Chapter 7 (Mankiwa & Taylor)
Consumers, Producers, and the Efficiency of Markets
1) 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
(a) $5,000.
(b) $15,000.
(c) $20,000.
(d) not able to be calculated from the information given.
Answer: D
2) 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
(a) less than $5.
(b) at least $95.
(c) at least $100.
(d) $105.
Answer: B
3) 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
(a) $0.
(b) $50.
(c) $100.
(d) unknown based upon the information provided.
Answer: B
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4) Figure 9.1 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 will
(a) fall to $820.
(b) fall by $84.
(c) fall by $58.
(d) fall to $369.
Answer: B
5) Figure 9.1 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
(a) $301.00.
(b) $924.50.
(c) $1,225.50.
(d) $1,250.00.
Answer: B
6) As the price of a good increases, the loss in consumer surplus is larger,
(a) the more elastic demand is.
(b) the more money previously spent on the good.
(c) the less money previously spent on the good.
(d) the smaller the price increase.
Answer: B
7) If lower‐income households spend a greater share of their income on cigarettes than do higherincome
households, then a tax that raises the price of cigarettes will
(a) cause lower‐income households to incur a greater loss of consumer surplus than that incurred by
higher‐income households.
(b) cause higher‐income households to incur a greater loss of consumer surplus than that incurred
by lower‐income households.
(c) raise consumer surplus among higher‐income households.
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(d) cause consumer surplus to decline among smokers, but the relative impact cannot be determined
from the given information.
Answer: D
8) 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
(a) each group’s average income.
(b) the actual quantities purchased by each.
(c) each individual’s price elasticity of demand.
(d) no additional information.
Answer: D
9) Sarah’s demand curve for whiskey has the same slope as Pete’s; however, it lies to the right of
Pete’s. An increase in the price of whiskey will cause
(a) Sarah to incur a greater loss of consumer surplus than Pete will.
(b) Pete to incur a greater loss of consumer surplus than Sarah will.
(c) Sarah and Pete to incur the same loss of consumer surplus.
(d) Sarah’s demand curve to shift closer to Pete’s.
Answer: A
10) 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
(a) decrease Sarah’s consumer surplus more than David’s.
(b) decrease David’s consumer surplus more than Sarah’s.
(c) increase Sarah’s consumer surplus more than David’s.
(d) increase David’s consumer surplus more than Sarah’s.
Answer: C
11) Producer surplus is equal to
(a) the area under the supply curve.
(b) the difference between price and average cost for all units sold.
(c) the difference between price and marginal cost for all units sold.
(d) the firm’s profit when fixed costs exist.
Answer: C
12) 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
(a) $5,000.
(b) $15,000.
(c) $20,000.
(d) not able to be calculated from the information given.
Answer: A
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13) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals
(a) 50.
(b) 25.
(c) 12.50.
(d) 10.
Answer: C
14) If a market produces a level of output below the competitive equilibrium, then
(a) social welfare is not maximized.
(b) consumer surplus might still be maximized.
(c) the actual price will be below the equilibrium price.
(d) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.
Answer: A
15) A competitive market maximizes social welfare because in a competitive market
(a) profits are zero.
(b) price equals marginal cost of the last unit produced.
(c) price equals average cost of the last unit produced.
(d) there is free entry and exit.
Answer: B
16) If a market produces a level of output that exceeds the competitive equilibrium output, then
(a) social welfare will be higher.
(b) producer surplus will be higher.
(c) marginal cost will exceed price.
(d) All of the above.
Answer: C
17) If an economist states that not enough of a good is being produced, she usually means that
(a) not everyone can afford the good.
(b) price exceeds marginal cost.
(c) consumer surplus equals zero.
(d) at equilibrium, some people who still wish to buy the good cannot find a seller.
Answer: B
18) Deadweight loss occurs when
(a) producer surplus is greater than consumer surplus.
(b) the maximum level of total welfare is not achieved.
(c) consumer surplus is reduced.
(d) an inferior good is consumed.
Answer: B
19) The deadweight loss associated with output less than the competitive level can be determined by
(a) subtracting the competitive level producer surplus from the producer surplus associated with 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) summing the change in the total consumer and producer surplus from moving from the
4competitive level of output to less output.
Answer: D
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