Chapter 6
Efficiency and Fairness of Markets
6.1 Resource Allocation Methods
1) Allocating resources by the order of someone in authority is a ____ allocation method.
A) first-come, first-served
B) market price
C) contest
D) majority rule
E) command
Answer: E
Topic: Allocation of resources
Skill: Level 2: Using definitions
Objective: Checkpoint 6.1
Author: STUDY GUIDE
2) Often people trying to withdraw money from their bank must wait in line, which reflects a
____ allocation method.
A) first-come, first-served
B) market price
C) contest
D) majority rule
E) command
Answer: A
Topic: Allocation of resources
Skill: Level 2: Using definitions
Objective: Checkpoint 6.1
Author: STUDY GUIDE
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3) When the city of Fresno holds a referendum to determine if taxes will be raised to pay for
road repairs, the city is using a ____ allocation method.
A) majority rule
B) market price
C) contest
D) personal characteristics
E) command
Answer: A
Topic: Allocation of resources
Skill: Level 2: Using definitions
Objective: Checkpoint 6.1
Author: STUDY GUIDE
4) If a person will rent an apartment only to married couples over 30 years old, that person is
allocating resources using a ____ allocation method.
A) majority rule
B) market price
C) contest
D) personal characteristics
E) command
Answer: D
Topic: Allocation of resources
Skill: Level 2: Using definitions
Objective: Checkpoint 6.1
Author: STUDY GUIDE
5) If you split your dessert with your date, you are using a ____ allocation method.
A) first-come, first-served
B) sharing equally
C) contest
D) personal characteristics
E) command
Answer: B
Topic: Allocation of resources
Skill: Level 2: Using definitions
Objective: Checkpoint 6.1
Author: STUDY GUIDE
Chapter 6 Efficiency and Fairness of Markets
6.2 Value, Price, and Consumer Surplus
1) Marginal benefit
A) increases as more of a good is consumed.
B) decreases as more of a good is consumed.
C) is the total benefit from all units consumed.
D) is constant as more of a good is consumed.
E) is the gain to the producer of producing and selling one more unit of a good.
Answer: B
Topic: Marginal benefit
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: SB
2) Which describes the economic meanings of value and price?
A) Value is exchange worth minus marginal benefit and price is the dollars that must be
paid.
B) Value is the marginal benefit obtained and price is the dollars that must be paid.
C) Value refers to the gain the producer gets from the good or service and price refers to
the gain the consumer gets from the good or service.
D) Value refers to the dollars that must be paid and price refers to the cost of producing
the good.
E) They are the same and both mean the dollars that must be paid.
Answer: B
Topic: Value and price
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: TS
3) To an economist, "value" is the same as
A) marginal cost.
B) consumer surplus.
C) the minimum price that people are willing to pay for another unit of the good.
D) marginal benefit.
E) total surplus.
Answer: D
Topic: Value and price
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: CD
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4) A point on the demand curve shows the
A) minimum price that people are willing to pay for another unit of a good.
B) dollars' worth of other goods that people must sacrifice to consume another unit of the
good.
C) maximum price that people are willing to pay for another unit of a good.
D) consumer surplus a person gains from consuming a unit of a good.
E) marginal benefit minus the consumer surplus from consuming another unit of a good.
Answer: C
Topic: Demand curve and marginal benefit curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: CD
5) Which of the following is true regarding a demand curve?
i) The demand curve is also the marginal benefit curve.
ii) The demand curve shows the dollars' worth of other goods that people are willing to
forgo to consume another unit of the good.
iii) The demand curve shows the maximum price that people are willing to pay for another
unit of a good.
A) i and ii.
B) i and iii.
C) ii and iii.
D) i, ii, and iii.
E) i only.
Answer: D
Topic: Demand curve and marginal benefit curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: CD
6) A demand curve can be interpreted as
A) a marginal benefit curve.
B) a total benefit curve.
C) an average benefit curve.
D) a marginal cost curve.
E) None of the above answers is correct.
Answer: A
Topic: Demand curve and marginal benefit curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: TS
Chapter 6 Efficiency and Fairness of Markets
7) A demand curve shows the number of
A) people who are interested in buying the good at any given price.
B) dollars it takes to buy certain quantities of a good.
C) dollars people are willing to give up to get a certain unit of a good.
D) goods that will be produced at any given price.
E) producers who demand to sell the good or service.
Answer: C
Topic: Demand curve and marginal benefit curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: SB
8) What must be true for a consumer to buy a good or service?
A) The price must be equal to or less than the marginal benefit.
B) The total benefit received must equal the total spent to buy the good or service.
C) The consumer must be able to obtain some consumer surplus.
D) The consumer must not be able to produce the product.
E) The price must be equal to or greater than the marginal benefit.
Answer: A
Topic: Demand curve and marginal benefit curve
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: TS
9) A consumer's total benefit from consuming a good is equal to the
A) total expenditure on the good.
B) consumer surplus on the quantity purchased.
C) consumer surplus plus the total expenditure.
D) consumer surplus minus the total expenditure.
