Chapter 13 Efficiency, Equity and the Role of Government (I)

1. When the allocation of resources is efficient, this implies that

(1) total social surplus is maximised.

(2) consumer surplus equals producer surplus.

(3) the resources are allocated to the consumers who value them most.

(4) marginal social benefit equals marginal social cost.

• A. (1) and (3) only

• B. (2) and (4) only

• C. (1), (3) and (4) only

• D. (2), (3) and (4) only

2. The following table shows the total cost schedule of a price-taking firm. There is a fixed cost of $5.

Suppose the market price is $16. The firm’s profit-maximising output level is ____________ and the firm’s producer surplus is ______________.

• A. 2 units … $7

• B. 2 units … $12

• C. 4 units … $7

• D. 4 units … $12

3. The following diagram shows the market demand and market supply curves for good X in a perfectly competitive market.

Suppose a harmful substance was found in good X, leading to a shift in the demand curve for good X from D₀ to D₁. Which of the following must be the results?

(1) The quantity transacted of good X decreases.

(2) The consumer surplus increases.

(3) The producer surplus decreases.

• A. (1) and (2) only

• B. (1) and (3) only

• C. (2) and (3) only

• D. (1), (2) and (3)

4. Thanks to warming seas, there was a good harvest of Boston lobsters. Suppose the demand for Boston lobsters remained unchanged. Which of the following statements about the good harvest are CORRECT?

(1) The supply of Boston lobsters increased.

(2) The price of Boston lobsters increased.

(3) The consumer surplus for people buying Boston lobsters increased.

(4) The quantity transacted of Boston lobsters increased.

• A. (1) and (4) only

• B. (1), (2) and (3) only

• C. (1), (3) and (4) only

• D. (2), (3) and (4) only

5. In a market economy, price signals

(1) guide consumption and production decisions.

(2) coordinate allocation of resources in the economy.

(3) help allocate goods to the highest-valued users.

• A. (1) and (2) only

• B. (1) and (3) only

• C. (2) and (3) only

• D. (1), (2) and (3)

6. Which of the following cases illustrate(s) the allocative function of price?

(1) A seller rented a Lunar New Year Fair stall at an auction at a price 50% higher than the opening bid.

(2) As the price of beef rises, many pig farms turn to raising cows.

(3) As the demand for print newspapers falls, some newspaper publishers switch to publishing online newspapers.

• A. (1) only

• B. (1) and (2) only

• C. (2) and (3) only

• D. (1), (2) and (3)

7. Suppose the market equilibrium output level is below the efficient output level. Which of the following statements is CORRECT?

• A. At the market equilibrium output level, the marginal benefit is smaller than the marginal cost.

• B. Deadweight loss will decrease if output is raised towards the efficient output level.

• C. At the market equilibrium output level, total social surplus is maximised.

• D. The market can achieve efficiency only through government intervention.

8. The diagram below shows the demand for and the supply of a good in a perfectly competitive market.

Suppose the government sets a price ceiling of P_c on the good. Which of the following is the result of setting the price ceiling?

• A. The total social surplus is equal to area acg.

• B. The consumer surplus is equal to area abfP_c.

• C. The producer surplus is equal to area P₀cg.

• D. The deadweight loss is equal to area ecf.

9. Suppose the supply curve of rental flats is upward sloping and the government raises the effective rent control on rental flats. Meanwhile, property owners prefer selling instead of renting out their flats. The producer surplus in the rental flats market ________________________.

• A. will increase

• B. will decrease

• C. will remain unchanged

• D. may increase or decrease

10. Suppose good X and good Y are substitutes and their supply curves are upward sloping. If the government imposes an effective price floor on good X,

(1) the total social surplus in the market of good X will decrease.

(2) the producer surplus in the market of good X may increase or decrease.

(3) the producer surplus in the market of good Y will increase.

• A. (1) and (2) only

• B. (1) and (3) only

• C. (2) and (3) only

• D. (1), (2) and (3)