Chapter 7 - Consumers, Producers, and the Efficiency of Markets

Question 1

Welfare Economics

Answer 1

• studies how the allocation of resources affects economic well-being

Question 2

Willingness to Pay (WTP)

Answer 2

• the max a buyer will pay for a good

Question 3

WTP Demand Curve

Answer 3

• WTP can be put in a schedule and in curve

- the curve will be like a staircase

Question 4

Consumer Surplus (CS)

Answer 4

• the amount a buyer is willing to pay minus the amount the buyer actually pays
• WTP - P

Question 5

CS with a Smooth Demand Curve

Answer 5

• calculate the area of the triangle formed above the price line
• area = 1/2 x base x height

Question 6

Cost

Answer 6

• the values of everything a seller must give up to produce a good
• similar staircase curve to WTP

Question 7

PS with a Smooth Supply Curve

Answer 7

• calculate the area of the triangle formed below the price line
• area = 1/2 x base x height

Question 8

Producers Surplus (PS)

Answer 8

• the amount a seller is paid for a good minus the seller’s cost

Question 9

Total Surplus

Answer 9

• sum of CS and PS

- total gains from trade in the market

Question 10

Equilibrium and Total Surplus

Answer 10

• maximizes total surplus