E) total expenditure on the good divided by the number of units purchased.
Answer: C
Topic: Total benefit
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: SB
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10) If Pat paid $10 for a bag of groceries and received $25 worth of consumer surplus, what is
the total marginal benefit that Pat obtained from the bag of groceries?
A) $10
B) $15
C) $25
D) $35
E) $5
Answer: D
Topic: Total benefit
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: TS
11) Samantha was willing to pay $10 for a hamburger because she was hungry but she only
paid $2.50. What is the marginal benefit Samantha gained from the hamburger?
A) $2.50
B) $7.50
C) $10.00
D) $12.50
E) None of the above answers is correct.
Answer: C
Topic: Total surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: TS
12) Consumer surplus is equal to
A) marginal benefit minus price.
B) price minus marginal benefit.
C) marginal benefit.
D) price.
E) marginal benefit plus price.
Answer: A
Topic: Consumer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: SB
Chapter 6 Efficiency and Fairness of Markets
13) Samantha was willing to pay $10 for a hamburger because she was hungry but she only
paid $2.50. What did Samantha realize from the hamburger?
A) a marginal benefit equal to $2.50
B) a marginal benefit equal to $10 minus $2.50
C) a marginal benefit of $2.50
D) consumer surplus equal to $10 minus $2.50
E) a marginal benefit equal to $10 plus $2.50
Answer: D
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: TS
14) The consumer acquires a consumer surplus on a good if the marginal benefit is
A) equal to the price.
B) greater than the price.
C) less than the price.
D) zero.
E) less than the marginal cost.
Answer: B
Topic: Consumer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: SB
15) Suppose Dan is willing to pay a maximum of $3,000 for a piano, but finds one he can buy
for $2,500. Dan's consumer surplus is
A) $5,500.
B) $3,000.
C) $2,500.
D) $500.
E) zero because he buys the piano.
Answer: D
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: SB
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16) Consumer surplus exists because
A) it costs less to produce goods than buyers must pay for them.
B) consumers value the good more highly than what they must pay to buy it.
C) taxes on goods are less than the appropriate amount.
D) the marginal benefit of the good is always equal to or less than the price of the good.
E) the price of the good is generally greater than the marginal cost of producing a unit of
the good.
Answer: B
Topic: Consumer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: TS
17) Which of the following is an example of consumer surplus?
A) Jose buys a hamburger for $2 and tells you he would not have paid a penny more.
B) John believes the price he paid for his computer was too high.
C) Mary buys a paper tablet for $2 and finds the same good at another store for $1.50.
D) Sue would have paid $15 for a new compact disc but paid only $10.
E) Anne finds a mountain bike for which she is willing to pay a maximum of $550 and the
price of the bike is $600.
Answer: D
Topic: Consumer surplus
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: TS
18) If you are willing to pay no more than $4 for a slice of pizza and the price of a slice of pizza
is $4, then
A) if you buy it, you would be cheated because you would realize no benefit from the
purchase.
B) you buy it but you get no marginal benefit from the purchase.
C) you will not buy it.
D) you buy it but you get no consumer surplus from the purchase.
E) you might buy it depending on how the slice's marginal benefit compares to its price.
Answer: D
Topic: Consumer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: TS
Chapter 6 Efficiency and Fairness of Markets
271
19) You pay $4 for every slice of pizza you buy. You buy three slices. Which of the following is
correct?
A) You must have received no consumer surplus from either the first or the second slice.
B) You received no benefit from the third slice.
C) The total benefit you receive is equal to what you paid.
D) You have probably received some consumer surplus.
E) You definitely received no consumer surplus on the third slice because that was the
last slice you purchased.
Answer: D
Topic: Consumer surplus
Skill: Level 4: Applying models
Objective: Checkpoint 6.2
Author: TS
20) In the summer of 2005, the price of gasoline increased greatly. Which of the following
occurred?
A) Drivers received no consumer surplus after the price increase.
B) Consumer surplus increased if drivers drove less.
C) Consumer surplus decreased.
D) If consumers drove the same amount, they received less total benefit.
E) Both the marginal benefit from each gallon of gasoline and the consumer surplus from
each gallon of gasoline decreased.
Answer: C
Topic: Consumer surplus
Skill: Level 4: Applying models
Objective: Checkpoint 6.2
Author: TS
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21) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's
consumer surplus from her 10th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) $1.50.
E) $2.50
Answer: B
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: CD
Chapter 6 Efficiency and Fairness of Markets
273
22) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's
consumer surplus from her 15th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) $1.50.
E) $2.50.
Answer: A
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: CD
23) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's
consumer surplus from all 15 sodas is
A) $15.00.
B) $22.50.
C) $11.25.
D) $8.00.
E) $1.50.
Answer: B
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: CD
24) The figure shows Diane's demand curve for soda. The price of a soda is $1.00. Diane's total
benefit from consuming 15 sodas is
A) $15.00.
B) $26.25.
C) $11.25.
D) $0.
E) None of the above answers is correct.
Answer: B
Topic: Total benefit
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: CD
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Bade/Parkin œ Foundations of Economics, Third Edition
25) In general, as the consumption of a good or service increases, the marginal benefit from
consuming that good or service
A) increases.
