Question 1

Suppose a consumer is willing to pay up to $$R500$$ for a pair of jeans, but the market price is $$R350. $$What is the consumer surplus from this purchase?

Accepted Answer

$$R150$$

Question 2

Which of the following best describes the concept of 'reservation price' in consumer surplus analysis?

Accepted Answer

The price at which a consumer is indifferent between buying and not buying a unit of a good.

Question 3

Given a quasilinear utility function $$u(x, m) = v(x) + m$$, where $$x is $$the discrete good and $$m is $$income, what is the reservation price for the first unit?

Accepted Answer

$$r_1 = v(1) - v(0$$)$$

Question 4

If the demand curve for a product is linear and given by $$P = 100 - 2Q$$, and the market price is $$P = 40$$, what is the consumer surplus when $$Q = 30$$?

Accepted Answer

$$900 ($$area under the demand curve above price)

Question 5

A price increase causes a decrease in consumer surplus. Which of the following factors will make the loss in consumer surplus larger?

Accepted Answer

A more elastic demand curve at equilibrium.

Question 6

Suppose a consumer’s utility function is Cobb-Douglas: $$U(x_1$, x_2$) = x_1$^{0.5} x_2$^{0.5}$$, with income $$m = 100$$ and prices $$p_1 = 1$, p_2$ = 1. If$$ $$p_1$$ increases to $$2$$, what is the compensating variation (CV)?

Accepted Answer

$$R41$$

Question 7

What is the main difference between compensating variation (CV) and equivalent variation (EV)?

Accepted Answer

CV holds utility at the original level, EV holds utility at the new level.

Question 8

If a firm’s supply curve is $$y = -10 + 50p$$, what is the producer surplus when the market price is $$p = 0.5$$?

Accepted Answer

$$2.25$$

Question 9

Which welfare measure is most appropriate for evaluating the impact of a new government road on society?

Accepted Answer

Benefit-cost analysis

Question 10

A new tax is imposed on a market. What is the likely effect on consumer and producer surplus?

Accepted Answer

Both consumer and producer surplus decrease, creating a deadweight loss.

Question 11

In the context of environmental valuation, what does 'willingness-to-pay' measure?

Accepted Answer

The monetary value individuals assign to improvements in environmental quality.

Question 12

If indifference curves are parallel and equally spaced, which welfare measures will be equal?

Accepted Answer

CV = EV = CS

Question 13

Suppose Uber’s estimated consumer surplus in four major US cities is $$2.8$$ billion, which is four times Uber’s revenue. What does this imply about the welfare impact of Uber?

Accepted Answer

Uber generates significant consumer benefits beyond its revenue.

Question 14

Which of the following is NOT a direct application of welfare measures in microeconomics?

Accepted Answer

Calculating the market equilibrium price

Question 15

If the supply curve is $$p = 2 + 0.02y$$ and the market price is $$p = 0.4$$, what is the producer surplus for $$y = 10$$ units?

Accepted Answer

$$1.00$$

Question 16

Why might compensating variation (CV) and equivalent variation (EV) yield different values for the same price change?

Accepted Answer

Because the amount of money buys different quantities of goods at different prices due to income effects.

Question 17

Which formula represents the net consumer surplus for $$n$$ units of a discrete good at price $$p$$ with quasilinear utility $$v(n)$$ and income $$m$$?

Accepted Answer

$$v(n) + m - pn$$

Question 18

In benefit-cost analysis, what does the area of deadweight loss represent?

Accepted Answer

The net cost to society from a regulation or tax that prevents mutually beneficial trades.

Question 19

If a new product (e.g., cellphones) is introduced and consumer surplus is estimated at $$50$$ billion, what does this indicate?

Accepted Answer

Consumers value the product much more than the market price they pay.

Question 20

Which of the following is a limitation of using consumer surplus to measure welfare?

Accepted Answer

It assumes quasi-linear preferences and may not be accurate if goods are income elastic.

Measuring Welfare in Microeconomics: Consumer and Producer Surplus, Compensating & Equivalent Variation, and Benefit-Cost Analysis

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