Question

Suppose that the equilibrium wage in the labor market is $8.00 per hour of labor. If a law increased the minimum wage from $7.25 to $10.00 per hour of labor, then
A. both consumer surplus and producer surplus increase since the new price is higher.
B. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus.
C. the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.
D. any possible increase in producer surplus would be larger than the loss of consumer surplus.
E. any possible increase in producer surplus would be smaller than the loss of consumer surplus.

Efficiency in a market is achieved when
A. all firms are producing the good at the same low cost per unit.
B. the sum of producer surplus and consumer surplus is maximized.
C. no buyer is willing to pay more than the equilibrium price for any unit of the good.
D. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs.
E. B and C, only.

According to the textbook, which of the following statements is (are) correct?
(x) Moving production from a high-cost producer to a low-cost producer will increase total surplus.
(y) Inefficiency of resource allocation occurs if a good is not being produced by sellers with the lowest cost.
(z) Inefficiency can be caused in a market by the presence of externalities or market power.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

A.When there is an increase in the minimum wage the consumer and producer surplus both will increase and the prices will be high. It is because workers will be able to spend more and this will improve the labor market conditions. This leads to an increase in the social welfare. So the correct option is A.

B.Efficiency in the market is achieved when the sun of the consumer and producer surplus is maximized. At the efficient level it is not possible to produce producer surplus by reducing consumer surplus and vice versa. This means that both the producer and consumer surplus is maximized. Thus option B is the correct answer.

C.According to the text book x and z are correct. When the production is moved from a high cost producer to a low cost producer it leads to an increase in the total surplus. Also when there are externalities or market power there is inefficiency. Inefficiency leads to market failure. Thus the option C is correct.