B) decreases.
C) stays the same.
D) at first increases and then decreases.
E) at first decreases and then increases.
Answer: B
Topic: Marginal benefit
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: STUDY GUIDE
26) Value is
A) the price we pay for a good.
B) the cost of resources used to produce a good.
C) objective so that it is determined by market forces, not preferences.
D) the marginal benefit we get from consuming another unit of a good or service.
E) the difference between the price paid for a good and the marginal cost of producing
that unit of the good.
Answer: D
Topic: Value and price
Skill: Level 2: Using definitions
Objective: Checkpoint 6.2
Author: STUDY GUIDE
27) A marginal benefit curve
A) is the same as a demand curve.
B) is the same as a supply curve.
C) slopes upwards.
D) is a vertical line at the efficient quantity.
E) is U-shaped.
Answer: A
Topic: Demand curve and marginal benefit curve
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: STUDY GUIDE
Chapter 6 Efficiency and Fairness of Markets
275
28) The difference between the marginal benefit from a new pair of shoes and the price of the
new pair of shoes is
A) the consumer surplus from that pair of shoes.
B) what we get.
C) what we have to pay.
D) the price when the marginal benefit is maximized.
E) the consumer's expenditure on the shoes.
Answer: A
Topic: Consumer surplus
Skill: Level 1: Definition
Objective: Checkpoint 6.2
Author: STUDY GUIDE
29) Suppose the price of a scooter is $200 and Cora Lee is willing to pay $250. Cora Lee's
A) consumer surplus from that scooter is $200.
B) consumer surplus from that scooter is $50.
C) marginal benefit from that scooter is $100.
D) consumer surplus from that scooter is $150.
E) consumer surplus from that scooter is $250.
Answer: B
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: STUDY GUIDE
30) If the price of a pizza is $13 per pizza, the consumer surplus from the first pizza consumed
____ the consumer surplus from the second pizza consumed.
A) is greater than
B) equals
C) is less than
D) cannot be compared to
E) None of the above answers is correct because more information is needed about the
marginal cost of producing the pizzas to answer the question.
Answer: A
Topic: Consumer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.2
Author: STUDY GUIDE
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6.3 Cost, Price, and Producer Surplus
1) The opportunity cost of producing one more unit of a good or service is the
A) marginal cost.
B) marginal benefit.
C) efficient level of production.
D) market outcome.
E) price of the good or service.
Answer: A
Topic: Marginal cost
Skill: Level 1: Definition
Objective: Checkpoint 6.3
Author: SB
2) Which of the following describes the economic meanings of cost and price?
A) Cost is exchange worth, and price is dollar worth.
B) Cost is what must be given up to produce a good, and price is what a seller receives
when the good is sold.
C) They are the same, and both mean what is received when a good is sold.
D) Cost refers to what the buyers pay for the good, and price refers to what sellers receive
when the good is sold.
E) Cost refers to the price that buyers must pay to buy the good.
Answer: B
Topic: Cost and price
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: TS
3) The supply curve of a good or service is the same as
A) the demand curve.
B) the marginal benefit curve.
C) the marginal cost curve.
D) the total surplus curve.
E) None of the above answers is correct.
Answer: C
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: TS
Chapter 6 Efficiency and Fairness of Markets
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4) Which of the following is a correct description of the supply curve?
i) The supply curve is also the marginal cost curve.
ii) The supply curve shows the dollars' worth of other goods that we must sacrifice to
produce another unit of a good.
iii) The supply curve shows the additional cost of producing another unit of a good.
A) i only
B) i and ii
C) ii and iii
D) i, ii, and iii
E) ii only.
Answer: D
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: CD
5) The supply curve shows the
A) marginal benefit of a firm producing another unit of a good.
B) dollars' worth of other goods and services we are willing to give up to get another unit
of the good.
C) minimum price that firms must receive to supply a certain quantity of a good.
D) the producer surplus of producing the good.
E) maximum price that firms will accept in order to supply a certain quantity of a good.
Answer: C
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: CD
6) A supply curve shows quantities supplied at various prices. It also shows the
A) total profit the firm earns at a given level of output.
B) marginal benefit of the good.
C) total cost of production.
D) marginal cost of production.
E) producer surplus, which is equal to the slope of the supply curve.
Answer: D
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: TS
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Bade/Parkin œ Foundations of Economics, Third Edition
7) A supply curve shows the marginal
A) benefit consumers receive from consuming a good.
B) profit businesses earn from selling a good.
C) cost of producing the good.
D) price paid for a good.
E) benefit sellers receive from selling a good.
Answer: C
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: SB
8) Producer surplus is the difference between the ____ summed over the quantity produced.
A) price of the good and the marginal cost of producing it
B) marginal benefit of the good and its marginal cost
C) marginal benefit of the good and its price
D) marginal cost of the good and the opportunity cost of producing it
E) None of the above answers is correct.
Answer: A
Topic: Producer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: SB
9) If the price is greater than the marginal cost of producing a good, the seller has
A) no benefit from the sale.
