Economics Chapter 4 Test Flashcards

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Questions and Answers

What occurs only at the output where the combined amounts of consumer surplus and producer surplus are maximized?

Allocative efficiency

What efficiency loss occurs if actual production and consumption take place at Q3?

e + f

What is the situation at the output level Q2?

Allocative efficiency

How is producer surplus graphically measured?

Above the supply curve and below the actual price Signup and view all the answers

Why do economists consider governments to be wasteful?

Whenever they over-or underallocate resources to a project Signup and view all the answers

Why can private firms hardly produce a public good profitably?

The free-rider problem Signup and view all the answers

Adverse selection occurs when someone with home insurance decides to take the chance that a dying tree would fall on the garage.

False Signup and view all the answers

In the case of equilibrium price P1, areas representing consumer surplus are?

a + b Signup and view all the answers

What efficiency loss occurs if actual production and consumption happen at Q1?

b + d Signup and view all the answers

This characteristic refers to someone using an interstate highway regardless of payment.

Nonexcludability Signup and view all the answers

At the output where combined amounts of consumer and producer surplus are largest, what is equal?

Maximum willingness to pay equals minimum acceptable price Signup and view all the answers

Many economists prefer a carbon tax to cap-and-trade for reducing carbon dioxide emissions due to complexity in monitoring.

True Signup and view all the answers

If actual production and consumption occur at Q2, what is achieved?

Efficiency Signup and view all the answers

Efficiency losses indicated by the area bce occur at which output level?

Q1 Signup and view all the answers

If Charlie buys a T-shirt priced at $9 for which he was willing to pay $10, what is his consumer surplus?

$1 Signup and view all the answers

Why is there an adverse selection problem in the market for used cars?

Owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars Signup and view all the answers

What causes the MB curves in the diagram to slope downward?

Diminishing marginal utility Signup and view all the answers

What does a cap-and-trade program assign?

A property right to polluting the atmosphere Signup and view all the answers

What does cost-benefit analysis attempt to achieve?

Compare the benefits and costs associated with any economic project or activity Signup and view all the answers

What is producer surplus?

The difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price Signup and view all the answers

When does an efficiency loss (or deadweight loss) decline in size?

When maximum willingness to pay exceeds minimum acceptable price Signup and view all the answers

How is an efficiency loss (or deadweight loss) measured?

As the combined loss of consumer surplus and producer surplus Signup and view all the answers

What consumer and producer surplus do Amanda and Tony experience from the sale of the ruby?

Amanda experiences $10 of consumer surplus and Tony experiences $190 of producer surplus Signup and view all the answers

If Brinley's music sales are low due to Internet piracy, what strategy should he follow to enhance profits?

Keep prices of downloads low and raise prices for concerts and merchandise Signup and view all the answers

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay Signup and view all the answers

Study Notes

Allocative Efficiency

Occurs at output level where total consumer surplus and producer surplus are maximized.
Maximum willingness to pay for the last unit equals minimum acceptable price.

Efficiency Loss

When production/consumption occurs at output levels differing from allocative efficiency, efficiency loss (deadweight loss) arises.
Identified by specific areas (e + f, b + d, or bce) in given diagrams.

Producer and Consumer Surplus

Producer surplus is the area above the supply curve and below the price line.
Consumer surplus can be quantified by the difference between willingness to pay and actual price paid.

Government and Resource Allocation

Economists label government actions as wasteful when resources are misallocated to projects.
Effective allocation requires adjustments to reflect actual supply and consumer demand.

Public Goods and Free-Rider Problem

Private firms struggle to profitably produce public goods due to the free-rider problem, where individuals benefit without contributing to costs.

Adverse Selection

Occurs when those with low-quality goods, like used cars, are more likely to sell, while high-quality sellers hold onto their goods, leading to market inefficiencies.

Market Characteristics

Nonexcludability refers to the inability to prevent individuals from using resources, exemplified by interstate highways.

Carbon Emission Management

Economists generally favor a carbon tax over cap-and-trade due to the complexity of monitoring multiple CO2 sources.

Cost-Benefit Analysis

A method used to evaluate the viability of projects by comparing their costs with the benefits they generate.

Impact on Surplus

Efficiency loss declines when output is produced such that maximum willingness to pay surpasses minimum acceptable price.
Total efficiency loss is reflected in the combined reduction of consumer and producer surplus.

Pricing Strategies

For maximizing profits, a recommended strategy in response to piracy includes lowering digital product prices while increasing prices for live events and merchandise.

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Description

Test your understanding of allocative efficiency and related concepts from Chapter 4 of Economics. These flashcards cover key definitions and graphical interpretations necessary for mastering the material. Great for revision before your exam!