AP Micro Consumer and Producer Surplus Practice

The difference between the price a consumer would be willing to pay for a cone of ice cream and the actual market price that she pays gives a measure of her

• consumer surplus

• producer surplus

• marginal utility

• marginal cost

• ability to pay

• UVZ

• WYZ

• RVUT

• XVZY

• 0YZS

The graph above shows the market demand for good X. A movement from point A to point B would most likely be caused by

• an increase in the price of good Z, a substitute

• an increase in consumers' income

• a decrease in consumers' income

• a decrease in production costs for good X

• a decrease in the supply of good X

Which of the following is most likely to occur when a competitive market adjusts from one equilibrium to another?

• A decrease in demand will cause the equilibrium price, equilibrium quantity, and total surplus to increase.

• An increase in demand will cause the equilibrium price, equilibrium quantity, and producer surplus to increase.

• A decrease in supply will cause the equilibrium price to decrease, the equilibrium quantity to increase, and consumer surplus to decrease.

• An increase in supply will cause the equilibrium price to increase, the equilibrium quantity to decrease, and consumer surplus to increase.

• A decrease in supply and increase in demand will cause the equilibrium quantity to decrease but the equilibrium price to be indeterminate.

Answer explanation

An increase in demand shifts the demand curve to the right. A rightward shift in the demand curve results in an increase in the equilibrium price and the equilibrium quantity, which causes producer surplus (the triangle below the equilibrium price and above the supply curve) to increase.

Assume that the market demand for a good is perfectly inelastic, the market supply for the good is perfectly elastic, and the market is in equilibrium. If there is a decrease in the price of a key input used in the production of the good, which of the following will occur?

• There will be a decrease in the equilibrium quantity.

• There will be no change in the producer surplus.

• There will be a decrease in the producer surplus.

• There will be a decrease in the consumer surplus.

• There will be an increase in the equilibrium price.

Answer explanation

With a perfectly elastic (horizontal) supply curve, there is no producer surplus.

Based on the graph, the consumer surplus at the market equilibrium price and quantity is shown by which area?

• GMK

• GMN

• ZMN

• MNK

• GZN

Answer explanation

Consumer surplus is the difference between the maximum price consumers are willing to pay for a unit of a product (as depicted by the demand curve) and the actual price they do pay. At equilibrium, the consumer surplus is measured by the area of the triangle under the demand curve but above the equilibrium price for the quantities between zero and equilibrium quantity, Q

R

QR. It is represented by the area ZMN

ZMN.

In the absence of market failures, a perfectly competitive market equilibrium is efficient for which of the following reasons?

• Consumer surplus is maximized and consumers are better off relative to producers.

• Producer surplus is maximized and producers are better off relative to consumers.

• Total economic surplus is maximized and all mutually beneficial transactions are exhausted.

• Total economic surplus is distributed equally between producers and consumers.

• The quantity of output is produced at a constant cost so that every consumer pays the same price.

Answer explanation

The competitive market in equilibrium is efficient because it maximizes the sum of consumer surplus and producer surplus. Perfectly competitive markets in equilibrium ensure that all mutually beneficial transactions are exhausted; that is, all opportunities to make some people better off without making other people worse off have been satisfied.

Assume the market for a good is in equilibrium. An increase in the market supply of the good will result in

• a shortage at the original price of the good, which causes the market price to decrease

• a shortage at the original price of the good, which causes the market price to increase

• a surplus at the original price of the good, which causes the market price to decrease

• a surplus at the original price of the good, which causes the market price to increase

• neither a surplus nor a shortage

Answer explanation

An increase in supply will create a surplus at the original price, because quantity supplied will exceed quantity demanded at the original price, resulting in a downward pressure on prices, which causes the market price to decrease.

Assume the government imposes a price floor above the current equilibrium price in the market for a good. Which of the following will occur?

• Since the price floor is set above the equilibrium price, nothing will change because the price floor is not binding.

• There will be a shortage of the good.

• Compared to the equilibrium price, there will be an increase in the quantity exchanged.

• There will be an excess supply of the good.

• At the quantity sold, the marginal cost of production will exceed the marginal benefit to consumers.

Answer explanation

A price floor (or minimum price) above the equilibrium price will be binding. There will be a decrease in the quantity demanded and an increase in the quantity supplied, creating a surplus or an excess supply of the good.