B) a loss.
C) some producer surplus from the sale.
D) some negative consumer surplus from the sale.
E) None of the above answers is correct.
Answer: C
Topic: Producer surplus
Skill: Level 1: Definition
Objective: Checkpoint 6.3
Author: TS
Chapter 6 Efficiency and Fairness of Markets
279
10) The producer surplus of making and selling 10 chairs is found by
A) multiplying the selling price by 10.
B) subtracting the marginal cost from the selling price for each chair and summing the
differences.
C) subtracting from the total revenue the cost of producing one chair multiplied by 10.
D) adding the marginal cost and the price of all 10 chairs.
E) None of the above answers is correct.
Answer: B
Topic: Producer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: TS
11) If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively,
and sells them for $80 each, what is the firm's total producer surplus?
A) $400
B) $225
C) $175
D) $150
E) $80
Answer: C
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: TS
12) Graphically, producer surplus is the area under the
A) demand curve and above the supply curve, up to the relevant quantity.
B) price and above the demand curve, up to the relevant quantity.
C) price and above the supply curve, up to the relevant quantity.
D) price and above the quantity axis, up to the relevant quantity.
E) demand curve and above the price, up to the relevant quantity.
Answer: C
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: SB
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13) ACME Doughnuts received $2,300 worth of producer surplus last month with total revenue
of $4,200. What is ACME's total cost of production?
A) $1,900
B) $2,300
C) $4,200
D) $7,500
E) $8,800
Answer: A
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: TS
Chapter 6 Efficiency and Fairness of Markets
14) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The
marginal cost of the 10,000th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) more than $0.50 and less than $1.00.
E) None of the above answers is correct.
Answer: B
Topic: Marginal cost
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: CD
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15) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The
marginal cost of the 20,000th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) more than $1.00.
E) None of the above answers is correct.
Answer: C
Topic: Marginal cost
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: CD
16) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The
____ price that must be offered so that the 10,000th soda is produced is ____.
A) minimum; $0.50
B) minimum; $1.00
C) maximum; $0.50
D) maximum; $1.00
E) minimum; more than $0.50 but less than $1.00
Answer: A
Topic: Marginal cost
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: CD
17) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The
producer surplus from the 10,000th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) more than $1.00.
E) None of the above answers is correct.
Answer: B
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: CD
Chapter 6 Efficiency and Fairness of Markets
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18) The figure above shows the supply curve for soda. The market price is $1.00 per soda. The
producer surplus from the 20,000th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) more than $1.00.
E) None of the above answers is correct.
Answer: A
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: CD
19) Cost
A) is what the buyer pays to get the good.
B) is always equal to the marginal benefit for every unit of a good produced.
C) is what the seller must give up to produce the good.
D) is greater than market price, which results in a profit for firms.
E) means the same thing as price.
Answer: C
Topic: Cost
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: STUDY GUIDE
20) If a firm is willing to supply the 1,000th unit of a product at a price of $23 or more, we know
that $23 is the
A) highest price the seller hopes to realize for this output.
B) minimum price the seller must receive to produce this unit.
C) average price of all the prices the seller could charge.
D) price that sets the marginal benefit equal to the marginal cost.
E) only price for which the seller is willing to sell this unit of the good.
Answer: B
Topic: Supply and marginal cost
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: STUDY GUIDE
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Bade/Parkin œ Foundations of Economics, Third Edition
21) A supply curve shows the ____ of producing one more unit of a good or service.
A) producer surplus
B) consumer surplus
C) total benefit
D) marginal cost
E) marginal benefit to the producer
Answer: D
Topic: Supply curve and marginal cost curve
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: STUDY GUIDE
22) Producer surplus is
A) equal to the marginal benefit from a good minus its price.
B) equal to the price of a good minus the marginal cost of producing it.
C) always equal to consumer surplus.
D) Both answers A and C are correct.
E) Both answers B and C are correct.
Answer: B
Topic: Producer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: STUDY GUIDE
23) Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an
hour. What is your producer surplus?
A) $5 an hour
B) $10 an hour
C) $15 an hour
D) $25 an hour
E) More than $25 an hour.
Answer: A
Topic: Producer surplus
Skill: Level 3: Using models
Objective: Checkpoint 6.3
Author: STUDY GUIDE
Chapter 6 Efficiency and Fairness of Markets
24) In a figure that shows a supply curve and a demand curve, producer surplus is the area
A) below the demand curve and above the market price.
B) below the supply curve and above the market price.
C) above the demand curve and below the market price.
D) above the supply curve and below the market price.
E) between the demand curve and the supply curve.
Answer: D
Topic: Producer surplus
Skill: Level 2: Using definitions
Objective: Checkpoint 6.3
Author: STUDY GUIDE
6.4 Are Markets Efficient?
1) Efficiency in markets is found at the point where
A) marginal cost is smallest.
B) marginal benefit is largest.
C) total benefit equals total cost.
D) marginal benefit equals marginal cost.
E) marginal benefit exceeds marginal cost by the maximum amount possible.
