- A government-set price floor on a product
B. will drive resources away from the production of the product.
C. will attract more resources towards the production of the product.
D. does not interfere with the rationing function of price in a market system.
F. is intended to benefit the buyers of the product.
- Graphically, producer surplus is measured as the area
A. above the supply curve and above the actual price.
B. above the supply curve and below the actual price
C. under the demand curve and below the actual price.
D. under the demand curve and above the actual price.
- When supply shifts from S to S1, consumer surplus
A. increases or decreases
B. decreases
C. stays the same
- Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Tony experiences a
A. producer surplus of $200 and Tony experiences a consumer surplus of $10.
B. consumer surplus of $670 and Tony experiences a producer surplus of $200.
C. consumer surplus of $10 and Tony experiences a producer surplus of $190.
D. producer surplus of $10 and Tony experiences a consumer surplus of $190.
- If the price-elasticity coefficient for a good is -.75, the demand for that good is described as
A. elastic.
B. inferior.
C. inelastic.
D. normal.
The correct answer and explanation is:
Correct Answers:
- C. Will attract more resources towards the production of the product.
- B. Above the supply curve and below the actual price.
- B. Decreases.
- C. Consumer surplus of $10 and Tony experiences a producer surplus of $190.
- C. Inelastic.
Explanations:
- Price Floor and Resource Allocation:
A price floor is a minimum price set by the government above the equilibrium price. It is typically used to benefit producers, such as minimum wage laws. When the price is artificially set higher, producers are incentivized to produce more because of the potential for higher revenue. Thus, resources are attracted to the production of the product. However, this can lead to surpluses, as consumers may not buy as much at the higher price. - Producer Surplus on a Graph:
Producer surplus is the difference between the price producers are willing to accept and the actual price they receive. On a graph, this area lies above the supply curve (representing producers’ minimum acceptable prices) and below the market price. It is a measure of the benefit producers gain from participating in the market. - Consumer Surplus and Supply Shift:
When supply shifts from S to S1, it typically means supply has decreased, leading to higher prices and reduced quantity. Consumer surplus, the benefit consumers receive from paying less than their maximum willingness to pay, decreases because higher prices reduce both the quantity bought and the surplus on each unit. - Surpluses in Ruby Transaction:
Consumer surplus is the difference between what Amanda was willing to pay ($340) and what she paid ($330), equaling $10. Producer surplus is the difference between the actual price ($330) and the minimum price Tony would accept ($140), equaling $190. This transaction creates value for both Amanda and Tony. - Price Elasticity and Inelastic Demand:
A price-elasticity coefficient of -0.75 means a 1% increase in price leads to a 0.75% decrease in quantity demanded. Since the absolute value is less than 1, the demand is inelastic, meaning consumers are relatively unresponsive to price changes. Inelastic demand is common for necessities or goods with few substitutes.