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If a consumer is willing to pay $20 for a shirt but only has to pay $16, the $4 difference is:
A)
consumer surplus.
B)
consumer deficit.
C)
producer surplus.



If a consumer is willing to pay $20 for a shirt but only pays $16 for the shirt, the $4 difference is consumer surplus. The consumer surplus plus the market price equals the total value of the product to the consumer.

TOP

In an unregulated competitive market, which of the following conditions most accurately describes the condition that exists when the efficient quantity of a good or service is produced and consumed?
A)
Consumer surplus equals producer surplus.
B)
The sum of consumer surplus and producer surplus is maximized.
C)
Producer surplus is maximized.



When the efficient quantity is produced, the sum of the consumer surplus and producer surplus is maximized.

TOP

Producer surplus is best defined as the:
A)
sum of the differences between the price of each unit of a good and its opportunity cost.
B)
amount by which the price of the next unit of a good exceeds the consumer's marginal benefit from the good.
C)
number of units by which the supply is greater than the quantity demanded by consumers.



The sum of the differences between price and opportunity cost is producer surplus.

TOP

Which of the following statements most accurately describes what will occur in an unrestricted economy when tastes change so that marginal benefit exceeds marginal cost at the current quantity produced and sold of a good or service?
A)
The quantity of other goods and services produced will increase.
B)
The quantity consumed will decrease.
C)
The quantity of the good or service produced will increase.



In an unrestricted economy, the efficient quantity is the one for which the marginal benefit equals the marginal cost. When marginal benefit is greater than marginal cost at a given quantity, producers will produce more since consumers are willing to pay more than the cost of production.

TOP

Producer surplus is best described as the:
A)
excess of price over the opportunity cost of production.
B)
amount by which price exceeds the cash cost of production.
C)
excess quantity supplied relative to quantity demanded.



Producer surplus is defined as the excess of price over the opportunity cost, not the cash cost, of production. Excess quantity supplied relative to quantity demanded represents a surplus of the good in the market, but is not referred to as producer surplus.

TOP

If a 10% income increase caused a group of consumers to increase their purchases of television sets from 95 to 105, the group's income elasticity of demand for television sets would be closest to:
A)
0.10.
B)
1.00.
C)
2.00.



Income elasticity is the sensitivity of demand to changes in consumer income.
Income elasticity = (percent change in quantity demanded) / (percent change in income) = [(105 − 95) / (100)] / 0.10 = 1

TOP

If the admission price for a rock concert is raised from $25 to $30 causing sales to drop from 60,000 to 40,000, the price elasticity of demand for tickets to the concert is:
A)
2.20.
B)
-1.67.
C)
-2.20.



Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price, using the average value of the variable in the computations. The percent change in quantity demanded is (40,000 − 60,000) / ((60,000 + 40,000) / 2) = -0.4. The percent change in price is (30 − 25) / ((30 + 25) / 2) = 0.1818. The price elasticity of demand is -0.40 / 0.1818 = -2.2.

TOP

Antonio Conti consumes 2 pounds of beef per week when beef is $4.50 per pound and 3 pounds of chicken when chicken sells for $3.50 per pound. If the price of chicken increases to $4.00 per pound, Conti’s consumption of beef increases to 2.5 pounds per week. Which of the following most accurately describes Conti’s cross elasticity of demand for beef versus chicken? The cross price elasticity of demand for:
A)
beef relative to chicken is +1.67 and beef and chicken are complimentary goods.
B)
beef relative to chicken is +1.67 and beef and chicken are substitutes.
C)
chicken relative to beef is +1.75 and beef and chicken are substitutes.



The average quantity of beef demanded is (2.0 + 2.5) / 2 = 2.25 pounds, so the percentage change in the quantity of beef demanded is (2.5 – 2.0) / 2.25 = +22.22%. The average price of chicken is ($3.50 + $4.00) / 2 = $3.75 per pound, so the percentage change in the price of chicken ($4.00 – $3.50) / $3.75 = +13.33%. The cross price elasticity of demand for beef relative to the price of chicken is 22.2 / 13.3 = 1.67. Since the cross price elasticity is positive, chicken and beef are substitutes for Conti.

TOP

Assume that for the average consumer, the quantity demanded for jeans increases from 5 to 7 pairs per year in response to a price decrease from $29 to $24 per pair. The respective price elasticity and relative elasticity of demand for jeans is best described by which of the following?
A)
−1.77; relatively inelastic.
B)
−2.32; relatively elastic.
C)
−1.77; relatively elastic.


The percentage change in quantity demanded is (7 − 5) / [(7 + 5) / 2] = 33.33% and the percentage change in price is (24 − 29) / [(24 + 29) / 2] = -18.87%. Thus, price elasticity = 33.33% / -18.87% = -1.77.
A good is considered to be elastic if the absolute value of price elasticity is greater than 1. In this case, the absolute value of the price elasticity of demand for jeans is 1.77, so the price elasticity for jeans is relatively elastic.

TOP

When household incomes go down and the quantity of a product demanded goes up, the product is:
A)
an inferior good.
B)
a necessity.
C)
a normal good.



When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and margarine.

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