Consumer and Producer Surplus in an Unregulated Market Equilibrium

1. For question 1, please fill in (b) on your bubble sheet, as this is exam form B. (We are using this question to verify the exam form.) b) Form B Refer to the diagram below for questions 2-10. Suppose that the market is currently unregulated and in equilibrium. 2. What is consumer surplus in this market? a) 24 b) 18 c) 12 d) 7 e) 6 3. What is producer surplus in the market? a) 32 b) 30 c) 24 d) 18 e) 12.5 4. True or False: This is not a Pareto efficient market allocation, as producer surplus is different from consumer surplus a) True b) False Suppose now a tax of $4 is imposed in the market. 5. What is consumer surplus in the market? a) 6 b) 3.5 c) 3 d) 1.5 e) 0 6. What is the government’s tax revenue in the market? a) 8 b) 12 c) 16 d) 20 e) 0 7. What is the change in the economy’s total surplus from the free market to the market with a $4 tax? In other words, what is the deadweight loss in the taxed market? a) 3 b) 6 c) 12 d) 18 e) 0 8. Who bears the greater share of the burden of this $4 tax? a) There is not enough information b) Both consumers and producers bear the same burden c) Neither consumers and producers bear any burden d) Producers e) Consumers Suppose now that, instead of the $4 tax described above, a price floor of $9 is imposed. 9. What is consumer surplus in this market? a) 2 b) 4 c) 8 d) 0 e) Not enough information 10. What is producer surplus in this market? a) 30 b) 11 c) 1 d) 0 e) Not enough information 11. Why is the First Welfare Theorem important? a) It tells us that happiness is important, and without it everyone will be sad b) When it applies we can implement the most equitable outcome in society: everyone is equally well off. c) If used correctly, it could be used to predict stock prices d) It shows that government intervention always leads to a better allocation for the economy e) It provides conditions that ensure that the free market is Pareto efficiency. 12. Suppose that demand is perfectly inelastic and supply is unit elastic in the market for widgets. If a tax is imposed in the market, bear the entire burden of the tax and surplus does not change. a) Producers, producer b) Producers, consumer c) Neither consumers nor producers, both surpluses do not change d) Consumers, producer e) Consumers, consumer 13. What is the logic behind estimating the elasticity of demand, by comparing equilibrium price and quantity in June 2007 with June 2008? a) Consumer tastes for driving vary with the season so comparing June to June holds tastes fixed b) There were no changes in technology over this period so the change from June 2007 to June 2008 is a movement along a fixed supply curve c) There was a change in the price of a substitute over this period causing the demand curve to shift d) The price change was small over this period and this makes it possible to more precisely estimate elasticity 14. All of the following are examples of why the demand for gasoline is more elastic in the long-run than the short run except a) In the long run, individuals can adjust their commuting distance to work b) In the long run, oil producers can adjust the amount of oil reserves they have, but these are fixed in the short run c) In the long run, consumers can adjust fuel efficiency of the vehicles they drive but this is fixed in the short run d) In the long run, consumers can more easily adjust the number of cars they own, since their original cars wear out eventually over time 15. What is the reason to use data of the U.S. and Norway as an example of how to calculate the long run price elasticity of demand of gasoline? a) Long run elasticity of demand requires a long time period where prices have been different, but during that time, many other factors could have changed within a country. Therefore, we compare two similar countries where prices are different b) Norway currently has income and technology that were used by the US a long time ago, so we can look at Norway as the “old US” and compare it with the US c) Norway does not tax gasoline whereas the US does. This will give us the difference needed to calculate the long run price elasticity of demand. d) We have data on how people from the U.S. move to Norway and change their behavior in purchasing gasoline. We can compare what they are consuming in Norway with what they used to consume in the U.S. to find long run price elasticity of demand 16. Consider the following statements, which may or may not be true, about the supply management policy of the dairy industry in Canada. (1) (2) The policy consists of extensive subsidies that are funded by the Canadian government. The policy results in a reduction of PD, the price consumers pay for milk, compared to no government regulation. a) (1) and (2) are both true b) Only (1) is true. c) Only (2) is true. d) (1) and (2) are both false. 