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Questions and Answers
What does economic surplus represent in the market?
What does economic surplus represent in the market?
- The total revenue generated by producers.
- The lost value when market demand exceeds supply.
- The profit earned by firms after costs.
- The total value of consumer and producer surplus for each quantity exchanged. (correct)
Which of the following situations contributes to deadweight loss resulting from underproduction?
Which of the following situations contributes to deadweight loss resulting from underproduction?
- An increase in consumer demand.
- A price floor above the equilibrium price. (correct)
- A market operating at competitive equilibrium.
- A price ceiling set below the equilibrium price. (correct)
If consumers pay $14/unit and producers receive $8/unit after a tax is applied, how much tax revenue is generated per unit?
If consumers pay $14/unit and producers receive $8/unit after a tax is applied, how much tax revenue is generated per unit?
- $14
- $8
- $6 (correct)
- $22
What is the correct formula for calculating deadweight loss due to a subsidy?
What is the correct formula for calculating deadweight loss due to a subsidy?
What defines productive efficiency in the context of economics?
What defines productive efficiency in the context of economics?
How is economic surplus affected when a subsidy is introduced?
How is economic surplus affected when a subsidy is introduced?
What is the essence of allocative efficiency?
What is the essence of allocative efficiency?
What happens to economic surplus when a tax is imposed?
What happens to economic surplus when a tax is imposed?
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Study Notes
Economic Surplus
- The combined total of consumer, producer, and economic surplus for all quantities exchanged.
Deadweight Loss
- The value of economic surplus lost when the market is not at competitive equilibrium.
- Can be caused by underproduction or overproduction.
- Occurs due to factors like price controls (floors and ceilings), taxes, and subsidies.
Deadweight Loss: Price Controls
- Price floor at 100:
- Consumer surplus: Area A.
- Producer surplus: Area B + C + D.
- Deadweight loss: Area E + F.
- Price ceiling at 40:
- Consumer surplus: Area A + B + C
- Producer surplus: Area D
- Deadweight loss: Area E + F
Deadweight Loss: Tax
- Consumers pay $14 per unit to producers.
- Producers pay $6 per unit to the government.
- Producers receive $8 per unit.
- Consumer surplus: (20-14)*30/2
- Producer surplus: (8-5)*30/2
- Tax revenue: 6*30
- Deadweight loss: 6*(50-30)/2
- Economic surplus: CS + PS + Tax Revenue.
- Tax revenue comes from producer and/or consumer surplus.
Deadweight Loss: Subsidy
- Consumers pay $22 per unit to producers.
- Producers receive $14 per unit from the government.
- Producers actually receive $36 per unit.
- Deadweight loss: (36-22)*(140-100)/2.
- Consumer surplus: Area below demand curve, above the $22 price level.
- Producer surplus: Below the $36 price level, above the supply curve.
- Subsidy: 14*140
- Deadweight loss: 14*(140-100)/2.
- Economic surplus: CS + PS - Subsidy.
- Subsidies are considered negative taxes and come from economic surplus from other markets.
Productive Efficiency vs. Allocative Efficiency
- Productive efficiency is achieved when production occurs at the lowest average total cost. This is represented by points on the Production Possibilities Frontier (PPF).
- Allocative efficiency is achieved when marginal benefit equals marginal cost (MB=MC). This is represented by the competitive equilibrium level of production.
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