient Market
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

18) In a competitive equilibrium, the total consumer surplus must equal the total producer
surplus.
Answer: FALSE
Topic: An Efficient Market
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

19) When the efficient quantity of output is being produced and sold, the deadweight loss is
maximized.
Answer: FALSE
Topic: Deadweight Loss
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

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20) If the marginal social benefit of ice cream curve shifts rightward because people now
like ice cream better than before, the marginal social cost curve of ice cream will shift
leftward.
Answer: FALSE
Topic: Is the Competitive Market Efficient?
Skill: Analytical
Status: Old
AACSB: Reflective thinking

21) Market failure is the situation in which a market delivers an inefficient outcome.
Answer: TRUE
Topic: Is the Competitive Market Efficient?
Skill: Definition
Status: Old
AACSB: Reflective thinking

22) A competitive market is always efficient.

Answer: FALSE
Topic: Is the Competitive Market Efficient?
Skill: Graphing
Status: Old
AACSB: Reflective thinking

23) One of the obstacles to efficiency is monopoly.

Answer: TRUE
Topic: Obstacles to Efficiency, Externalities
Skill: Graphing
Status: Old
AACSB: Reflective thinking

24) When there are external costs of production, such as when electric utilities burn coal, a
competitive market will produce an inefficient level of output.
Answer: TRUE
Topic: Obstacles to Efficiency, Externalities
Skill: Conceptual
Status: Old
AACSB: Reflective thinking

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9 Extended Problems

1) The figure above shows the market for ink-jet printers.

a) What are the equilibrium price and equilibrium quantity of printers? Is this equilibrium
efficient? Explain.
b) Calculate the total amount consumers paid for printers bought.
c) Calculate the consumer surplus.
d) Calculate the producer surplus.

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Answer:
a) The equilibrium price is $100 and the equilibrium quantity is 80 printers per week. The
equilibrium is efficient if the only people who benefit from printers are the people who buy
them, so that the demand curve is the marginal social benefit (MSB) curve, and if the only
people who bear the cost of printers are the people who produce them, so that the supply
curve is the marginal social cost (MSC) curve. In this case, when the market is in
equilibrium, MSB = MSC, which means the equilibrium is efficient.
b) Because consumers buy 80 printers and pay the market price, $100 per printer, the
total amount they pay is $100 × 80 = $8,000.

c) The consumer surplus is the value of the printers buy minus the price paid summed
over the quantity bought. The consumer surplus is the area labeled in the figure above.
Recalling that the area of a triangle is 1/2 multiplied by the base multiplied by the height,
the consumer surplus equals 1/2 × (80 × $20), or $800.
d) The producer surplus is the price of a printer minus the marginal cost of producing it,
summed over the quantity sold. The producer surplus is the area labeled in the figure
above. The area of a triangle is 1/2 multiplied by the base multiplied by the height, so the
producer surplus equals 1/2 × (80 × $10) = $400.
Topic: Consumer Surplus and Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

162
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 Quantity Quantity
Price
demanded supplied
(cents per
(bottles per (bottles per
bottle)
day) day)
40 1,200 0
80 1,000 200
120 800 400
160 600 600
200 400 800
240 200 1,000
280 0 1,200

2) The table above gives the demand and supply schedules for bottled spring water in
Springsboro. Assume that the only people who benefit from spring water are the people
who drink it and the only people who bear the cost of bottled spring water are the people
who produce it.
a) Draw the market demand and market supply curves. What are the equilibrium price
and equilibrium quantity of spring water? Is this equilibrium efficient? Explain.
b) What is the maximum price that consumers are willing to pay for the 400th bottle?
What is the minimum price that producers are willing to accept for the 400th bottle?
Explain.
c) Are 400 bottles a day less than or greater than the efficient quantity? Explain your
answer.
d) If the market for spring water is efficient, what is the consumer surplus? Show it on
your graph. What is the producer surplus? Show it on your graph.
e) If spring water bottlers produce 400 bottles a day, is there a deadweight loss? If yes,
what is it? Explain your answer using your graph.

