Chapter 5: The Welfare of Markets

Question 1

Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much as $300 for the massage, but they negotiate a price of $200.

Answer 1

consumer surplus is $20 larger than producer surplus

Question 2

The demand curve for cookies is downward sloping. When the price of cookies is $2, the quantity demanded is 100.

If the price rises to $3, what happens to consumer surplus?

Answer 2

it falls by less than $100

Question 3

John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well.

How much does producer surplus rise as a result of this price increase?

Answer 3

between $100 and $200

Question 4

An efficient allocation of resources maximizes

Answer 4

consumer surplus plus producer surplus

Question 5

When a market is in equilibrium, the buyers are those with the ________ willingness to pay, and the sellers are those with the ________ costs.

Answer 5

highest, lowest

Question 6

Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer’s willingness to pay is

Answer 6

positive but less than the marginal seller’s cost.

Question 7

A tax on a good has a deadweight loss if

Answer 7

the reduction in consumer and producer surplus is greater than the tax revenue

Question 8

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price.

What is the change in producer surplus, change in consumer surplus, and deadweight loss?

Answer 8

$0, -$10, $0

Question 9

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping.

If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

Answer 9

increases by more than 50 percent

Question 10

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve.

If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue

Answer 10

increases by less than 50 percent and may even decline

Question 11

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

Answer 11

government’s tax revenue

Question 12

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.

Answer 12

small, small

Question 13

If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then

Answer 13

the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade

Question 14

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls.

Which of the following describes the situation?

Answer 14

Domestic production of coffee falls, and Ectenia becomes a coffee importer

Question 15

When a nation opens itself to trade in a good and becomes an importer,

Answer 15

producer surplus decreases, but consumer surplus and total surplus both increase

Question 16

If a nation that imports a good imposes a tariff, it will increase

Answer 16

the domestic quantity supplied

Question 17

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade?

Answer 17

Starting to allow trade when the world price is greater than the domestic price