Question

1)

When a market is missing:

• consumers' willingness to pay is too low to sustain the efficient quantity.

• the government must create the market artificially.

• there is the potential for total surplus to increase through the creation of a new market.

• deadweight loss would increase, but only if more units are exchanged.

2)

A seller's willingness to sell:

• is determined by the buyer's willingness to pay.

• can never be higher than the market price.

• is determined by the opportunity cost of producing and selling her good.

• must always be equal to a buyer's willingness to pay.

3)

Assume the market in the graph is in equilibrium at demand D and supply S₁. If the supply curve shifts to S₂, and a new equilibrium is reached, which of the following is true?

• Producer surplus decreases by $30.

• Producer surplus increases by $90.

• Producer surplus decreases by $20.

• Producer surplus increases by $120.

Answer 1

1. When a market is missing:

• Correct answer is "consumers' willingness to pay is too low to sustain the efficient quantity."

2.

A seller's willingness to sell:

Correct answer is "is determined by the opportunity cost of producing and selling her good"

3.

Assume the market in the graph is in equilibrium at demand D and supply S₁. If the supply curve shifts to S₂, and a new equilibrium is reached, which of the following is true?

Correct answer is "Producer surplus increases by $90."

For Supply S1 and Demand D, the area of producer surplus is (1/2)*(7-4)*(20-0)=30

For Supply S2 and Demand D, the area of producer surplus is (1/2)*(6-0)*(40-0)=120

Increase in producer supply by 120-30=90 .