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Answer:

a) The figure above shows the supply and demand curves. The equilibrium price is $1.60
and the equilibrium quantity is 600 bottles a day. The equilibrium is efficient. Because the
demand curve is the same as the marginal social benefit (MSB) curve and the supply curve
is the same as the marginal social cost (MSC) curve, when the market is in equilibrium,
MSB = MSC, which is the efficiency condition.
b) The demand curve shows consumers' willingness to pay. If 400 bottles are produced,
the maximum price that consumers are willing to pay for the last bottle is $2.00. The
supply curve shows the minimum price that producers are willing to accept to produce a
certain quantity. The minimum price they are willing to accept to produce the 400th bottle
is $1.20.
c) The efficient quantity is 600, so 400 is less than the efficient quantity. There is
underproduction compared to the efficient quantity. When 400 bottles of water are
produced, the marginal social benefit from an additional bottle is $2.00 while the marginal
social cost of this bottle is only $1.20. So society can get more value from its resources if
more water is produced.

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d) If the market for spring water is efficient, 600 bottles are produced. The consumer
surplus is the value of water that consumers buy minus the amount they pay summed over
the quantity purchased, so the consumer surplus is the area of the triangle labeled in the
figure above. The area of a triangle is 1/2 multiplied by the base multiplied by the height,
so the consumer surplus equals 1/2 × (600 × $1.20), which is $360. The producer surplus
is the price of water minus the marginal cost of producing it, summed over the quantity
sold, so the producer surplus is the area of the triangle labeled in the figure above. This
area is equal to 1/2 × (600 × $1.20), which is $360.

e) If 400 bottles are produced, the economy produces 200 bottles less than the efficient
quantity. For each of the bottles between 400 and 600, society loses the value equal to the
difference between the marginal social benefit and the marginal social cost, which is the
same as the distance between the demand curve and the supply curve. This loss is the
deadweight loss, illustrated in the figure above. The deadweight loss is the area of the
triangle, which equals 1/2 × (200 × $0.80) = $80.
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

165
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 Price Quantity Quantity
(dollars per demanded supplied
gallon) (gallons per day) (gallons per day)
1.00 600 0
1.50 500 200
2.00 400 400
2.50 300 600
3.00 200 800
3.50 100 1,000
4.00 0 1,200

3) The table gives the demand and supply schedules for milk in Cowburg. Assume that the
only people who benefit from milk are the people who consume it and the only people who
bear the cost of milk are the people who produce it.
a) Draw the market demand and market supply curves. What are the equilibrium price and
equilibrium quantity of milk? Is this equilibrium efficient? Explain.
b) What is the maximum price that consumers are willing to pay for the 500th gallon?
What is the minimum price that producers are willing to accept for the 500th gallon?
Explain.
c) Are 500 gallons a day less than or greater than the efficient quantity? Explain your
answer.
d) If the market for milk is efficient, what is the consumer surplus? Show it on your graph.
What is the producer surplus? Show it on your graph.
e) If farmers produce 500 gallons a day, is there a deadweight loss? If yes, what is it?
Explain your answer using your graph.

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Answer:

a) The figure above shows the demand and supply curves. The equilibrium price is $2.00
and the equilibrium quantity is 400 gallons a day. The equilibrium is efficient. The demand
curve is the same as the marginal social benefit (MSB) curve and the supply curve is the
same as the marginal social cost (MSC) curve, so when the market is in equilibrium, MSB
= MSC, which is the efficiency condition.
b) The demand curve shows consumers' willingness to pay. If 500 gallons are produced,
the maximum price that consumers are willing to pay for the last gallon is $1.50. The
supply curve shows the minimum price that producers are willing to accept to produce a
certain quantity. The minimum price they are willing to accept to produce the 500th gallon
of milk is $2.25.
c) The efficient quantity is 400 gallons per day, so 500 gallons is greater than the efficient
quantity. There is overproduction compared to the efficient quantity. When 500 gallons of
milk are produced, the marginal benefit from an additional gallon is $1.50 while the
marginal cost of this gallon is $2.25. In this case, MSB < MSC, which means that society
loses value if 500 gallons of milk are produced.

