Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
1)
A firm that generates zero economic profit usually has

1)

_______
A)
negative business profit.
B)
business profit equal to half the total revenue.
C)
zero business profit.
D)
positive business profit.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
Revised
AACSB
Analytic skills

2)
In the long run, competitive firms MUST be profit maximizers because if they do not maximize profits

2)

_______
A)
they will not survive.
B)
they will attract entry.
C)
they will not be price takers.
D)
the profits that they do earn will only cover variable costs.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
Previous Edition
AACSB
Analytic skills

3)
Long-run economic rent or profit does not exist for fixed factors like land because

3)

_______
A)
these factors will earn economic profits.
B)
there is no market for such factors.
C)
these factors have L-shaped isoquants.
D)
bidding drives up the price of the factor until no economic rent exists.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
Revised
AACSB
Analytic skills

4)
Does a competitive long-run equilibrium require cost-minimization?

4)

_______
A)
No, in the long-run firms make zero profits.
B)
No, because competition ensures their survival.
C)
Yes, if they didn't even less efficient firms would enter the industry.
D)
Yes, if firms fail to be as efficient as their competitors they are driven out of the market.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
Previous Edition
AACSB
Analytic skills

5)
Firms are ________ with an economic profit of zero, they will ________ in the industry if they ________ be
better off in another industry.

5)

_______
A)
satisfied, stay, won't

B)

unsatisfied, stay, won't

C)
unsatisfied, leave, will

D)

satisfied, leave, will

Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
Revised
AACSB
Analytic skills

6)
Which of the following characterizes long-run equilibrium in perfect competition?

6)

_______
A)
P=MC<ATC

B)

P>MC=ATC

C)

P=MC>ATC

D)

P=MC=ATC
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

7)
What is one reason firms might lobby to prevent entry into their market?

7)

_______
A)
The long run equilibrium might be characterized by P=MC=ATC
B)
The long run equilibrium might be characterized by P>MC=ATC
C)
The long run equilibrium might be characterized by P=MC<ATC
D)
The long run equilibrium might be characterized by P=MC>ATC
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

8)
Survivability in a perfectly competitive world requires that

8)

_______
A)
firms produce new and different products.
B)
firms maximize profit.
C)
firms minimize average total cost.
D)
firms maximize revenue.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

9)
If a firm is in a perfectly competitive world but decides to charge a higher price than its competitors,

9)

_______
A)
the firm's profits will be zero or negative and the firm will fail in the short-run.
B)
the firm's profits will be positive or negative and the firm will fail in the long-run.
C)
the firm's profits will be zero or negative and the firm will fail in the long-run.
D)
the firm's profits will be positive or negative and the firm will fail in the short-run.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

10)
The owners of sports franchises often complain that free-agency (open bidding for player services)
threatens their profitability and thus their long-run viability. Given your knowledge of perfect
competition, which of the following is correct?

10)

______
A)
team owners might be correct in as much as free-agency bids up the price of players so that economic
profits from those players is negative.
B)
team owners are lying, as free-agent salaries are still much too low.
C)
team owners might be correct in as much as free-agency bids up the price of players so that economic
profits from those players equal zero.
D)
team owners are telling the truth, as free-agent salaries are much too high.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

11)
What is one reason perfectly competitive firms wish to be ever more efficient?

11)

______
A)
Individual firms can more control their costs than the price they can charge.
B)
Individual firms can more control their costs than their output levels.
C)
Individual firms are awarded by the tax code to be more efficient.
D)
Individual firms don't need to be efficient, government policies do not reward efficiency.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

12)
Suppose when a market has four firms, average profit is $1,000 per month. When the market has five
firms, the average profit is -$50 per month. This suggests that

12)

______
A)
there is no long-run equilibrium in this market as profits can never be zero.
B)
the long-run equilibrium number of firms is five.
C)
the long-run equilibrium number of firms is four.
D)
the long-run equilibrium number of firms is between four and five.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

13)
Before the DVD, the VCR was a popular format for taping and replaying video. When the DVD was
introduced, which of the following most accurately describes the long-run adjustment process in the VCR
industry?

13)

______
A)
Demand decreased, price decreased, quantity decreased, profit decreased.
B)
Demand increased, costs increased, price increased, quantity increased, profit decreased.
C)
Costs increased, price increased, demand decreased, quantity decreased, profit decreased.
D)
Demand decreased, quantity decreased, price decreased, profit decreased.
Topic
Zero Profit for Competitive Firms in the Long Run
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

14)
If entry is limited due to a limited input, firms in that market earn long run economic profit.
Topic

Zero Profit for Competitive Firms in the Long Run

Question
Status
Previous Edition
AACSB

Analytic skills

15)
In the long-run firms in a competitive market make zero economic profit. This induces most firms to leave
the industry.
Topic

Zero Profit for Competitive Firms in the Long Run

Question
Status
Previous Edition
AACSB

Analytic skills

16)
Even if two competitive firms in the same market have different production technologies, they will each
earn long-run zero profits. Why?
Topic

Zero Profit for Competitive Firms in the Long Run

Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
17)
Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no
less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith's
consumer surplus is

17)

______
A)
$15,000.
B)
$5,000.
C)
$20,000.
D)
not able to be calculated from the information given.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

18)
You enter a store and buy a bottle of soda. Do you usually receive consumer surplus?

18)

______
A)
Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B)
No, because you value other drinks more.
C)
Yes, because you are thirsty.
D)
No, because you have less money after the transaction.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

19)
Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy.
Mary refused. One can conclude that Mary's consumer surplus from the toy is

19)

______
A)
at least $100.

B)

less than $5.