17. Consider when there is a binding price ceiling on apartment rent in Minneapolis. Then there is a migration of renters to Minneapolis. Which of the following is true? a) Not enough information. b) There will be a larger shortage after the migration. c) There will be a smaller shortage after the migration. d) There will be a surplus after the migration. e) There will be the same shortage after the migration. 18. Consider a market such that (1) demand is perfectly inelastic and (2) supply is perfectly is no tax, the equilibrium price is $5 and the equilibrium quantity is 25 units. elastic. When there , Suppose a tax of $2 per unit imposed on the market. After the tax, the seller price Ps = the buyer price PD = , and the quantity a) There is insufficient information. b) 7, 7, and “less than 25.” c) 5, 5, and “equals 25.” d) 5, 7, and “equals 25.” e) 3, 5, and “greater than 25” . 19. If toilet paper is a necessity good, it means that as your income increases, a) the share of income you spend on toilet paper decreases b) the share of income you spend on toilet paper increases c) your total spending on toilet paper goes down d) you buy less toilet paper e) you buy the same amount of toilet paper 20. When calculating elasticity, we use percentage changes instead of actual changes because a) None of the above b) Using actual changes will always overestimate elasticity c) Using actual changes will always underestimate elasticity d) Using percentage changes will get rid of the negative sign e) Using percentage changes will get rid of the units problem You are the Independent System Operator (ISO) in an electricity market. You have received the bid information in the table below for a double auction. Each buyer’s bid is an offer to buy one unit of electricity. Each seller’s bid is an offer to sell one unit of electricity. Buyers Milton Maynard Friedrich Elinor Adam Bid (Offer to buy in $ ) 8 5 3 12 9 21. What price clears the market? a) 10 b) 9 c) 8 d) 5 e) 4 22. Who produces in the market clearing allocation? a) Joan b) Joan, Gordon c) Joan, Gordon, Irving d) Deirdre, Ludwig, Irving e) Deirdre, Ludwig, Irving, Gordon, Joan Sellers Joan Gordon Deirdre Irving Ludwig Bid (Offer to sell in $) 1 4 17 8 10 Questions 23-26 are about the market for widgets. For each scenario, determine what the equilibrium quantity (Qwidget) and equilibrium price (Pwidget) of widgets. 23. Income increases. Assume the income elasticity for widgets is negative. a) Qwidget ↑ and Pwidget ↓. b) Qwidget ↓ and Pwidget ↓. c) Qwidget ↓ and Pwidget ↑. d) Qwidget ↑ and Pwidget ↑. 24. The price of smidgets increases. Assume smidgets and widgets are substitutes. a) Qwidget ↓ and Pwidget ↑. b) Qwidget ↑ and Pwidget ↑. c) Qwidget ↓ and Pwidget ↓. d) Qwidget ↑ and Pwidget ↓. 25. There is technological change that decreases labor productivity in the widget industry. a) Qwidget ↑ and Pwidget ↓. b) Qwidget ↑ and Pwidget ↑. c) Qwidget ↓ and Pwidget ↓. d) Qwidget ↓ and Pwidget ↑. 26. Two things happen: (i) The price of smidgets increases and (ii) labor productivity decrease. widget ↑ and we can’t tell what happens to Qwidget. a) P b) Pwidget ↓ and we can’t tell what happens to Qwidget. widget ↑ and we can’t tell what happens to Pwidget. c) Q d) Qwidget ↓ and we can’t tell what happens to Pwidget. happens to Refer to the diagram below to answer questions 26-29. 27. The diagram above shows a market with a subsidy. What is the consumer surplus? a) a b) a+d c) a+d+g+h d) g e) g+d+e 28. What is the producer surplus? a) a b) a+d c) a+d+g+h d) g e) g+d+e 29. What is the total surplus? a) a+b+c-g-h b) a+b+c+d+e+g-i-f c) a+d+g d) a+d+g-i e) a+d+g-i-f 30. What is the area of dead weight loss? a) -f b) -h c) -(i+f) d) -(i+f+h) e) -i 31. When there is a subsidy in the market, which of the following principles for Pareto efficiency is/are violated? (1) The consumers that value consumption the most consume first (2) The producers with the lowest marginal cost sell first (3) Quantity in the market should be such that the marginal reservation price equals the marginal cost a) (3) only b) (2) only c) (2) and (3) d) (1) only e) (1) and (2) 32. A classmate asks you why the falling price of substitute goods to the iPhone, for example when the new Samsung or Google phones start becoming cheaper, the price of the iPhone doesn’t fall? Shouldn’t the demand for iPhones fall when the prices of its substitutes decrease? Why wouldn’t this lower the price of iPhones? The correct response to your friend, based only on what you have learned so far in this class, is: a) “You’re right. Economics is dumb and can’t say anything about the real world!” b) “Yes, the demand will fall, but the demand is perfectly elastic so prices don’t change” c) “Yes, the demand will fall, but it will be offset by an equal shift of the supply curve to the left to bring price back to the original level” d) “Yes, the demand will fall, but the supply is perfectly inelastic so prices don’t change” e) “The analysis that we have been doing is only for competitive markets, and the market for iPhones is not one that falls under that category” 33. True or False: The First Welfare theory states that taxes never lead to Pareto improvements. a) True b) False