Figure 6.2. Figure 6.3

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1 Topic 4 test MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) There is a deadweight loss if the last unit produced has a A) marginal benefit greater than its marginal cost. B) marginal benefit equal to its marginal cost. C) marginal cost greater than its marginal benefit or marginal benefit greater than its marginal cost. D) marginal cost greater than its marginal benefit. Figure 6.2 2) What is the marginal benefit to all the people of Kaffenia from increasing their daily consumption of donuts from 250 to 300 dozen? A) $1.00 B) $ C) $3.00 D) $ Figure 6.3 3) What is the opportunity cost to the economy of Kaffenia of producing the 200th pound of chocolate each day? A) $ B) $ C) $2.50 D) $2.00 4) Adam Smith argued that each participant in a competitive market is led to promote the A) inefficient use of society's resources, even though his intention is to make society better off. B) efficient use of society's resources, because his intention is to make society better off. C) efficient use of society's resources, even though it is not his intention to make society better off. 1

2 D) inefficient use of society's resources, because it is not his intention to make society better off. 5) Gina is eating two slices of pizza. Which of the following statements is true? A) Gina's marginal benefit from the second slice of pizza equals the maximum she is willing to pay for the second slice. B) Gina must have some consumer surplus from the second slice of pizza. C) Gina can not have any consumer surplus from the second slice of pizza. D) Gina's marginal benefit from the second slice of pizza is equal to the sum of the benefit from the first slice plus the benefit from the second slice. Figure 6.5 6) In Figure 6.5, the deadweight loss is zero if the price is A) $8. B) $6. C) $4. D) $2. Figure 6.4 7) In Figure 6.4, Q1 is A) the efficient amount to produce because at Q1 marginal benefits are greater than marginal costs. B) an inefficient amount to produce because at Q1 marginal benefits are greater than marginal costs. C) the efficient amount to produce because at Q1 marginal benefits equal marginal costs. D) an inefficient amount to produce because at Q1 marginal benefits equal marginal costs. Figure 6.3 2

3 8) Which of the following conditions could cause the actual price and quantity of chocolate in Kaffenia not to be the most efficient price and quantity? A) a price ceiling set by the government at $1.50 per pound B) an excise tax of $.25 per pound, newly imposed by the government C) a price floor set by the government at $1.00 per pound D) all of the above 9) To cover all costs of production and earn a modest but normal profit, Farmer Jones knows that he must sell his tomatoes for at least $5.00 per kg. He simply cannot accept any lower price and remain in business. Fortunately, Farmer Jones sold all his tomatoes to a local canned soup producer for $5.50 per kg. How much consumer surplus did the soup company achieve? A) $.50 times the number of kilograms produced B) $5.00 times the number of kilograms produced C) $5.50 times the number of kilograms produced D) none of the above Figure ) What is the opportunity cost to the economy of Kaffenia of producing the 250th dozen donuts each day? A) $6.00 B) $8.00 C) $7.00 D) $5.00 SHORT ANSWER. Write the word or phrase that best completes each statement or answers th e question. 11) Can price ceilings and price floors interfere with the efficient quantity of a commodity being 3

4 produced? 12) Can both producer surplus and consumer surplus exist at the same time in a particular market? 13) What determines the maximum amount that someone is willing to pay for a commodity? 14) The new sportscar in the dealer's showroom had a sticker price of $35,900. Sally liked the car but decided she would pay no more than $32,000 for it, otherwise she would do without it. After haggling with the dealer, she purchased the car for $31,500. Did she gain any consumers surplus? If so, how much? If not, why not? 15) It cost Sally $ to make a wooden doghouse, taking into account the dollar value of all resources including the value of her own labor time. She therefore decided that $ was the minimum price for which she would sell the doghouse. Lucky Sally was actually able to sell the doghouse for $ Did she earn any producer surplus? If so, how much? If not, why not? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) It is most likely correct to say that most private schools earn some producer surplus from many of their students. 17) The opportunity cost to the firm of producing one more unit of output is also called marginal cost. 18) If the marginal benefit exceeds the marginal cost of producing the next kilowatt hour of electricity, then it is efficient to go ahead and produce as many kilowatt hours as possible. 19) If the hot dog vendors at Melbourne Cricket Ground are earning a producer surplus on each hot dog they sell, then cricket fans cannot be achieving any consumer surplus on they hot dogs they buy. 20) A consumer's demand curve for popcorn is downward sloping as is the marginal benefit of popcorn curve. 4

5 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) C 2) D 3) B 4) C 5) A 6) B 7) C 8) B 9) D 10) C SHORT ANSWER. Write the word or phrase that best completes each statement or answers th e question. 11) Yes. A price ceiling is set below the market equilibrium price and results in a smaller quantity (than the efficient quantity) that producers are wiling to produce and sell. A price floor is set above the market equilibrium and results in a smaller quantity (than the efficient quantity) that consumers are willing to purchase. Both ceilings and floors reduce actual quantity below the efficient quantity. 12) Yes. The actual market price can, at the same time, be above the seller's minimum required selling price and below the buyer's maximum willing purchase price. So, buyer and seller can both earn a surplus on the same transaction. 13) The maximum amount someone is willing to pay is the dollar value of their marginal benefit of that commodity. The marginal benefit of any particular commodity can be measured as the dollar value of whatever other goods and services a person is willing to give up in order to get one more unit of that commodity. 14) Yes. Consumer surplus is the difference between the highest price one would pay rather than not make a particular purchase and the lower price actually paid. Sally gained a consumer surplus of $ ) Yes. Producer surplus is the difference between the actual selling price of a commodity and the lowest price the seller would have been willing to accept. Sally earned a producer surplus of $ TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) TRUE 17) TRUE 18) FALSE 5

6 19) FALSE 20) TRUE 6