C)

$105.

D)

at least $95.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

20)
Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in $/gallon and Q is
measured in gallons). He recently discovered a spring where water can be obtained free of charge. His
consumer surplus from this water is

20)

______
A)
$100.
B)
$50.
C)
$0.
D)
unknown based upon the information provided.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

21)
Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying the
product

21)

______
A)
is maximized.

B)

equals zero.
C)
can't be calculated.

D)

Need more information.

Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

22)
The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). The current price is $0.35 per minute. If the price were to increase by ten cents
per minute, consumer surplus would

22)

______
A)
fall to $369.

B)

fall by $84.

C)

fall by $58.

D)

fall to $820.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

23)
The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). At the current price of $0.35 per minute, consumer surplus equals

23)

______
A)
$924.50.

B)

$1,250.00.

C)

$301.00.

D)

$1,225.50.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

24)
The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). If the price were zero, consumer surplus equals

24)

______
A)
$301.00.

B)

$924.50.

C)

$1,250.00.

D)

$1,225.50.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

25)
The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). If the price were $2.50, consumer surplus equals

25)

______
A)
$301.00.

B)

$0

C)

$1,225.50.

D)

$924.50.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

26)
As the price of a good increases, the loss in consumer surplus is larger,

26)

______
A)
the more money previously spent on the good.
B)
the less money previously spent on the good.
C)
the smaller the price increase.
D)
the more elastic demand is.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

27)
If lower-income households spend a greater share of their income on cigarettes than do higher-income
households, then a tax that raises the price of cigarettes will

27)

______
A)
cause lower-income households to incur a greater loss of consumer surplus than that incurred by higher-
income households.
B)
raise consumer surplus among higher-income households.
C)
cause consumer surplus to decline among smokers, but the relative impact cannot be determined from
the given information.
D)
cause higher-income households to incur a greater loss of consumer surplus than that incurred by lower-
income households.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

28)
Suppose consumers of cigarettes can be classified into two groups heavy users and light users. Heavy
users purchase more cigarettes and are less sensitive to price changes relative to light users. To
determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when
the price of cigarettes increases, one would need to know

28)

______
A)
each individual's price elasticity of demand.
B)
each group's average income.
C)
the actual quantities purchased by each.
D)
no additional information.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

29)
Sarah's demand curve for shoes has the same slope as Pete's; however, it lies to the right of Pete's. An
increase in the price of shoes will cause

29)

______
A)
Sarah and Pete to incur the same loss of consumer surplus.
B)
Pete to incur a greater loss of consumer surplus than Sarah will.
C)
Sarah to incur a greater loss of consumer surplus than Pete will.
D)
Sarah's demand curve to shift closer to Pete's.
Topic
Consumer Welfare
Question Status
Revised
AACSB
Analytic skills

30)
Sarah and David both have linear demand curves for lemonade. Sarah's demand curve for lemonade
intersects David's demand curve at a price of 50 cents per glass. Sarah's demand curve is more inelastic
than David's. A change in the price of lemonade from 50 cents to 25 cents per glass will

30)

______
A)
decrease Sarah's consumer surplus more than David's.
B)
increase Sarah's consumer surplus more than David's.
C)
increase David's consumer surplus more than Sarah's.
D)
decrease David's consumer surplus more than Sarah's.
Topic
Consumer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

31)
Sally is shopping for textbooks at the beginning of the semester. What is one reason she might decide to
not purchase a textbook?

31)

______
A)
Her expected consumer surplus is negative.
B)
Her expected profits are positive.
C)
Her expected producer surplus is positive.
D)
Her expected consumer surplus is positive.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

32)
Consumers seek to

32)

______
A)
maximize expected consumer surplus.

B)

maximize profits.
C)
minimize expenditures.

D)

maximize choice.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

33)
Consumers often purchase products that, afterward, they regret purchasing. This can be explained by

33)

______
A)
consumers trying products to determine if their consumer surplus increases.
B)
consumers trying products to determine if firm advertising is honest.
C)
consumers trying to maximize choice.
D)
consumers trying to minimize expenditures.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

34)
What is one reason it might be difficult to dissuade people from pirating music off the internet?

34)

______
A)
Producer surplus is very low when music is pirated.
B)
In general, consumers get a rush from "stealing."
C)
Consumer surplus is very high when music is pirated.
D)
Consumers mistakenly believe that the internet is public domain.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

35)
In the long-run equilibrium in perfect competition, consumer surplus is

35)

______
A)
less than producer surplus.

B)

positive.
C)
zero.

D)

negative.
Topic
Consumer Welfare
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

36)
Consumer surplus from a given purchase is the difference between what one was willing to pay for that
purchase and what was actually paid.
Topic

Consumer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

37)
Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any
given price increase.
Topic

Consumer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

38)
The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.
Topic

Consumer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

39)
Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack. Draw a graph to
illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus
when the price of cigarettes increases. Explain and label the figure.
Topic

Consumer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills
 40)
Figure 9.6 shows an individual's demand curve for time per month spent telecommunicating while driving
(talking on the car phone.) A car phone is useless except for talking with somebody who is not in the car.
If calls are priced at ten cents per minute, what is the consumer surplus derived from talking? What is
the most this person would pay for the car phone? Explain.
Topic

Consumer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
41)
Producer surplus is equal to

41)

______
A)
the area under the supply curve.
B)
the firm's profit when fixed costs exist.
C)
the difference between price and marginal cost for all units sold.
D)
the difference between price and average cost for all units sold.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

42)
Producer surplus equals

42)

______
A)
total revenue minus total variable cost.
B)
profit plus fixed cost.
C)
total revenue minus the sum of all marginal cost.
D)
All of the above.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

43)
Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no
less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Jones'
producer surplus is

43)

______
A)
$15,000.
B)
$5,000.
C)
$20,000.
D)
not able to be calculated from the information given.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

44)
Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals

44)

______
A)
12.50.

B)

10.