Answer: D
Topic: Market efficiency
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: TS
2) Efficiency in a market occurs when the production of the good is such that
A) marginal benefit exceeds marginal cost.
B) marginal benefit equals marginal cost.
C) marginal benefit is lower than marginal cost.
D) the marginal cost stops increasing.
E) marginal benefit exceeds marginal cost by the maximum amount possible.
Answer: B
Topic: Market efficiency
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: MR
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3) If the market for bicycles is efficient, then
A) no more bicycles can be produced.
B) marginal benefit exceeds marginal cost.
C) consumer surplus must be greater than producer surplus.
D) it is not possible to produce more bicycles without sacrificing another, more highly
valued good.
E) consumer surplus must equal producer surplus.
Answer: D
Topic: Market efficiency
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: CD
4) If the marginal benefit of a hot dog is greater than its marginal cost, then to increase
efficiency,
A) more hot dogs should be produced.
B) fewer hot dogs should be produced.
C) nothing should be done if the marginal benefit is greater than the marginal cost by the
maximum amount because in this case the efficient quantity of hot dogs is being
produced.
D) production should be halted.
E) More information is needed about the price of a hot dog in order to determine if
production should be increased, decreased, or not changed.
Answer: A
Topic: Market efficiency
Skill: Level 3: Using models
Objective: Checkpoint 6.4
Author: SB
Chapter 6 Efficiency and Fairness of Markets
5) The figure above shows the marginal benefit and marginal cost curves for pizza. In the
figure, for which of the following quantities is the marginal benefit greater than the
marginal cost?
A) the 10,000th pizza.
B) the 20,000th pizza.
C) the 30,000th pizza.
D) All of these quantities has a marginal benefit greater than its marginal cost.
E) None of these quantities has a marginal benefit greater than its marginal cost.
Answer: A
Topic: Market efficiency
Skill: Level 3: Using models
Objective: Checkpoint 6.4
Author: SB
287
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6) The figure above shows the marginal benefit and marginal cost curves for pizza. In the
figure, what is the efficient quantity of pizza?
A) 0 pizzas
B) 10,000 pizzas
C) 20,000 pizzas
D) 30,000 pizzas
E) The efficient quantity cannot be determine without more information.
Answer: C
Topic: Market efficiency
Skill: Level 3: Using models
Objective: Checkpoint 6.4
Author: SB
7) At a competitive equilibrium, if there are no taxes, subsidies, price regulations, quantity
regulations, or externalities
A) the marginal benefit is greater than the marginal cost.
B) resource use is efficient.
C) the marginal benefit is less than the marginal cost.
D) both the marginal benefit and the marginal cost of the last unit produced equal zero.
E) the marginal benefit is greater than the marginal cost by as much as possible.
Answer: B
Topic: Market efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: SB
Chapter 6 Efficiency and Fairness of Markets
8) At a competitive market equilibrium, if there are no taxes, subsidies, price regulations,
quantity regulations, or externalities
i) consumer surplus is maximized.
ii) marginal cost equals marginal benefit.
iii) resources are efficiently used.
iv) producer surplus is maximized.
A) ii and iii.
B) i and ii.
C) i and iv.
D) i, ii, iii, and iv.
E) ii only.
Answer: A
Topic: Market efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: CD
9) Which of the following occurs when a market is efficient?
A) Consumer surplus equals producer surplus.
B) Consumer surplus is as large as possible.
C) Producer surplus is as large as possible.
D) The sum of consumer surplus and producer surplus is maximized.
E) The marginal benefit exceeds the marginal cost by as much as possible.
Answer: D
Topic: Market efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: TS
10) What did Adam Smith identify as the source of the invisible hand in 1776?
A) a benevolent central government that decided was best for everyone
B) an individual's concern for fellow humans
C) an individual's own self-interest
D) the stock market
E) buyers' and suppliers' concerns to obtain and retain good reputations .
Answer: C
Topic: Invisible hand
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: TS
289
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11) The "invisible hand" refers to the notion that
A) competitive markets send resources to their highest valued uses.
B) government intervention is necessary to ensure efficiency.
C) marginal benefit decreases as more is consumed.
D) marginal cost increases as more is produced.
E) no matter what allocation method is used, the resulting production is efficient.
Answer: A
Topic: Invisible hand
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: SB
12) The efficiency of competitive markets happens because
A) of the benevolence of the butcher, the brewer, and the baker.
B) people make environmentally aware purchasing decisions.
C) prices adjust to make buying plans and selling plans compatible.
D) government organizes and monitors production.
E) the U.S. economy uses a command system to allocate resources within the competitive
markets.
Answer: C
Topic: Invisible hand
Skill: Level 4: Applying models
Objective: Checkpoint 6.4
Author: SB
13) When technology increases the supply of a good and lower prices increase the quantity
demanded,
A) the economy is reallocating resources to achieve an efficient allocation.
B) consumer surplus falls.
C) the invisible hand is unnecessary.
D) the marginal benefit of the good increases with the quantity produced.
E) the economy is no longer efficient because the quantity changes.
