Q: Which equation correctly represents total consumer surplus in a market with a linear demand curve and price $$P$$?

$$\text{Consumer Surplus} = \frac{1}{2} (Q^*) (P_{max} - P)$$

Question 1

Which of the following best describes consumer surplus in a market?

Accepted Answer

The difference between the highest price a consumer is willing to pay for a good and the actual price the consumer pays.

Question 2

Suppose the market price for a cup of chai tea is $$3.50. Theresa is willing to pay 6.00 $$for a cup. What is Theresa’s consumer surplus?

Accepted Answer

$$6.00 - 3.50$$ = $$2.50$$

Question 3

Producer surplus is best defined as:

Accepted Answer

The difference between the lowest price a firm would accept for a good or service and the price it actually receives.

Question 4

If the supply curve for a good shifts upward by the amount of a per-unit tax, what happens to the equilibrium price and quantity?

Accepted Answer

Equilibrium price increases and equilibrium quantity decreases.

Question 5

Deadweight loss in a market is:

Accepted Answer

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Question 6

A price ceiling set below the equilibrium price will most likely result in:

Accepted Answer

A shortage of the good.

Question 7

Which equation correctly represents total consumer surplus in a market with a linear demand curve and price $$P$$?

Accepted Answer

$$	ext{Consumer Surplus} = \frac{1}{2} (Q^*) (P_{max} - P)$$

Question 8

If a government imposes a price floor above the equilibrium price, what is the likely outcome?

Accepted Answer

A surplus, as quantity supplied exceeds quantity demanded.

Question 9

Economic efficiency in a market is achieved when:

Accepted Answer

The marginal benefit to consumers of the last unit produced equals its marginal cost of production.

Question 10

In the market for gasoline, a 10-cent-per-gallon tax is imposed. If the price consumers pay rises by 8 cents and the price sellers receive falls by 2 cents, what is the tax incidence?

Accepted Answer

Consumers pay 80% of the tax and sellers pay 20%.

Question 11

Suppose the demand for a product is very inelastic. If a per-unit tax is imposed, who will bear most of the tax burden?

Accepted Answer

Buyers (consumers) will bear most of the tax burden.

Question 12

Which of the following is NOT a likely result of a government-imposed price ceiling during an emergency (such as the COVID-19 pandemic)?

Accepted Answer

Rationing of the good to those willing to pay the most.

Question 13

If the government imposes a minimum wage above the equilibrium wage, what is the most likely effect in the labor market?

Accepted Answer

Unemployment increases as quantity of labor supplied exceeds quantity demanded.

Question 14

Which formula represents producer surplus in a market with a linear supply curve and market price $$P$$?

Accepted Answer

$$	ext{Producer Surplus} = \frac{1}{2} (Q^*) (P - P_{min})$$

Question 15

Which of the following statements about deadweight loss is correct?

Accepted Answer

Deadweight loss is zero at competitive equilibrium.

Question 16

A government imposes a per-unit tax on cigarettes. After the tax, the price paid by consumers increases by $$0.90, and the price received by producers decreases by 0.10. $$What does this imply about the elasticity of demand and supply?

Accepted Answer

Demand is relatively inelastic compared to supply.

Question 17

Which of the following is a normative statement regarding price controls?

Accepted Answer

Whether price controls are 'bad' depends on values and judgments.

Question 18

In the context of public finance, what makes one tax more efficient than another?

Accepted Answer

It imposes a smaller excess burden relative to the tax revenue it raises.

Question 19

Which of the following best explains why the legal obligation to pay a tax does NOT determine the tax incidence?

Accepted Answer

Tax incidence is determined by the relative elasticities of demand and supply.

Economic Efficiency, Government Price Setting, and Taxes: Consumer and Producer Surplus

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