C)

50.

D)

25.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

45)
Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals

45)

______
A)
12.50.

B)

25.

C)

10.

D)

50.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

46)
The difference between producer surplus and profit is always the associated

46)

______
A)
opportunity costs.

B)

variable costs.
C)
fixed costs.

D)

total costs.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

47)
In the short run, if a firm operates, it earns a profit of $500. The fixed costs of the firm are $100. This firm
has a producer surplus of

47)

______
A)
$500.

B)

$600.

C)

$400.

D)

$100.
Topic
Producer Welfare
Question Status
Previous Edition
AACSB
Analytic skills

48)
Assume the price of tomatoes increases. Which of the following cause would correspond to greater
producer surplus?

48)

______
A)
An increase in supply.

B)

A decrease in supply.
C)
An increase in demand.

D)

An increase in costs.
Topic
Producer Welfare
Question Status
New
AACSB
Analytic skills

49)
In the long-run equilibrium in perfect competition

49)

______
A)
producer surplus is greater than consumer surplus.
B)
producer surplus is positive.
C)
producer surplus is negative.
D)
producer surplus is less than consumer surplus.
Topic
Producer Welfare
Question Status
New
AACSB
Analytic skills

50)
If a firm enjoys producer surplus in perfectly competitive Market A of $1000 and would enjoy producer
surplus in perfectly competitive Market B of $1200, the firm would consider moving to Market B if

50)

______
A)
fixed costs in Market B are less than the fixed costs in Market A plus $200
B)
fixed costs are less than $200 in Market B.
C)
fixed costs are less than $300 but greater than $200 in Market B.
D)
fixed costs are greater than $100 in Market A.
Topic
Producer Welfare
Question Status
New
AACSB
Analytic skills

51)
Assume government policy increases the demand for corn.

51)

______
A)
The producer surplus of corn growers will decrease.
B)
The producer surplus of corn growers will not change.
C)
The producer surplus of corn growers will increase.
D)
The consumer surplus of corn buyers will increase.
Topic
Producer Welfare
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

52)
Producer surplus is the sum of the profits earned by all firms in a market.
Topic

Producer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

53)
Producer surplus equals total revenue minus the sum of all marginal cost.
Topic

Producer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

54)
When is the profit a firm earns equal to the producer surplus? Explain.
Topic

Producer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills
 55)
Suppose the market supply curve for wheat is shown in the above figure. Calculate the producer surplus
when price is $2 per bushel. If legislation mandates that the price be $1 per bushel, what is the resulting
loss in producer surplus?
Topic

Producer Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
56)
Economists claim that measuring society's welfare as CS + PS

56)

______
A)
is not commonly accepted.
B)
is inappropriate since ultimately everyone is a consumer.
C)
is valid only when the same person could be either a consumer or a producer.
D)
treats the gains to consumers and producers equally.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

57)
Advocates of steel tariffs to protect U.S. steel firms realize that when imposing such tariffs the gains of
firms are outweighed by the losses to consumers.. This implies that

57)

______
A)
want to help consumers.
B)
such advocates value consumer surplus more than producer surplus.
C)
such advocates value producer surplus more than consumer surplus.
D)
such advocates value producer surplus and consumer surplus equally.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

58)
If a market produces a level of output below the competitive equilibrium, then

58)

______
A)
the actual price will be below the equilibrium price.
B)
social welfare might still be enhanced if a price ceiling keeps price below the competitive price.
C)
consumer surplus might still be maximized.
D)
social welfare is not maximized.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

59)
If in a market the last unit of output was sold at a price higher than marginal cost

59)

______
A)
the unit increased total profit.
B)
producer is better off producing more.
C)
social welfare is not maximized.
D)
consumers are better off if less of the product is sold.
Topic
Competition Maximizes Welfare
Question Status
Revised
AACSB
Analytic skills

60)
A competitive market maximizes social welfare because in a competitive market

60)

______
A)
price equals average cost of the last unit produced.
B)
price equals marginal cost of the last unit produced.
C)
there is free entry and exit.
D)
profits are zero.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

61)
If a market produces a level of output that exceeds the competitive equilibrium output, then

61)

______
A)
marginal cost will exceed price.

B)

producer surplus will be higher.

C)
social welfare will be higher.

D)

All of the above.

Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

62)
If an economist states that not enough of a good is being produced, she usually means that

62)

______
A)
consumer surplus equals zero.
B)
at equilibrium, some people who still wish to sell the good cannot find a buyer.
C)
price exceeds marginal cost.
D)
not everyone can afford the good.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

63)
Deadweight loss occurs when

63)

______
A)
producer surplus is greater than consumer surplus.
B)
an inferior good is consumed.
C)
consumer surplus is reduced.
D)
the maximum level of total welfare is not achieved.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

64)
Giving presents of Christmas does NOT generate a deadweight loss if

64)

______
A)
nobody can be made better off by returning the gift and purchasing a different one.
B)
everybody gets exactly want she wants.
C)
all gift are money.
D)
All of the above.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

65)
The deadweight loss associated with output less than the competitive level can be determined by

65)

______
A)
summing the change in the total consumer and producer surplus from moving from the competitive level
of output to less output.
B)
subtracting the consumer surplus from the producer surplus associated with less output.
C)
summing the consumer and producer surplus associated with less output.
D)
subtracting the competitive level producer surplus from the producer surplus associated with less output.
Topic
Competition Maximizes Welfare
Question Status
Previous Edition
AACSB
Analytic skills

66)
If activists successfully lobbied government to force firms to produce more output than they normally
would in a perfectly competitive market,

66)

______
A)
taxation would solve the problem.

B)

producer surplus would increase.

