Q: What is the formula for consumer surplus?

$$\text{Consumer Surplus} = \sum (\text{WTP} - P) $$ over all units bought

Q: What is producer surplus?

$$\text{Producer Surplus} = \sum (P - MC) $$ over all units produced

Q: What is the formula for total surplus in a market with no externalities?

$$\text{Total Surplus} = \text{Consumer Surplus} + \text{Producer Surplus} $$

Question 1

Refer to the third image (with supply and demand curves). What does the area between the supply and demand curves up to the equilibrium quantity represent?

Accepted Answer

The total surplus, which is the sum of consumer and producer surplus

Question 2

Suppose the marginal benefit (MB) for Amy and Bob for the first unit is $$10 and 9$$, respectively, and the marginal cost (MC) for Chris and Diana for the first unit is $$1 and 3$$, respectively. What is the maximum possible surplus from producing the first unit?

Accepted Answer

$$10 - 1$$ = $$9 $$

Question 3

In a competitive market with no externalities, what condition must be met for the allocation to be efficient?

Accepted Answer

Marginal social benefit equals marginal social cost

Question 4

If the supply curve for lemons shifts to the left due to an early freeze (see the image with lemons), what happens to consumer surplus?

Accepted Answer

Consumer surplus decreases by area B + C

Question 5

What is the formula for consumer surplus?

Accepted Answer

$$	ext{Consumer Surplus} = \sum (	ext{WTP} - P) $$ over all units bought

Question 6

Which of the following is a plausible reason for government intervention in a competitive market?

Accepted Answer

To correct for externalities such as pollution

Question 7

If the supply of flat-screen TVs becomes very elastic (see the image with horizontal supply), who benefits most from falling production costs?

Accepted Answer

Consumers

Question 8

What is producer surplus?

Accepted Answer

$$	ext{Producer Surplus} = \sum (P - MC) $$ over all units produced

Question 9

Which of the following best describes the 'invisible hand' theory?

Accepted Answer

Individuals pursuing their own interests can lead to a socially optimal allocation

Question 10

In the context of fairness, what is the main drawback of end-of-state fairness?

Accepted Answer

It provides no incentive for people to work hard

Question 11

A competitive market is fair according to which type of fairness?

Accepted Answer

Procedure fairness

Question 12

If the demand for French bread rises (see the image with French bread), what happens to producer surplus?

Accepted Answer

Producer surplus increases by area B + C

Question 13

Which of the following is NOT a role of government in supporting competitive markets?

Accepted Answer

Set prices for all goods

Question 14

What is the formula for total surplus in a market with no externalities?

Accepted Answer

$$	ext{Total Surplus} = 	ext{Consumer Surplus} + 	ext{Producer Surplus} $$

Question 15

Which scenario would most likely require government intervention due to market failure?

Accepted Answer

A market with significant information asymmetry

Question 16

If every market is perfectly competitive and there are no externalities, what is the outcome?

Accepted Answer

Markets allocate resources efficiently in all markets

Question 17

What is the main weakness of competitive market fairness?

Accepted Answer

It fails to compensate people with low endowment

Question 18

Which of the following is an example of an externality?

Accepted Answer

A factory polluting the air

Question 19

In a competitive market, what information does the freely floating price provide?

Accepted Answer

The optimal production and consumption choices for buyers and sellers

Question 20

Which of the following best describes the outcome of competition among sellers in a competitive market?

Accepted Answer

Survival of the most efficient producers

5. Efficiency and Equity in Competitive Markets

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