Chapter 7

True/False (2 pts each)

Indicate whether the statement is true or false.

____ 1. If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is $90.

____ 2. Let P represent price; let QS represent quantity supplied; and assume the equation of the supply curve is
. If 90 units of the good are produced and sold, then producer surplus amounts to

$1,350.

____ 3. The current policy on kidney donation effectively sets a price ceiling of zero.

____ 4. Producer surplus is the cost of production minus the amount a seller is paid.

Multiple Choice (2 pts each)

Identify the choice that best completes the statement or answers the question.

Figure 7-13

P
700 Supply
600

500

400

300

200

100

1 2 3 4 5 Q

____ 1. Refer to Figure 7-13. If the price of the good is $600, then producer surplus amounts to
a. $650.
b. $800.
c. $900.
d. $1,000.
 Figure 7-12

Price

Supply

P2
B
A

P1
C G

Q1 Q2 Quantity

____ 2. Refer to Figure 7-12. When the price rises from P1 to P2, which area represents the increase in producer
surplus to existing producers?
a. A
b. A+B
c. A+B+C
d. G

____ 3. Total surplus

a. can be used to measure a market’s efficiency.
b. is the sum of consumer and producer surplus.
c. is the to value to buyers minus the cost to sellers.
d. All of the above are correct.
 Figure 7-17

Price

Supply

P2

P1

Demand
Q1 Quantity

____ 4. Refer to Figure 7-17. Which area represents total surplus in the market when the price is P1?
a. A+B
b. B+C
c. C+D
d. A+B+C+D

____ 5. Welfare economics is the study of how

a. the allocation of resources affects economic well-being.
b. a price ceiling compares to a price floor.
c. the government helps poor people.
d. a consumer’s optimal choice affects her demand curve.

____ 6. Which of the Ten Principles of Economics does welfare economics explain more fully?
a. The cost of something is what you give up to get it.
b. Markets are usually a good way to organize economic activity.
c. Trade can make everyone better off.
d. A country’s standard of living depends on its ability to produce goods and services.

____ 7. If a consumer places a value of $20 on a particular good and if the price of the good is $25, then the
a. consumer has consumer surplus of $5 if he buys the good.
b. consumer does not purchase the good.
c. price of the good will rise due to market forces.
d. market is out of equilibrium.
____ 8. Dawn’s bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes
from the benefit of the lower prices to
a. only existing customers who now get lower prices on the gowns they were already
planning to purchase.
b. only new customers who enter the market because of the lower prices.
c. both existing customers who now get lower prices on the gowns they were already
planning to purchase and new customers who enter the market because of the lower prices.
d. Consumer surplus does not increase; it decreases.

____ 9. Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato
you bought this week, you paid a price exactly equal to your willingness to pay. Then
a. you should buy more tomatoes before the end of the week.
b. you already have bought too many tomatoes this week.
c. your consumer surplus on the last tomato you bought is zero.
d. your consumer surplus on all of the tomatoes you have bought this week is zero.

Figure 7-8

Price

Supply

A D H
P2

B G
P1

Q1 Q2 Quantity

____ 10. Refer to Figure 7-8. Which area represents producer surplus when the price is P2?
a. BCG
b. ACH
c. ABGD
d. AHGB

____ 11. Producer surplus equals

a. Value to buyers - Amount paid by buyers.
b. Amount received by sellers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.
 Figure 7-20

Price
K
48 Supply
A
44

40

36
F
32 G
28
H
24
B Demand
20

16

12

8
C
4

1 2 3 4 5 6 7 8 9 10 11 Quantity

____ 12. Refer to Figure 7-20. If 4 units of the good are produced and sold, then
a. the cost to sellers exceeds the value to buyers.
b. producer surplus is maximized.
c. total surplus is minimized.
d. the allocation of resources is inefficient.

____ 13. Externalities are

a. side effects passed on to a party other than the buyers and sellers in the market.
b. side effects of government intervention in markets.
c. external forces that cause the price of a good to be higher than it otherwise would be.
d. external forces that help establish equilibrium price.