Answer: A
Topic: Invisible hand
Skill: Level 4: Applying models
Objective: Checkpoint 6.4
Author: SB
Chapter 6 Efficiency and Fairness of Markets
14) When output is less than the efficient level,
A) consumers are willing to pay more for another unit than it costs to produce the unit.
B) the amount consumers are willing to pay equals the cost of production.
C) the cost of production is greater than the price consumers are willing to pay.
D) the production costs can't be measured.
E) the marginal cost of producing the good must be greater than the marginal benefit
from the good.
Answer: A
Topic: Underproduction
Skill: Level 3: Using models
Objective: Checkpoint 6.4
Author: SB
15) When there is underproduction, so that a market produces less than the efficient amount,
A) consumer surplus definitely is larger than when the efficient quantity is produced.
B) the sum of producer surplus and consumer surplus is larger than when the efficient
quantity is produced.
C) there is a deadweight loss.
D) consumers definitely lose and producers definitely gain.
E) consumers definitely gain and producers definitely lose.
Answer: C
Topic: Underproduction
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: MR
16) Overproduction results in
A) external costs.
B) external benefits.
C) deadweight loss.
D) super-efficiency.
E) the marginal benefit of the last unit produced being larger than the marginal cost.
Answer: C
Topic: Overproduction
Skill: Level 3: Using models
Objective: Checkpoint 6.4
Author: SB
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17) What do economists call the loss society experiences when the production of a good is less
than the efficient amount?
A) tax
B) subsidy
C) price floor
D) deadweight loss
E) quantity restriction.
Answer: D
Topic: Deadweight loss
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: SB
18) Which of the following leads to a deadweight loss?
i) overproduction
ii) underproduction
iii) taxes
iv) monopoly
A) ii only.
B) iii and iv.
C) i and ii.
D) i, ii, iii, and iv.
E) i, ii, and iii.
Answer: D
Topic: Obstacles to efficiency
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: CD
19) Which of the following government policies ensures market efficiency?
A) subsidy
B) tax
C) price regulations
D) quantity regulations
E) None of the above answers is correct.
Answer: E
Topic: Obstacles to efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: SB
Chapter 6 Efficiency and Fairness of Markets
20) If the government imposes a tax on a competitive market with no externalities, then
i. resource use is not efficient.
ii. there is a deadweight loss.
iii. consumer surplus is at its maximum.
A) ii only.
B) i and ii.
C) iii only.
D) i and iii.
E) i, ii, and iii.
Answer: B
Topic: Tax
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: CD
21) What is the impact of a government subsidy to producers?
A) less is produced relative to the efficient level creating a deadweight loss
B) more is produced relative to the efficient level creating a deadweight loss
C) producer surplus is increased, which creates a larger consumer surplus
D) producers are able to sell the product at a higher price
E) consumers must pay a higher price for the good.
Answer: B
Topic: Subsidy
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: TS
22) Subsidies ____ the price paid by the buyer and ____ the price received by the seller.
A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease
E) do not change; increase
Answer: C
Topic: Subsidy
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: SB
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23) When there is a cost or benefit that affects someone other than the seller and buyer, then
there is
A) a tax.
B) a subsidy.
C) a quantity regulation.
D) a price regulation.
E) an externality.
Answer: E
Topic: Externalities
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: SB
24) Air pollution is an external cost because it
A) is a pollution of the external environment.
B) is a cost not borne by the producer of the good.
C) benefits no one.
D) is not associated with resource use.
E) is created only when production occurs.
Answer: B
Topic: External cost
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: SB
25) A public good
A) is a good that is usually consumed in public, such as a restaurant meal.
B) is a good that can be consumed simultaneously by everyone.
C) is a good produced by government.
D) results in an efficient allocation of resources.
E) is a good for which people are willing to pay a very high price for it.
Answer: B
Topic: Public good
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: SB
Chapter 6 Efficiency and Fairness of Markets
26) Which of the following occurs when a market is efficient?
A) Producers earn the highest income possible.
B) Production costs equal total benefit.
C) Consumer surplus equals producer surplus.
D) Scarce resources are used to produce the goods and services that people value most
highly.
E) Every consumer has all of the good or service he or she wants.
Answer: D
Topic: Market efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: STUDY GUIDE
27) When a market is efficient the
A) sum of consumer surplus and producer surplus is maximized.
B) deadweight gain is maximized.
C) quantity produced is maximized.
D) marginal benefit of the last unit produced exceeds the marginal cost by as much as
possible.
E) total benefit equals the total cost.
Answer: A
Topic: Market efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: STUDY GUIDE
28) The concept of "the invisible hand" suggests that markets
A) do not produce the efficient quantity.
B) are always fair.
C) produce the efficient quantity.
D) are unfair.
E) allocate resources unfairly and inefficiently.
Answer: C
Topic: Invisible hand
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: STUDY GUIDE
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29) Which of the following can result in a market producing an inefficient quantity of a good?
i. competition
ii. an external cost or an external benefit
iii. a tax
A) i only
B) iii only.
C) ii only.
D) ii and iii.
E) i and iii.