C)
total surplus in the market would decline.

D)

consumer surplus would decline.

Topic
Competition Maximizes Welfare
Question Status
New
AACSB
Analytic skills

67)
What is one reason activists might lobby the government for regulation limiting the production of a
product to less than would normally be in a perfectly competitive market?

67)

______
A)
They seek to avoid future regulation.
B)
They value producer surplus more than consumer surplus.
C)
They value consumer surplus more than producer surplus.
D)
They seek to minimize total surplus.
Topic
Competition Maximizes Welfare
Question Status
New
AACSB
Analytic skills

68)
What is one reason activists might lobby the government to force firms to produce more output than they
normally would in a perfectly competitive market?

68)

______
A)
They seek to minimize total surplus.
B)
They seek to avoid future regulation.
C)
They value producer surplus more than consumer surplus.
D)
They value consumer surplus more than producer surplus.
Topic
Competition Maximizes Welfare
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

69)
As the quantity produced of a good increases, the social welfare generated by that good increases.
Topic

Competition Maximizes Welfare

Question
Status
Previous Edition
AACSB

Analytic skills

70)
While producing less then the competitive output decreases social welfare, the same cannot be said about
producing more than the competitive output.
Topic

Competition Maximizes Welfare

Question
Status
Previous Edition
AACSB

Analytic skills

71)
Explain why the competitive output maximizes welfare.
Topic

Competition Maximizes Welfare

Question
Status
Previous Edition
AACSB

Analytic skills

72)
Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to
consumers. Such a policy would enhance the health of the citizenry, they argue. Assuming a downward-
sloping linear demand curve and a horizontal long-run supply curve, determine the resulting output and
social welfare from such a policy. Compare this result to the competitive equilibrium.
Topic

Competition Maximizes Welfare

Question
Status
Previous Edition
AACSB

Analytic skills

73)
Suppose an industry trade group has convinced legislators that a price floor should be used so that
producer surplus is maximized in the market for milk. The group argues that such a policy would save the
"family farm." Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,
determine the resulting price, output and social welfare from such a policy. Compare this result to the
competitive equilibrium.
Topic
Competition Maximizes Welfare
Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
74)
The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, which of the following is most
likely to occur?

74)

______
A)
The supply curve will remain unchanged.
B)
The supply curve of real estate brokers will shift to the left.
C)
The supply curve of real estate brokers will shift to the right.
D)
Social welfare will remain unchanged.
Topic
Policies that Shift Supply Curves
Question Status
Previous Edition
AACSB
Analytic skills

75)
The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, which of the following is most
likely to occur?

75)

______
A)
Social welfare will increase.

B)

Entry of new brokers will increase.

C)
Producer surplus will increase.

D)

Consumer surplus will increase.

Topic
Policies that Shift Supply Curves
Question Status
Previous Edition
AACSB
Analytic skills

76)
The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, then consumer surplus will
most likely

76)

______
A)
decrease.
B)
increase.
C)
remain unchanged.
D)
There is not enough information to answer.
Topic
Policies that Shift Supply Curves
Question Status
Previous Edition
AACSB
Analytic skills

77)
The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, then social welfare will most
likely

77)

______
A)
not change but there will be a transfer from producer to consumer.
B)
not change but there will be a transfer from consumer to producer.
C)
decrease although producers are made better off.
D)
decrease although consumers are made better off.
Topic
Policies that Shift Supply Curves
Question Status
Previous Edition
AACSB
Analytic skills

78)
A new law applied to a competitive market that requires laid off workers be paid a large severance
payment will

78)

______
A)
decrease consumer surplus in the market.

B)

increase consumer surplus in the market.

C)
increase total welfare.

D)

not generate a deadweight loss.

Topic
Policies that Shift Supply Curves
Question Status
Revised
AACSB
Analytic skills

79)
If a city decides to restrict the number of pizza parlors

79)

______
A)
pizza parlors will make higher profits.

B)

total welfare will decrease.

C)
the price of pizza will increase.

D)

All of the above.

Topic
Policies that Shift Supply Curves
Question Status
Previous Edition
AACSB
Analytic skills

80)
In economics, welfare analysis focuses on

80)

______
A)
international aid programs.

B)

food stamp programs.

C)
income transfer programs.

D)

None of the above.

Topic
Policies that Shift Supply Curves
Question Status
New
AACSB
Analytic skills

81)
In economics, welfare analysis is useful to

81)

______
A)
determine who gains and who loses in a particular policy option.
B)
prove which policy option is "best."
C)
gauge the validity of "mend it, don't end it."
D)
determine who should receive income transfers.
Topic
Policies that Shift Supply Curves
Question Status
New
AACSB
Analytic skills

82)
What is one reason existing firms might lobby the government to increase regulation in their industry?

