ECO/365

PRINCIPLES OF MICROECONOMICS

The Latest Version A+ Study Guide

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ECO 365 Week 2 Practice: Market Dynamics and

Efficiency Quiz
Complete the Week 2 Market Dynamics and
Efficiency Quiz in McGraw-Hill Connect®. These are
randomized questions.

Note: You have unlimited attempts available to

complete practice assignments. The highest scored
attempt will be recorded. These assignments have
earlier due dates, so plan accordingly. Grades must
be transferred manually to eCampus by your
instructor. Don't worry, this might happen after the
due date.
The monthly demand and supply schedules for new cars
at a large California dealership are shown in the table
below.

Market for New Cars

Quantity of
Price Cars Quantity of
(dollars) Demanded Cars Supplied
$30,000 0 250
25,000 100 225
20,000 200 200
15,000 300 175
10,000 400 150

If the dealership is currently charging $25,000 for a new

car, at the end of the month there will be:

a shortage of 125 cars.

a surplus of 5,000 cars.

a surplus of 125 cars.

a shortage of 5,000 cars.

neither a surplus nor a shortage; the market will be in

equilibrium.

The demand and supply schedules for sunscreen at a

small beach are shown below.

Market for Sunscreen

Quantity Quantity
Price of of
(dollars Sunscreen Sunscreen
per Demanded Supplied
bottle) (bottles) (bottles)
$35 1,000 8,500
30 2,000 7,000
25 3,000 5,500
20 4,000 4,000
15 5,000 2,500
10 6,000 1,000

Instructions: Enter your answers as a whole number.

a. If the price is $15 per bottle, how many bottles of

sunscreen are demanded and supplied?

Qd =
Qs =
In this case, there would be upward pressure on the
price.

b. What is the equilibrium price and quantity in the

market for sunscreen?

P=
Q=
Use the following graph for the milk market to answer
the question below.

There would be excess production of milk whenever the

price is

Multiple Choice

greater than $1.50 per gallon.

greater but not less than $2.00 per gallon.

less than $1.50 per gallon.

less but not greater than $2.00 per gallon.

There is a surplus in a market for a product when

Multiple Choice

quantity demanded is less than quantity supplied.

demand is less than supply.

the current price is lower than the equilibrium price.

quantity demanded is greater than quantity supplied.

Use the following table to answer the question below.

Quantity
Demanded perQuantity Supplied
Price per Unit Year per Year
$5 2,000 0
10 1,800 300
15 1,600 600
20 1,400 900
25 1,200 1,200
30 1,000 1,500

There will be a shortage whenever the price is

Multiple Choice

equals $25.

higher than $25.

higher than $30.

lower than $25.

A decrease in demand and an increase in supply will

Multiple Choice

decrease price and affect the equilibrium quantity in an

indeterminate way.

decrease price and increase the equilibrium quantity.

increase price and affect the equilibrium quantity in an

indeterminate way.

affect price in an indeterminate way and decrease the

equilibrium quantity.

There is an excess demand in a market for a product

when

Multiple Choice

quantity demanded is greater than quantity supplied.

supply is less than demand.

the current price is higher than the equilibrium price.

quantity demanded is less than quantity supplied.

In competitive markets, surpluses or shortages will

Multiple Choice

cause shifts in the demand and supply curves that tend to

eliminate the excess production or excess demand.

cause changes in the quantities demanded and supplied

that tend to intensify the excess production or excess
demand.

never exist because the markets are always at

equilibrium.

cause changes in the quantities demanded and supplied

that tend to eliminate the excess production or excess
demand.
There is a shortage in a market for a product when

Multiple Choice

quantity demanded is lower than quantity supplied.

supply is less than demand.

demand is less than supply.

the current price is lower than the equilibrium price.

Which of the following is an example of a price ceiling?

Multiple Choice
Price supports for agricultural products.

Subsidies for apartment rent in major cities.

Limits on interest rates charged by credit card

companies.

Minimum-wage laws for unskilled workers.

Assume that the graphs show a competitive market for

the product stated in the question.
Select the graph above that best shows the change in the
market for leather coats when leather coats
become more fashionable among young consumers.

Multiple Choice

graph (1)

graph (4)
graph (3)

graph (2)

In competitive markets, a surplus or shortage will

Multiple Choice

never exist because the markets are always at

equilibrium.

cause changes in the quantities demanded and supplied

that tend to eliminate the surplus or shortage.

cause changes in the quantities demanded and supplied

that tend to intensify the surplus or shortage.
cause shifts in the demand and supply curves that tend to
eliminate the surplus or shortage.

Use the following graph for the milk market to answer

the question below.

In this market, the equilibrium price is ____ and

equilibrium quantity is ___

Multiple Choice

$1.50 per gallon; 28 million gallons.

$1.50 per gallon; 30 million gallons.

$1.00 per gallon; 35 million gallons.

$28 per gallon; 150 million gallons.

Use the following table to answer the question below.