Answer: D
Topic: Obstacles to efficiency
Skill: Level 1: Definition
Objective: Checkpoint 6.4
Author: STUDY GUIDE
30) When underproduction occurs,
A) producers gain more surplus at the expense of consumers.
B) marginal cost is greater than marginal benefit.
C) consumer surplus increases to a harmful amount.
D) there is a deadweight loss that is borne by the entire society.
E) the deadweight loss harms only consumers.
Answer: D
Topic: Underproduction
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: STUDY GUIDE
31) When production moves from the efficient quantity to a point of overproduction,
A) consumer surplus definitely increases.
B) the sum of producer surplus and consumer surplus increases.
C) there is a deadweight loss.
D) consumers definitely lose and producers definitely gain.
E) consumers definitely gain and producers definitely lose.
Answer: C
Topic: Deadweight loss
Skill: Level 2: Using definitions
Objective: Checkpoint 6.4
Author: STUDY GUIDE
Chapter 6 Efficiency and Fairness of Markets
6.5 Are Markets Fair?
1) People who agree with utilitarianism principles believe that
A) everyone should try to maximize personal utility.
B) unequal incomes are justified if wealthier people provide utility to poor people.
C) only certain groups in society deserve to be happy.
D) equal incomes will achieve the greatest happiness for the greatest number.
E) equalizing incomes is not fair if it requires taxes.
Answer: D
Topic: Utilitarianism
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
2) A modified version of utilitarianism proposed by John Rawls argues for
A) the idea that an equal distribution of income is the fairest, most efficient one.
B) the idea that a fair distribution of income is one in which the rules of earning income
are equal for all.
C) income to be redistributed to make the poorest person's share as large as possible.
D) no need to redistribute income if the economic pie is as large as possible.
E) using first-come, first-served as the fairest method of allocating resources.
Answer: C
Topic: Utilitarianism
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
3) Utilitarianism is about
A) efficient resource use.
B) having an equal income distribution.
C) fair rules.
D) the command system of allocating resources.
E) the big tradeoff.
Answer: B
Topic: Utilitarianism
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: SB
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4) Utilitarianism states that
A) a society should make the maximum number of people the happiest they can be.
B) only goods that provide utility should be produced.
C) income transfers should be ignored.
D) there is a tradeoff between efficiency and fairness.
E) only the "fair rules" approach to fairness is correct.
Answer: A
Topic: Utilitarianism
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: CD
5) The "big tradeoff" considers
A) the benefit of achieving "the greatest happiness for the greatest number."
B) whether the rules or the results are fair.
C) the cost of using market prices to allocate resources.
D) the cost of making income transfers when comparing efficiency to fairness.
E) the cost of using majority rule to allocate resources.
Answer: D
Topic: Big tradeoff
Skill: Level 1: Definition
Objective: Checkpoint 6.5
Author: CD
6) Which of the following is part of the cost of income transfers?
A) Tax-collecting agencies cost money to administer.
B) Taxing incomes encourages people to work harder.
C) Income transfers make the results more unfair.
D) Income transfers increase the size of the economic pie.
E) Income transfers are a similar to allocating resources using a lottery.
Answer: A
Topic: Big tradeoff
Skill: Level 3: Using models
Objective: Checkpoint 6.5
Author: SB
Chapter 6 Efficiency and Fairness of Markets
299
7) As pointed out by the "big tradeoff," government action that redistributes incomes so that
everyone has the same income leads to
A) fairness according to the "fair rules" approach.
B) efficient markets.
C) resources being allocated according to a command system.
D) a smaller total output
E) lower taxes on the rich than on the poor so that the rich do not lose their incentive to
work.
Answer: D
Topic: Big tradeoff
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
8) Why does redistribution, so that the distribution of income is equal, bring about less total
output?
A) Incentives to work are reduced.
B) No one can determine marginal benefit or marginal cost as a result.
C) Those in political power will likely receive a larger income.
D) Because the marginal benefit and marginal cost of work have been equally increased.
E) The premise of the question is incorrect because an equal distribution of income would
increase rather than decrease the total amount produced.
Answer: A
Topic: Big tradeoff
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
9) The "big tradeoff" refers to
A) producing capital goods instead of consumable goods.
B) marginal benefit versus marginal cost.
C) efficiency and fairness.
D) taking an economics course instead of some other course.
E) using market prices rather than a command system to allocate resources.
Answer: C
Topic: Big tradeoff
Skill: Level 1: Definition
Objective: Checkpoint 6.5
Author: TS
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10) Redistributing income from the rich to the poor creates inefficiency because of
A) wasteful expenditures by people receiving welfare grants.
B) administrative costs to operate the government redistribution agencies.
C) the incentive to produce more output is decreased.
D) Both answers B and C are correct.
E) Both answers A and C are correct.
Answer: D
Topic: Big tradeoff
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
11) What was John Rawls' proposal in his book entitled A Theory of Justice?
A) Rich people should not be taxed.
B) A good goal for society is to attempt to make the poorest as well off as possible.
C) Unfairness results from the rules of a game.
D) Efficient resource use is the only thing that matters.