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d) If the market for milk is efficient, 400 gallons of milk are sold and bought. The
consumer surplus is the value of water that consumers buy minus the amount they pay
summed over the quantity purchased, so the consumer surplus is the area of the triangle
labeled in the figure above. The area of a triangle is 1/2 multiplied by the base multiplied
by the height, so the consumer surplus equals 1/2 × (200 × $2.00), which is $400. The
producer surplus is the price of water minus the marginal cost of producing it, summed
over the quantity sold, so the producer surplus is the area of the triangle labeled in the
figure above. This area is equal to 1/2 × (400 × $1.00), which is $200.

e) If 500 gallons of milk are produced, the economy produces 100 gallons more than the
efficient quantity. Each of the additional 100 gallons of milk has a marginal cost that
exceeds the marginal benefit. So each imposes a loss on society equal to the marginal
social cost minus the marginal social benefit, which is the distance between the supply
curve and the demand curve. This loss is the deadweight loss, illustrated in the figure
above. The deadweight loss is the area of the triangle, which equals 1/2 × (100 × $0.75) =
$37.50.
Topic: Deadweight Loss
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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 Quantity Quantity
Price Quantity
demanded in demanded in
(dollars per supplied
July November
gallon) (gallons per day)
(gallons per day) (gallons per day)
2.00 300 150 0
2.50 250 100 100
3.00 200 50 200
3.50 150 0 300
4.00 100 0 400
4.50 50 0 500
5.00 0 0 600

4) The table gives the demand and supply schedules for ice cream in Sweetsville in July and
November. Assume that the only people who benefit from ice cream are the people who
consume it and the only people who bear the cost of ice cream are the people who produce
it.
a) Draw the market demand and market supply curves. What are the equilibrium price and
equilibrium quantity of ice cream in July and November? Is the allocation of resources
efficient in July? Is it efficient in November? Explain.
b) What is the maximum price that consumers are willing to pay for the 100th gallon of ice
cream in July? In November? What is the minimum price that producers are willing to
accept for the 100th gallon in July and November? Explain.
c) What happens to consumer surplus and producer surplus in November compared to
July? Why?

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Answer:

a) The figure is shown above. In July, the equilibrium price is $3.00 and the equilibrium
quantity is 200 gallons of ice cream a day. In November, the equilibrium price is $2.50 and
the equilibrium quantity is 100 gallons a day. The allocation of resources is efficient in both
July and November because the demand curve is the marginal social benefit (MSB) curve
and the supply curve is the marginal social cost (MSC) curve, so at equilibrium MSB =
MSC, which is the efficiency condition.
b) The demand curve shows consumers' willingness to pay. If 100 gallons of ice cream are
produced, the maximum price that consumers are willing to pay for the last gallon is $4.00
in July and $2.50 in November. The supply curve shows the minimum price that producers
are willing to accept to produce a certain quantity. Because the supply curve remains the
same, the minimum price that producers are willing to accept to produce the 100th gallon
of ice cream is $2.50 in both July and November.
c) Consumer surplus is the value that consumers receive minus the price they pay
summed over the quantity bought. Both the surplus received from each gallon of ice cream
bought and the quantity bought decreased in November compared to July. Therefore,
consumer surplus decreased from $200 in July to $50 in November. Producer surplus is the
price of ice cream minus the marginal cost of producing it, summed over the quantity sold.
Because the market price of ice cream fell while the marginal costs remained the same,
both the surplus received from each gallon of ice cream sold and the quantity sold
decreased in November compared to July. Therefore, producer surplus decreased from
$100 in July to $25 in November.
Topic: Consumer Surplus and Producer Surplus
Skill: Analytical
Status: Old
AACSB: Analytical thinking

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