Short Answer
1. Answer the following questions based on the graph that represents J.R.'s demand for ribs per week at
Judy's Rib Shack.

a. At the equilibrium price, how many ribs would J.R. be willing to purchase?
b. How much is J.R. willing to pay for 20 ribs?
c. What is the magnitude of J.R.'s consumer surplus at the equilibrium price?
d. At the equilibrium price, how many ribs would Judy be willing to sell?
e. How high must the price of ribs be for Judy to supply 20 ribs to the market?
f. At the equilibrium price, what is the magnitude of total surplus in the market?
g. If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus?
h. If the price of ribs fell to $5, what would happen to Judy's producer surplus?
i. Explain why the graph that is shown verifies the fact that the market equilibrium
(quantity) maximizes the sum of producer and consumer surplus.
 Chapter 7 Answer Section
TRUE/FALSE
1. ANS: F PTS: 1 DIF: 1 REF: 7-1
NAT: Analytic LOC: Supply and demand TOP: Consumer surplus
MSC: Applicative

2. ANS: T PTS: 1 DIF: 2 REF: 7-2

NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Applicative

3. ANS: T PTS: 1 DIF: 2 REF: 7-3

NAT: Analytic LOC: Supply and demand TOP: Efficiency
MSC: Interpretive

4. ANS: F PTS: 1 DIF: 1 REF: 7-2

NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Definitional

MULTIPLE CHOICE
1. ANS: D PTS: 1 DIF: 2 REF: 7-2
NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Applicative

2. ANS: A PTS: 1 DIF: 2 REF: 7-2

NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Applicative

3. ANS: D PTS: 1 DIF: 2 REF: 7-3

NAT: Analytic LOC: Supply and demand TOP: Total surplus
MSC: Interpretive

4. ANS: B PTS: 1 DIF: 2 REF: 7-3

NAT: Analytic LOC: Supply and demand TOP: Total surplus
MSC: Applicative

5. ANS: A PTS: 1 DIF: 1 REF: 7-0

NAT: Analytic LOC: Supply and demand TOP: Welfare
MSC: Definitional

6. ANS: B PTS: 1 DIF: 2 REF: 7-0

NAT: Analytic LOC: Supply and demand TOP: Welfare
MSC: Interpretive
 7. ANS: B PTS: 1 DIF: 2 REF: 7-1
NAT: Analytic LOC: Supply and demand TOP: Consumer surplus
MSC: Applicative

8. ANS: C PTS: 1 DIF: 2 REF: 7-1

NAT: Analytic LOC: Supply and demand TOP: Consumer surplus
MSC: Interpretive

9. ANS: C PTS: 1 DIF: 3 REF: 7-1

NAT: Analytic LOC: Supply and demand TOP: Consumer surplus
MSC: Analytical

10. ANS: B PTS: 1 DIF: 2 REF: 7-2

NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Applicative

11. ANS: B PTS: 1 DIF: 2 REF: 7-2

NAT: Analytic LOC: Supply and demand TOP: Producer surplus
MSC: Definitional

12. ANS: D PTS: 1 DIF: 2 REF: 7-3

NAT: Analytic LOC: Supply and demand TOP: Efficiency
MSC: Interpretive

13. ANS: A PTS: 1 DIF: 1 REF: 7-4

NAT: Analytic LOC: Supply and demand TOP: Externalities
MSC: Definitional

SHORT ANSWER
1. ANS:
a. 40
b. $10.00
c. $80.00.
d. 40
e. $5
f. $200
g. It would fall from $80 to only $20.
h. It would fall from $120 to only $30.
i. At quantities less than the equilibrium quantity, the marginal value to buyers exceeds the
marginal cost to sellers. Increasing the quantity in this region raises total surplus until
equilibrium quantity is reached. At quantities greater than the equilibrium quantity, the
marginal cost to sellers exceeds the marginal value to buyers and total surplus falls.
PTS: 1 DIF: 3 REF: 7-3 NAT: Analytic
LOC: Supply and demand TOP: Consumer surplus | Producer surplus | Total surplus
MSC: Analytical