Question

27. Suppose that Samantha purchases one pound of chicken, which is worth $5 to her, costs $4 to produce, and imposes $2 in environmental damages on people who live near the chicken farm. This purchase...

a) raises social welfare by $5.

b) raises social welfare by $3.

c) raises social welfare by $1.

d) reduces social welfare by $1.

e) reduces social welfare by $6.

market demand curve does not illustrate...

a. at what price consumers would purchase a given quantity of the good.

b. the quantity of the good that will be demanded at a particular price.

c. the price and quantity of the good that maximize the net benefits to society.

d. the marginal benefits of a good, measured in monetary units.

e. individuals’ willingness to pay for a good.

Suppose that an ice cream parlor raises the price of an ice cream cone from $3 to $4, and that the parlor sells five fewer cones each day. Which of the following statements is false?

a. The demand for ice cream cones is downward sloping.

b. Consumer surplus from ice cream cones has decreased.

c. Part of the area of consumer surplus becomes part of the area of producer surplus.

d. Some people’s willingness-to-pay for a cone is greater than $3 but less than $4.

e. Ice cream cones provide declining marginal benefits.

Which of the following statements is false in the welfare analysis model presented in Chapter 5?

a. The intersection of the supply and demand curves provides the price and quantity that can theoretically maximize the net benefits in a market.

b. The demand curve represents the marginal benefits of a good or service.

c. The net benefits in a market are equal to the sum of the consumer surplus and the producer surplus.

d. The net benefits in a market are equal to the total benefits minus the total costs.

e. Social welfare analysis focuses on the fairness of the distribution of benefits in a market.

Answer 1

27. Given, margiinal private cost, MPC = 4, marginal benefit to Samantha = $5 and marginal damages to society = $2

Thus, marginal social cost = MPC + MD = $6

Clearly, since MSC>MPC, there is a total welfare loss of $1 to the society

[There is gain of $1 in terms of profit, and a loss of $2 in terms of societal damage]

Ans. (d)

28. The market demand curve illustrates all the combinations of price and quantity in a particular market. It is normally downward sloping, depicting the law of demand.

However, it does not illustrate the marginal benefits of a good, measured in monetary units.

Ans. (d)

29. Given, increase in price = 1 and fall in quantity = 5 units

Thus, from the given options, it depicts all but that some people’s willingness-to-pay for a cone is greater than $3 but less than $4.

Ans, (d)

30. Of the given options, (d) The net benefits in a market are equal to the total benefits minus the total costs is not correct. This is because this gives the total benefit/profit and not the net benefit.

Ans. (d)