E) Governments must use a command system to allocate resources.
Answer: B
Topic: John Rawls
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: SB
12) The "equality of opportunity" idea of fairness claims
A) a society should make the poorest as well off as possible.
B) the results and the rules should both be fair.
C) it's not fair if the rules aren't fair.
D) private property can be transferred under government order.
E) only a first-come, first-served system of allocating resources is fair.
Answer: C
Topic: Fair rules
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: CD
Chapter 6 Efficiency and Fairness of Markets
301
13) Assume the Nozick rules are being followed in the economy so that the distribution of
income is fair. What must be true for this to create an efficient allocation of resources?
A) All people are earning equal incomes.
B) There are no public goods, monopolies, high transactions costs, or external costs and
benefits.
C) The costs of administering redistribution equals the benefits the poor receive.
D) The government must redistribute income in a fashion that minimizes the "big
tradeoff."
E) The government must allocate resources using a command mechanism.
Answer: B
Topic: Fair rules
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
14) In December 2004, Arkansas had a severe ice storm that caused electrical blackouts. The
Fictitious Portable Generator firm of Little Rock had several portable generators that could
be used by homeowners to provide electricity. Which of the following would be the
fair-rules way to provide them?
A) The government confiscates the generators owned by Fictitious and distributes them.
B) Fictitious is forced by the state to rent the generators at half the normal rate.
C) The state sets up a lottery to determine who rents the available generators at the
normal rate.
D) Fictitious rents generators at the equilibrium market price.
E) Fictitious follows government commands about who gets to use the generators.
Answer: D
Topic: Fairness in natural disasters
Skill: Level 4: Applying models
Objective: Checkpoint 6.5
Author: TS
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15) Which of the following is true for taxes? They are
A) always administered fairly.
B) a necessary part of living in an economy with a fair distribution of income.
C) always administered without creating unfairness or inefficiency.
D) an involuntary transfer of private property.
E) do not create a big tradeoff problem.
Answer: D
Topic: Fairness in natural disasters
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: TS
16) If the government takes over the distribution of some scarce good in a time of a natural
disaster and provides the good at no charge to users, what must also be done?
A) the government must produce the good itself
B) some rationing mechanism must be set up to determine who gets the good
C) everyone hurt in the natural disaster must get one of the goods
D) nothing
E) because we live in a democracy, the government must use majority rule as the
rationing mechanism
Answer: B
Topic: Fairness in natural disasters
Skill: Level 3: Using models
Objective: Checkpoint 6.5
Author: TS
17) The idea that unequal incomes is unfair generally uses the ____ principle of fairness.
A) big tradeoff
B) involuntary exchange
C) voluntary exchange
D) it's not fair if the result isn't fair
E) it's not fair if the rules aren't fair
Answer: D
Topic: Fair results
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: STUDY GUIDE
Chapter 6 Efficiency and Fairness of Markets
18) The principle that states that we should strive to achieve "the greatest happiness for the
greatest number" is
A) equity.
B) fairness.
C) market equilibrium.
D) utilitarianism.
E) the big tradeoff.
Answer: D
Topic: Utilitarianism
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: STUDY GUIDE
19) Which of the following is an example in which "the big tradeoff" can occur?
A) the government redistributes income from the rich to the poor
B) Ford increases the price of a pickup truck
C) a basketball player signs a $5 million contract
D) a college lowers tuition
E) the price of personal computers falls year after year
Answer: A
Topic: The big tradeoff
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: STUDY GUIDE
20) The "fair rules" approach to fairness is based on
A) income transfers from the rich to the poor.
B) property rights and voluntary exchange.
C) utilitarianism.
D) the big tradeoff.
E) allocating resources using majority rule.
Answer: B
Topic: Fair rules
Skill: Level 2: Using definitions
Objective: Checkpoint 6.5
Author: STUDY GUIDE
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21) An unequal distribution of income is considered fair according to Robert Nozick if
A) marginal cost equals marginal benefit.
B) the cost of administering a welfare system is minimized.
C) property rights are enforced and voluntary exchange occurs.
D) the economy is producing its maximum total output.
E) resources are allocated using the command method.
Answer: C
Topic: Fair rules
Skill: Level 3: Using models
Objective: Checkpoint 6.5
Author: STUDY GUIDE
22) Suppose a hurricane is poised to strike Miami and the price of plywood jumps from $15 a
board to $28. If the government buys all of the plywood at $28 and offers it to consumers for
$15, which of the following is true?
A) There will be enough plywood for everyone at the $15 government price.
B) There will be a surplus of plywood at the $15 government price.
C) Some people who buy plywood at the $15 government price will resell the plywood to
consumers who are willing to pay $28, earning a producer surplus of $13.
D) Because the government is both buying and selling the plywood, there is no need to
impose a tax to pay for the government intervention.
E) The big tradeoff means that more plywood will be purchased with the government
intervention than would be the case without the government intervention.
Answer: C
Topic: Fairness in natural disasters
Skill: Level 4: Applying models
Objective: Checkpoint 6.5
Author: STUDY GUIDE