Economics 25 Multiple choice / T & F questions problem set

Economics 25 Multiple choice / T & F questions problem setplus 1 solution question from 3 parts.

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California State University, Fullerton Professor Farka, Ph.D.

Department of Economics Economics 201

Problem Set 10 Questions

True/False Questions:

1. For any given quantity, the price on a demand curve represents the marginal buyer’s willingness to pay.

2. Consumer surplus can be measured as the area between the demand curve and the supply curve.

3. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because: (1) consumer surplus

received by existing buyers increases and (2) new buyers enter the market.

4. If the price is lowered below equilibrium, then consumer surplus in that market will increase.

5. All else equal, an increase in demand will cause an increase in producer surplus.

6. Total surplus in a market can be measured as the area below the supply curve plus the area above the demand curve, up to

the point of equilibrium.

7. If the price is increased above equilibrium, then the producer surplus in that market will increase.

Multiple Choice Questions:

8. When a buyer’s willingness to pay for a good is equal to the price of the good, the

a. buyer’s consumer surplus for that good is maximized.
b. buyer will buy as much of the good as the buyer’s budget allows.
c. price of the good exceeds the value that the buyer places on the good.
d. buyer is indifferent between buying the good and not buying it.

9. If the cost of producing sofas decreases, then consumer surplus in the sofa market will

a. Increase.
b. Decrease.
c. remain constant.
d. Increase for some buyers and decrease for other buyers.

10. When the demand for a good increases and the supply of the good remains unchanged, producer surplus:

a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.

11. When the demand for a good increases and the supply of the good remains unchanged, consumer surplus

a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.

12. All else equal, what happens to consumer surplus if the price of a good decreases below the equilibrium?

a. Consumer surplus increases.
b. Consumer surplus decreases.
c. Consumer surplus is unchanged.
d. Consumer surplus may increase, decrease, or remain unchanged.

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13. When there is a technological advance in the ice cream industry, consumer surplus in that market will

a. Decrease
b. Increase
c. not change, since technology affects producers and not consumers.
d. not change, since consumers’ willingness to pay is unaffected by the technological advance.

14. Which of the following will cause an increase in producer surplus?

a. Price is increased above the equilibrium level
b. buyers expect the price of the good to be lower next month
c. the price of a substitute increases
d. income increases and buyers consider the good to be inferior

Answer questions 15-19 using the following Figure

Sup p ly

Demand

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Quantity

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

Price

15. At the equilibrium price, consumer surplus is

a. $150.
b. $200.
c. $300.
d. $500.

16. At the equilibrium price, producer surplus is

a. $150.
b. $200.
c. $300.
d. $500.

17. At the equilibrium price, total surplus is

a. $150.
b. $200.
c. $300.
d. $500.

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18. If the government increases the price to $120 in this market, then total surplus will decrease by
a. $0.
b. $125.
c. $225.
d. $600.

19. If the government lowers the price to $70 in this market, then total surplus will be

a. $0.
b. $125.
c. $375.
d. $500.

20. If the price a consumer pays is equal to his willingness to pay, then the consumer surplus relevant to that purchase is

a. zero.
b. negative, and the consumer would not purchase the product.
c. positive, and the consumer would purchase the product.
d. There is not enough information given to answer this question.

21. Televisions are a normal good and buyers of televisions experience a decrease in income. Consumer surplus:

a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.

22. Suppose the demand for nachos decreases. What will happen to producer surplus in the market for nachos?

a. It increases.
b. It decreases.
c. It remains unchanged.
d. It may increase, decrease, or remain unchanged.

23. A price ceiling is binding when it is set

a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.

24. The government imposes a price floor on cellular phones. Which of the following events could transform the price floor
from one that is binding to one that is not binding?
a. Cellular phones become less popular.
b. Traditional land line phones become more expensive.
c. The components used to produce cellular phones become less expensive.
d. Firms expect the price of cellular phones to fall in the future.

25. A simultaneous increase in both the demand for MP3 players and the supply of MP3 players would imply that

a. consumer surplus is ambiguous and the cost of producing MP3 players has increased.
b. Consumer surplus has increased and the cost of producing MP3 players has decreased.
c. Consumer surplus has decreased, and the cost of producing MP3 players has increased.
d. Consumer surplus is ambiguous, and the cost of producing MP3 players has decreased.

Problem Solving/Short Answers: To receive credit, you MUST show work/calculations/reasoning

Suppose that demand and supply curves for cassette tapes are as follows:

Q

D
= 60-P

Q
S
= 30+2P

a) Calculate Consumer and Producer Surplus in Equilibrium
b) Calculate Consumer and Producer Surplus when P increases to P=$11.
c) Calculate Consumer and Producer Surplus when P decreases to P=$8.