82)

______
A)
Firms cannot be trusted to treat their customers fairly and ethically.
B)
It increases entry and exit costs, thereby potentially increasing producer surplus to existing firms.
C)
It increases entry and exit costs, but has no impact on producer surplus.
D)
It increases entry and exit costs, thereby reducing producer surplus to existing firms.
Topic
Policies that Shift Supply Curves
Question Status
New
AACSB
Analytic skills

83)
In 2007, the National Collegiate Athletic Association put a moratorium on new Football Bowl Series
(formerly Division IA) teams. This policy will

83)

______
A)
ensure that consumer surplus is greater in the future.
B)
protect the producer surplus of existing football programs.
C)
ensure that when entry occurs, producer surplus will be positive.
D)
ensure that when entry occurs, producer surplus will not be zero.
Topic
Policies that Shift Supply Curves
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

84)
Policies that restrict supply could generate an increase in social welfare because the increase in producer
surplus could exceed the decrease in consumer surplus.
Topic

Policies that Shift Supply Curves

Question
Status
Previous Edition
AACSB

Analytic skills

85)
If a city decides to lift restrictions of how many taxi cabs can operate social welfare will increase.
Topic

Policies that Shift Supply Curves

Question
Status
Previous Edition
AACSB

Analytic skills

86)
Suppose anyone with a driver's license is capable of supplying one trip from the airport to the downtown
business center on any given day. The long-run supply curve of such trips is horizontal at p = $50, which
is the average cost of such trips. Suppose daily demand is Q = 1000 - 10p. Calculate the change in
consumer surplus, producer surplus and social welfare if the city government requires those people
supplying such trips to possess a special license, and the government will issue only 300 licenses.
Topic

Policies that Shift Supply Curves

Question
Status
Previous Edition
AACSB

Analytic skills
 87)
The above figure shows the demand and supply curves in the market for milk. If the government imposes
a quota at 500 gallons, calculate the deadweight loss.
Topic

Policies that Shift Supply Curves

Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
88)
The total welfare associated with a market that includes a government sales tax equals

88)

______
A)
consumer surplus plus producer surplus minus government tax revenue.
B)
consumer surplus plus producer surplus.
C)
the government tax revenue.
D)
consumer surplus plus producer surplus plus government tax revenue.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

89)
If a city government enacts a maximum price on rent

89)

______
A)
quantity demanded will increase.

B)

allocational problems develop.

C)
quantity supplied will decrease.

D)

All of the above.

Topic
Policies that Create a Wedge
Question Status
Revised
AACSB
Analytic skills

90)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, the loss in social
welfare equals

90)

______
A)
f.

B)

b + c.

C)

a.

D)

f + g.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

91)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, deadweight loss
occurs because

91)

______
A)
the supplier of the last apartment unit receives a rental price that is less than the marginal cost of
supplying it.
B)
the quantity of apartments supplied has decreased.
C)
consumers place a greater value on the last apartment unit than the cost to supply it.
D)
All of the above.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

92)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, the consumer's net
gain in surplus equals

92)

______
A)
b - f.
B)
c - f.
C)
d - f.
D)
The answer cannot be determined from the information given.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

93)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus

93)

______
A)
stays the same.
B)
decreases.
C)
increases.
D)
changes in a direction that cannot be determined from the information given.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

94)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus
decreases by

94)

______
A)
i.

B)

b + f.

C)

d.

D)

c + g.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

95)
The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus
will be

95)

______
A)
d.

B)

d + e.

C)

d + c + g.

D)

d + g.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

96)
The above figure shows supply and demand curves for apartment units in a large city. At the unregulated
equilibrium, producer surplus will be

96)

______
A)
d.

B)

d + c + g.

C)

d + e.

D)

d + g.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

97)
The above figure shows supply and demand curves for apartment units in a large city. The area "e"
represents

97)

______
A)
the loss in producer surplus if a rent ceiling of $350 is imposed.
B)
the total revenue received by supplying Q1 units.
C)
the marginal cost of supplying Q1 units.
D)
the total variable cost of supplying Q1 units.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

98)
The above figure shows supply and demand curves for apartment units in a large city. The area "c"
represents

98)

______
A)
a transfer from producers to consumers if a rent ceiling of $350 is imposed.
B)
a transfer from consumers to producers if a rent ceiling of $350 is imposed.
C)
the total revenue received by supplying Q1 units.
D)
the loss in consumer surplus if a rent ceiling of $350 is imposed.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

99)
The above figure shows supply and demand curves for milk. In an effort to help farmers, the government
passes a law that establishes a $3 per gallon price support. To maintain the price support, government
expenditures must equal

99)

______
A)
f + g + h + i + j.

B)

k + i.
C)
f + g + h + i + j + k.

D)

f + g + h + i + j + k + e.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

100)
The above figure shows supply and demand curves for milk. If amount Q2 is produced in the market

100)

_____
A)
a deadweight loss is generated.

B)

consumer surplus is minimized.

C)
producer surplus is maximized.

D)

All of the above.

Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

101)
The above figure shows supply and demand curves for milk. In an effort to help farmers, the government
passes a law that establishes a $3 per gallon price support. To maintain the price support, government
must purchase

101)

_____
A)
- gallons.

B)

- gallons.
C)
gallons.

D)

gallons.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

102)
The above figure shows supply and demand curves for milk. In an effort to help farmers, the government
passes a law that establishes a $3 per gallon price support. As a result, consumer surplus falls by

102)

_____
A)
b + f - c.

B)

f + g.

C)

b + f.

D)

a.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

103)
The above figure shows supply and demand curves for milk. In an effort to help farmers, the government
passes a law that establishes a $3 per gallon price support. The loss in social welfare resulting from this
price support equals

103)

_____
A)
$3 ∗ k.

B)

[$3 ∗ ( - )] - h.
C)
j.

