Question 1

Unless markets are perfectly competitive, they may fail to maximize the total benefits to buyers and sellers.

Accepted Answer

When markets are not perfectly competitive, there may be market failures such as monopolies, externalities, and information asymmetry that prevent the market from reaching an efficient outcome and maximizing the total benefits to buyers and sellers.

Question 2

Ticket scalping can increase total surplus in the market for tickets to sporting events.

Accepted Answer

Ticket scalping allows for a more efficient allocation of tickets as those who value the ticket the most are willing to pay a higher price. This increases total surplus by transferring tickets from those who value them less to those who value them more. However, it can also lead to price gouging and unfair distribution of tickets.

Question 3

Given the following two equations:
1) Total Surplus = Consumer Surplus + Producer Surplus
2) Total Surplus = Value to Buyers - Cost to Sellers
Show how equation (1) can be used to derive equation (2).

Accepted Answer

The answer of Given the following two equations:
1) Total Surplus...

Question 4

Answer each of the following questions about demand and consumer surplus.
a. What is consumer surplus, and how is it measured?
b. What is the relationship between the demand curve and the willingness to pay?
c. Other things equal, what happens to consumer surplus if the price of a good falls? Why?
Illustrate using a demand curve.
d. In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

Accepted Answer

The answer of Answer each of the following questions about...

Question 5

Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay $650. The total surplus is $200.

Accepted Answer

The total surplus is calculated as the difference between the buyer's willingness to pay and the seller's willingness to sell, which is $650 - $450 = $200. Therefore, the statement is true.

Question 6

Tammy loves donuts. The table shown reflects the value Tammy places on each donut she eats:  
a. Use this information to construct Tammy's demand curve for donuts.
b. If the price of donuts is $0.20, how many donuts will Tammy buy?
c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she have at a price of $0.20?
d. If the price of donuts rose to $0.40, how many donuts would she purchase now? What would happen to Tammy's consumer surplus? Show this change on your graph.

Accepted Answer

The answer of Tammy loves donuts. The table shown reflects...

Question 7

Answer each of the following questions about supply and producer surplus.
a. What is producer surplus, and how is it measured?
b. What is the relationship between the cost to sellers and the supply curve?
c. Other things equal, what happens to producer surplus when the price of a good rises?
Illustrate your answer on a supply curve.

Accepted Answer

The answer of Answer each of the following questions about...

Question 8

In order to conclude that markets are efficient, we assume that they are perfectly competitive.

Accepted Answer

The efficient market hypothesis assumes that markets are perfectly competitive, meaning that there are many buyers and sellers in the market, no single entity is large enough to have significant market power, and all participants have access to the same information. This assumption is necessary for the hypothesis to hold true.

Question 9

Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.

Accepted Answer

Economists suggest that ticket scalping is a result of increased demand for certain events and that by restricting scalping, the supply of tickets decreases, driving up prices. Additionally, the costs of enforcement and compliance with anti-scalping laws can also be passed on to consumers, further increasing the cost of tickets.

Question 10

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

Accepted Answer

The current policy on kidney donation prohibits the buying and selling of organs, effectively setting a price ceiling of zero.

Question 11

When markets fail, public policy can potentially remedy the problem and increase economic efficiency.

Accepted Answer

When markets fail, there may be cases where public intervention can correct the market failure and lead to better economic outcomes. Examples include public goods, externalities, and monopolies.

Question 12

If a market is in equilibrium, then it is impossible for a social planner to raise economic welfare by increasing or decreasing the quantity of the good.

Accepted Answer

If a market is in equilibrium, it means that the quantity demanded by consumers is equal to the quantity supplied by producers at a certain price. This results in economic efficiency, where no further gains in welfare can be achieved through changes in quantity. Therefore, a social planner cannot raise economic welfare by increasing or decreasing the quantity of the good.

Question 13

If the United States legally allowed for a market in transplant organs, it is estimated that one kidney would sell for at least $100,000.

Accepted Answer

The answer of If the United States legally allowed for...

Question 14

Markets will always allocate resources efficiently.

Accepted Answer

This statement is false. While markets often lead to efficient allocation of resources, there are various market failures that can prevent this from happening. For example, externalities, monopoly power, and public goods can all cause inefficiencies in the market. Additionally, markets may prioritize short-term gains over long-term benefits or fail to account for ethical considerations.

Question 15

Wendy is willing to pay $50 for a concert ticket and Bruce would like to receive $25. If the market price is $40 for this transaction, then the total surplus would be $15.

Accepted Answer

The total surplus would actually be negative in this scenario. Wendy is willing to pay $50, but only has to pay $40, so her consumer surplus is $10. Bruce is willing to receive $25, but is only receiving $40, so his producer surplus is $15. However, the transaction itself has a deadweight loss of $25 ($10 from Wendy and $15 from Bruce). Therefore, the total surplus would be -$15.

Question 16

Even though participants in the economy are motivated by self-interest, the "invisible hand" of the marketplace guides this self-interest into promoting general economic well-being.

Accepted Answer

This is one of the basic principles of classical economics, as espoused by Adam Smith in his book "The Wealth of Nations".

Question 17

Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost.

Accepted Answer

This is a basic principle of free market economics, known as the law of supply and demand. In a free market, prices are determined by the intersections of the supply and demand curves, with goods being allocated to those who are willing to pay the most for them and sold by those who are able to produce them at the lowest cost. This generally leads to an efficient allocation of resources and a maximization of total social welfare.

Question 18

Market power and externalities are examples of market failures.

Accepted Answer

Market failures happen when the free market fails to allocate resources efficiently. Market power and externalities are both examples of market failures. Market power refers to the ability of a single market participant to affect the market as a whole, leading to higher prices and reduced competition. Externalities occur when the actions of one participant in the market have unintended costs or benefits for others who are not part of the transaction, leading to inefficient outcomes.

Question 19

Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs to society of this activity outweigh the benefits.

Accepted Answer

Economists generally believe that ticket-scalping can lead to a more efficient allocation of tickets, matching them with those who value them the most, thus potentially increasing overall societal welfare. The primary criticism often revolves around fairness and access, rather than a clear-cut economic cost outweighing benefits.

Question 20

What do economists call the highest amount a consumer will pay to purchase a good?

Accepted Answer

The answer of What do economists call the highest amount...

Quiz 7: Consumers, Producers, and the Efficiency of Markets