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Exam 7: Consumers, Producers and the Efficiency of Markets

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Question 1

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If a buyer's willingness to pay for a new car is R200 000 and she is able to actually buy it for R180 000, her consumer surplus is

A) R0.
B) R20 000.
C) R180 000.
D) R200 000.
E) R380 000.

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Question 2

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If a market is efficient, then

A) the market allocates buyers to the sellers who can produce the good at least cost.
B) all of these answers.
C) the quantity produced in the market maximises the sum of consumer and producer surplus.
D) the market allocates output to the buyers that value it the most.

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Question 3

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What is consumer surplus, and how is it measured?

Consumer surplus is the

Cost is a measure of the

Thandi loves toffees. The table shown reflects the value Thandi places on each toffee she eats: $\begin{array}{|l|l|}\hline \text { Value of first toffee } & \text { R0.60 } \\\hline \text { Value of second toffee } & \text { R0.50 } \\\hline \text { Value of third toffee } & \text { R0.40 } \\\hline \text { Value of fourth toffee } & \text { R0.30 } \\\hline \text { Value of fifth toffee } & \text { R0.20 } \\\hline \text { Value of sixth toffee } & \text { R0.10 }\\\hline\end{array}$ a. Use this information to construct Thandi's demand curve for toffees. b. If the price of toffees is R0.20, how many toffees will Thandi buy? c. Show Thandi's consumer surplus on your graph. How much consumer surplus would she have at a price of R0.20? d. If the price of toffees rose to R0.40, how many toffees would she purchase now? What would happen to Thandi's consumer surplus? Show this change on your graph.

Total surplus is the seller's cost minus the buyer's willingness to pay.

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then

a. At the equilibrium price, how many burgers would Ali be willing to purchase? b. How much is Ali willing to pay per burger for 20 burgers? c. What is the magnitude of Ali's consumer surplus at the equilibrium price? d. At the equilibrium price, how many burgers would the restaurant be willing to sell? e. How high must the price of burgers be for the restaurant to supply 20 burgers to the market? f. At the equilibrium price, what is the magnitude of total surplus in the market? g. If the price of burgers rose to R100, what would happen to Ali's consumer surplus? h. If the price of burgers fell to R50, what would happen to the restaurant's producer surplus? i. Explain why the graph that is shown verifies the fact that the market equilibrium (quantity) maximises the sum of producer and consumer surplus.

This table refers to five possible buyers' willingness to pay for a take-away meal. $\begin{array}{l}\text { Buyer Willingness To }\\\begin{array} { l l } & \text { Pay } \\\text { David } & \text { R85.00 } \\\text { Laura } & \text { R70.00 } \\\text { Megan } & \text { R55.00 } \\\text { Mallory } & \text { R40.00 } \\\text { Audrey } & \text { R35.00 }\end{array}\end{array}$ -Refer to the table above. If the price of a take-away meal is R69.00, who will purchase the good?

Welfare economics is the study of

A consumer's willingness to pay directly measures

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

Total surplus is the area

If your willingness to pay for a hamburger is R30.00 and the price is R20.00, your consumer surplus is R50.00.

Producer surplus is the area

If you had been willing to pay R21.90 for the litre of milk purchased at the supermarket, but were required to pay only R12.90, you have gained

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay R300 for one, buyer 2 is willing to pay R250 for one, and buyer 3 is willing to pay R200 for one. If the price is R250, how many vases will be sold and what is the value of consumer surplus in this market?

Equilibrium in a competitive market maximises total surplus.

Consumer surplus tends to be small when