D)

k + i.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

104)
The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in social welfare will equal

104)

_____
A)
f + g.

B)

c + g.

C)

b + f.

D)

b + c + f + g.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

105)
The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in consumer surplus will equal

105)

_____
A)
c + g.

B)

f + g.

C)

b + c + f + g.

D)

b + f.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

106)
The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in producer surplus will equal

106)

_____
A)
b + c + f + g.

B)

f + g.

C)

c + g.

D)

b + f.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

107)
The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the tax revenue is

107)

_____
A)
$2 ∗ ( - ).

B)

$2 ∗ .

C)

$2 ∗ .

D)

$2.
Topic
Policies that Create a Wedge
Question Status
Previous Edition
AACSB
Analytic skills

108)
Which of the following is not a potential result of a price floor?

108)

_____
A)
Price greater than free-market equilibrium price.
B)
Excess supply.
C)
Lower quality inputs are used which increases marginal cost
D)
All of the above.
Topic
Policies that Create a Wedge
Question Status
New
AACSB
Analytic skills

109)
Which of the following is a potential result of a price ceiling?

109)

_____
A)
Long lines.

B)

Excess supply.
C)
Higher quality output.

D)

Higher marginal costs.

Topic
Policies that Create a Wedge
Question Status
New
AACSB
Analytic skills

110)
A minimum wage is an example of a

110)

_____
A)
price floor.

B)

quantity quota.
C)
price ceiling.

D)

free market equilibrium.

Topic
Policies that Create a Wedge
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

111)

A per unit subsidy increases both consumer and producer surplus, but results in a deadweight loss.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
AACSB

Analytic skills

112)

The tax revenue that is generated by a government tax is counted towards total welfare.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
AACSB

Analytic skills

113)

The above figure shows the demand and supply curves in the market for milk. Currently the market is in
equilibrium. If the government imposes a $2 per gallon tax to be collected from sellers, estimate the
change in p, Q, and social welfare.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
 AACSB

Analytic skills

114)

The above figure shows the demand and supply curves in the market for milk. Currently, the market is in
equilibrium. If the government imposes a $2 per gallon tax to be collected from sellers, calculate the
dead weight loss associated with the tax, and explain why the dead weight loss occurs.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
AACSB

Analytic skills

115)

The above figure shows the demand and supply curves in the market for milk. Currently the market is in
equilibrium. If the government establishes a $4 per gallon price support, estimate the change in p, Q, and
social welfare.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
AACSB

Analytic skills

116)

The above figure shows the demand and supply curves in the market for milk. Currently the market is in
equilibrium. If the government establishes a $2 per gallon price ceiling to ensure that children are
nourished, estimate the change in p, Q, and social welfare.
Topic

Policies that Create a Wedge

Question
Status
Previous Edition
AACSB

Analytic skills

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
117)
The larger the U.S. imposed per unit import tariff on a good imported and produced in the U.S.

117)

_____
A)
the smaller the U..S consumer surplus.

B)

the larger the government revenue.

C)
the larger the U.S. producer surplus.

D)

All of the above.

Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

118)
A ban on imports, a tariff, or a quota raise the price to domestic consumers. This means that consumers
will buy less of the product at a higher price. The loss associated with this is called

118)

_____
A)
productive consumption loss.

B)

consumer misperception loss.

C)
consumption distortion loss.

D)

production associated loss.

Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

119)
The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. If imported rice is banned, the loss in social welfare is

119)

_____
A)
i

B)

a + b + c + d + e.

C)

c + e.

D)

a.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

120)
The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Currently 10 units are imported. The Consumption distortion loss is
equal to

120)

_____
A)
c.

B)

a + c + d + e.

C)

c+e

D)

c+g+i.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

121)
The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Currently 10 units are imported. The loss from shifting production
from foreign to domestic producers equals

121)

_____
A)
i.

B)

e.

C)

a + c + d + e.

D)

c+e
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

122)
The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. If a $1 tariff is imposed on imported rice, the loss in social welfare is

122)

_____
A)
b + c + d + e.

B)

i.

C)

a + c + d + e.

D)

a.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

123)
The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Suppose a free market exists. If a $1 per unit tariff is imposed on
imported rice, the quantity of imported rice will decrease by

123)

_____
A)
40 units.

B)

10 units.

C)

20 units.

D)

30 units.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

124)
The above figure shows the market for rice in Japan. represents the domestic supply curve, and
represents the world supply curve. Suppose a free market exists. An import quota of 30 units would

124)

_____
A)
increase producer surplus by "d."

B)

have no effect.
C)
cause social welfare to fall by $30.

D)

cause consumer surplus to fall by "e."

Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

125)
The above figure shows the market for rice in Japan. represents the domestic supply curve, and
represents the world supply curve. Suppose a free market exists. The smallest tariff necessary to
completely eliminate imported rice is

125)

_____
A)
$1 per unit.

B)

$2 per unit.

C)

$3 per unit.

D)

$4 per unit.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

126)
The above figure shows the market for rice in Japan. represents the domestic supply curve, and
represents the world supply curve. A $1 per unit tariff has the same effect on producer and consumer
surplus as a quota of

126)

_____
A)
10 units.

B)

20 units.

C)

30 units.

D)

40 units.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

127)
Tariffs and quotas create a loss in social welfare because

127)

_____
A)
consumer surplus declines.

B)

revenues from tariffs are misspent.

C)
producer surplus declines.

D)

All of the above.

Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

128)
The welfare loss from an import quota is greater than that of an equivalent tariff because

128)

_____
A)
tariff revenues represent an additional deadweight loss.
B)
tariff revenues can be used to society's benefit.
C)
domestic producers gain more from a quota than from a tariff.
D)
the loss in consumer surplus is not as large.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

129)
The cost of lobbying for an import quota in a perfectly competitive market

129)

_____
A)
shifts the supply curve of the good to the left.
B)
decreases the deadweight loss of the quota.
C)
increases the welfare loss of the quota.
D)
increases the consumer surplus.
Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

130)
Rent seeking in the form of lobbying for an increase in import tariffs by domestic producers

130)

_____
A)
increases the deadweight loss.

B)

increases total welfare.

C)
increases consumer surplus.

D)

None of the above.

Topic
Comparing both Types of Policies
Question Status
Previous Edition
AACSB
Analytic skills

131)
The United States and many other countries often impose trade sanctions on other countries. These
sanctions

131)

_____
A)
tend to decrease consumer and producer surplus only in the sanctioned country.
B)
tend to increase total welfare.
C)
decrease producer and consumer surplus in both the sanctioned and sanctioning countries.
D)
tend to decrease the deadweight loss.
Topic
Comparing both Types of Policies
Question Status
New
AACSB
Analytic skills

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
For the following, please answer "True" or "False" and explain why.

132)

The welfare loss of a tariff equals that of an import quota that leads to the same level of imports.
Topic

Comparing both Types of Policies

Question
Status
Previous Edition
AACSB

Analytic skills

133)

"Supporters of import restrictions and protectionist policies place greater weight on producer welfare
than on consumer welfare." Comment.
Topic

Comparing both Types of Policies

Question
Status
Previous Edition
AACSB

Analytic skills

134)

The domestic demand curve, domestic supply curve, and world supply curves for a good are given in the
above figure. All the curves are linear. Initially, the country allows imports. Then imports are banned.
Calculate how consumer and producer surplus change because of the ban. Is the country better off with
the ban on imports? Why?
Topic

Comparing both Types of Policies

 Question
Status
Previous Edition
AACSB

Analytic skills

135)

Explain why a government would impose an import tariff when domestic consumers suffer more than
producers gain?
Topic

Comparing both Types of Policies

Question
Status
Previous Edition
AACSB

Analytic skills

1)

D
2)
A
3)
D
4)
D
5)
A
6)
D
7)
D
8)
B
9)
C
10)
C
11)
A
12)
D
13)
D
14)
False. The price of the limited input will be bid up until zero economic profits result in the market that
uses the input.
15)
False. Those firm cannot make themselves better off by moving their resources into another industry
because all opportunity cost is covered.
16)
The firm that has more productive resources will have the cost of those resources bid up by the
marketplace. The more productive the resource, the more expensive it will be. This price is bid up until
the firm's profits are zero. The firm with less productive resources will also have zero profits because it is
not paying as much for its resources. There is no such thing as a free lunch or a free productivity gain for
competitive firms.
17)
D
 18)
A
19)
D
20)
B
21)
B
22)
B
23)
A
24)
C
25)
B
26)
A
27)
C
28)
D
29)
C
30)
C
31)
A
32)
A
33)
A
34)
C
35)
B
36)
True. This is the definition of consumer surplus.
37)
False. Consumers who are more sensitive to the price increase will reduce their purchase of the good by
a greater extent than those who are not price sensitive. As a result, they incur a smaller loss of consumer
surplus.
38)
False. The effect of a price change also depends on revenue changes.
39)
See the above figure. The curve labeled LE is the less elastic demand curve, and the curve labeled ME is
the more elastic demand curve. When price increases from $1 to , the person with demand curve ME
suffers a loss of a + c + e. The person with demand curve LE suffers a loss of a + b + c + d + e. Thus, the
person with the less elastic demand suffers the greater loss of consumer surplus.
40)
The consumer surplus from talking on the car phone is ($2.90 ∗ 20)/2 = $29. This person would pay up to
$29 per month to have the phone. Having the phone is worth $29 per month to this person because that
is the value this person places on calls from the car phone over and above what is paid just for the calls.
The phone has no other value to the person except to make the calls. If the phone cost more than $29 per
month this person would feel better off without the phone.
41)
C
42)
D
43)
B
44)
A
45)
C
46)
C
47)
B
48)
C
49)
D
50)
A
51)
C
52)
False. This definition ignores fixed costs. Producer surplus minus fixed costs equals profits.
53)
True. The sum of all marginal cost equals total variable cost. Total revenue minus total variable cost
equals producer surplus.
54)
Profit equals producer surplus when the firm has no fixed costs. Producer surplus can be thought of as
the gains from trade. In the short run, if the firm produces any output, it earns profit equal to revenue
minus variable costs minus fixed costs. If the firm shuts down, it loses the fixed costs. The producer
surplus equals the profit from trading minus the profit or loss from not trading, revenue minus variable
costs. If no fixed costs exist, then profit will equal the producer surplus.
55)
At a price of $2, producer surplus equals ($1.50 ∗ 1500)/2 = $1125. At a price of $1, producer surplus
equals ($0.50 ∗ 500)/2 = $125. The $1 decrease in prices results in a $1000 decrease in producer
surplus.
56)
D
57)
C
58)
D
59)
C
60)
B
61)
A
62)
C
63)
D
64)
D
65)
A
66)
C
67)
B
68)
D
69)
False. This only takes consumer surplus into account. Beyond the competitive equilibrium, additional
units of output have less value than the cost to make them. Thus, beyond the competitive equilibrium,
social welfare declines as the quantity of a good increases.
70)
False. When more than the competitive output is produced each unit sold cost more than it is valued at.
This reduces social welfare compared to the competitive output.
71)
If less output is produced, then the last unit that is consumed will be valued by consumers more than the
cost of producing it. If output is increased to the competitive level, consumers will value those additional
goods more than the cost of producing them, and welfare will increase. If output is greater than the
competitive output level, then the cost of producing the units beyond the competitive level is greater than
the value. At output levels greater than the competitive level, welfare is decreased. Thus, the competitive
output level maximizes welfare, because consumers value the last unit of output at exactly the amount
that it costs to produce it.
72)
Consumer surplus is maximized when price equals zero. Output will be the quantity where the demand
curve hits the quantity axis. The social welfare is less than the competitive result because for quantities
beyond the competitive equilibrium, producers incur a cost for which they are not reimbursed. Some of
this loss represents a transfer to consumers (the area under the demand curve to the right of the
equilibrium quantity). The area above the demand curve and below the supply curve for quantities
beyond the equilibrium quantity represents the deadweight loss.
73)
Producer surplus is maximized at a price that is midway between the supply curve and the demand curve
intercept. Compared to the competitive equilibrium, a lower quantity is sold at a higher price. The area
from this new quantity to the competitive quantity in between the demand and supply curves represents
the loss of consumer surplus that is not gained by anyonethe deadweight loss.
74)
B
75)
C
76)
A
77)
C
78)
A
79)
D
80)
D
81)
A
82)
B
83)
B
84)
False. One impact of a supply restriction is an exchange from consumers to producers. The net effect on
social welfare is negative. Additionally, there is a deadweight loss. This is the additional surplus that
could be generated if supply were not restricted. This effect is always negative. As a result, social welfare
always declines in response to a supply restriction.
85)
True. Even though turning producer surplus into consumer surplus doesn't increase total welfare, the
elimination of the deadweight loss that resulted from the limit does.
86)
The competitive equilibrium is Q = 1000 - (10 ∗ 50) = 500. With the supply restriction of 300, price
becomes $70. The loss in social welfare is [(70 - 50) ∗ (500 - 300)]/2 = $2,000. Producers gain (70 - 50) ∗
300 = $6,000. Consumers lose $6,000 + $2,000 = $8,000.
87)
DWL = .5(4 - 2)(1000 - 500) = 500
88)
D
89)
D
90)
D
91)
C
92)
B
93)
B
94)
D
95)
A
96)
B
97)
D
98)
A
99)
C
100)

