Consumer + Producer Surplus + DMU & MISC

Question 1

What is Consumer Surplus?

Answer 1

• The extra amount of money consumers are prepared to pay for a good or service above what they actually pay
• The utility/satisfaction Gaines from a good/service in excess of the amount paid for it

Question 2

What is Producer Surplus?

Answer 2

• The extra amount of money paid to producers above what they are willing to accept to supply a good or service
• It is the extra earning obtained by a producer above the minimum require for them to supply the good or service

Question 3

What is the incidence of a subsidy?

Answer 3

• Refers to how the gains of the subsidy are distributed between consumers and producers
• Depends on the elasticity of both demand and supply

Question 4

What is the incidence of the subsidy if demand is price elastic?

Answer 4

Most of the gain goes to the producers

Question 5

What is the incidence of the subsidy if the demand is price inelastic?

Answer 5

Most of the gains go to consumers

Question 6

What is the incidence of an indirect tax?

Answer 6

• Refers to the distribution of the tax between consumers and producers
• Depends on the elasticity of both demand and supply

Question 7

What is the incidence of the indirect tax when demand is price elastic?

Answer 7

Burden of the tax will fall mostly on producers

Question 8

What is the incidence of the indirect tac when demand is price inelastic?

Answer 8

Burden of the tax will fall mostly on consumers

Question 9

What is the Income Effect?

Answer 9

• Assuming a fixed level of income

- As price falls the amount that consumers can afford increases, therefore demand increases

Question 10

What is Marginal Utility?

Answer 10

Utility or satisfaction gained from consuming on extra unit of a good or service