A
101)

B
102)

C
103)

B
104)

A
105)

D
106)

C
107)

C
108)

C
109)

A
110)

A
111)

True. The government expenditure more than offset the gains to consumer and producer surplus
resulting in a deadweight loss.
112)

True. The tax will benefit either producers or consumers or both, but will also generate a dead weight
loss in total welfare.
113)

The supply curve shifts vertically by $2. The price changes from $3 per gallon to $4 per gallon. Quantity
falls from 1,000 gallons to 500 gallons. The decrease in consumer surplus is (500 + 1000) ∗ 1/2 = $750,
and the decrease in producer surplus is (500 + 1000) ∗ 1/2 = $750, and the tax revenue is 2 ∗ 500 =
$1000. Therefore the change in social welfare is $1000 - $750 - $750 = $500.
114)

The deadweight loss equals .5 ∗ 2 ∗ 500 ∗ $500. The deadweight loss occurs because the tax lowers the
output from the competitive level. At the output level that occurs with the tax, consumers value the last
unit of output by more than it costs to produce that unit.
115)

Price rises to $4 per gallon. Consumers purchase only 500 gallons of milk. The government purchases
1,000 gallons of milk to support the price at $4. Thus, a total of 1,500 gallons is produced. The loss in
social welfare equals 1,000 gallons of milk at $4/gallon (equals $4,000) less the producer surplus above
the old demand curve up to a price of $4 (which is $500). The loss in social welfare is $3,500.
116)
At a price of $2, only 500 gallons are produced. The deadweight loss equals [(1000 - 500) ∗ (4 - 2)]/2 =
$500.
117)

D
118)

C
119)

A
120)

D
121)

A
122)

B
123)

C
124)

B
125)

B
126)

A
127)

A
128)

B
129)

C
130)

A
131)

C
132)

False. In the case of a tariff the government receives revenue which does not reduce welfare. With a
quota this amount is often lost to foreign importers.
133)

Import restrictions increase the producer surplus of domestic producers. Consumer surplus, however,
decreases by more than producers gain. Thus, the statement seems to be correct.
134)

Consumer surplus before the ban equals .5 ∗ 75 ∗ 75 = $2812.5. Producer surplus before the ban equals
.5 ∗ 25 ∗ 25 = $312.5. Total social welfare equals $3125. The consumer surplus after the ban equals .5 ∗
50 ∗ 50 = $1250. Producer surplus equals .5 ∗ 50 ∗ 50 = $1250 after the ban. Total social welfare
equals $2500. Consumer surplus has decreased by $1562.5 and producer surplus has increased by
$937.5 because of the ban. Total social welfare has decreased by $625. The country is worse off because
the total social welfare has decreased.
135)

The tariff may be a product of producer rent seeking. Each producer will gain a relatively large amount
compared to the loss of each consumer. The producers may be able to coordinate their rent seeking
activities. Each consumer will only lose a relatively small amount so it is unlikely that consumers will
coordinate a protest to the tariff.