Quantity
Demanded perQuantity Supplied
Price per Unit Year per Year
$5 2,000 0
10 1,800 300
15 1,600 600
20 1,400 900
25 1,200 1,200
30 1,000 1,500
In this competitive market, the price and quantity will
settle at

Multiple Choice

$20 and 900 units.

$25 and 1,200 units.

$15 and 1,600 units.

$10 and 1,800 units.

The additional benefit of producing one more roast beef

sandwich at a local deli is $2. The additional cost of
producing one more roast beef sandwich is $3. To
improve allocative efficiency:

producers should produce at least one more roast beef

sandwich because MB > MC.

producers should produce at least one more roast beef

sandwich because MC > MB.

producers should not produce one more roast beef

sandwich because MB > MC.

producers should not produce one more roast beef

sandwich because MC > MB.

The value that consumers get (from consuming a

product) over and above what they actually paid for the
product is called
Multiple Choice

consumer surplus.

consumer utility.

consumption expenditures.

consumer demand.

Consumer surplus

Multiple Choice

is the difference between the maximum price consumers

are willing to pay for a product and the lower equilibrium
price.

is the difference between the minimum price producers

are willing to accept for a product and the higher
equilibrium price.

is the difference between the maximum price consumers

are willing to pay for a product and the minimum price
producers are willing to accept.

rises as equilibrium price rises.

Charlie is willing to pay $10 for a T-shirt that is priced at

$9. If Charlie buys the T-shirt, then his consumer surplus
is

Multiple Choice
$19.

$1.

$90.

$0.90.

If the equilibrium wage for fast-food restaurants is $8

and the government enforces a minimum wage of $15

Multiple Choice

workers will be able to find more jobs.

overall, society will be better off.

workers will get paid less.

fast-food restaurants will hire fewer workers.

The market supply curve indicates the

Multiple Choice

total revenues that sellers would receive from selling

various quantities of the product.

minimum acceptable prices that sellers are willing to

accept for the product.

maximum prices that buyers are willing and able to pay

for the product.
total amount that buyers will pay in buying a given
quantity of the product.

Charlie is willing to pay $10 for a T-shirt that is priced at

$9. If Charlie buys the T-shirt, then his consumer surplus
is

Multiple Choice

$90.

$1.

$19.

$0.90.
Graphically, producer surplus is measured as the area

Multiple Choice

under the demand curve and below the actual price.

above the supply curve and below the actual price.

under the demand curve and above the actual price.

above the supply curve and above the actual price.

Allocative efficiency occurs only at that output where

Multiple Choice

the combined amounts of consumer surplus and producer

surplus are maximized.

consumer surplus exceeds producer surplus by the

greatest amount.

marginal benefit exceeds marginal cost by the greatest

amount.

the areas of consumer and producer surplus are equal.

A producer’s minimum acceptable price for a particular

unit of a good

Multiple Choice
must cover the wages, rent, and interest payments
necessary to produce the good but need not include
profit.

equals the marginal cost of producing that particular unit.

is the same for all units of the good.

will, for most units produced, equal the maximum that

consumers are willing to pay for the good.

Productive efficiency occurs at the point where

Multiple Choice
the production technique minimizes economic surplus.

the production technique minimizes cost.

marginal benefit exceeds marginal cost by the greatest

amount.

consumer surplus exceeds producer surplus by the

greatest amount.

The minimum acceptable price for a product that

producer Sam is willing to receive is $15. The price he
could get for the product in the market is $18. How much
is Sam’s producer surplus?

Multiple Choice
$45

$3

$270

$33

The difference between the maximum price a consumer

is willing to pay for a product and the actual price the
consumer pays is called

Multiple Choice

market failure.

consumer surplus.
consumer demand.

utility.

Consumer surplus arises in a market because

Multiple Choice

the market price is higher than what some consumers are

willing to pay for the product.

at the current market price, quantity supplied is greater

than quantity demanded.

at the current market price, quantity demanded is greater

than quantity supplied.
the market price is below what some consumers are
willing to pay for the product.

The difference between the actual price that a producer

receives and the minimum acceptable price the producer
is willing to accept is called the producer

Multiple Choice

revenues.

surplus.

costs.
utility.

In the market for a particular pair of shoes, Jena is

willing to pay $75 for a pair while Jane is willing to pay
$85 for a pair. The actual price that each has to pay for a
pair of shoes is $65. What is the combined amount of
consumer surplus for Jena and Jane?

Multiple Choice

$130.

$215.

$30.

$10.
Producer surplus

Multiple Choice

is the difference between the maximum price consumers

are willing to pay for a product and the lower equilibrium
price.

rises as equilibrium price falls.

is the difference between the maximum price consumers

are willing to pay for a product and the minimum price
producers are willing to accept.

is the difference between the minimum price producers

are willing to accept for a product and the higher
equilibrium price.
The production of paper often creates a waste product
that pollutes waterways. Assume the producer of paper
does not directly pay to dispose of the waste in the water.

In this case, the price of paper will be below the socially

efficient price and the amount of paper produced will
be above the socially efficient amount.

Which of the following goods is nonrival?

A visit to the doctor at her office

A soccer match in a stadium

A pizza at a pizza parlor

A tuna in the ocean

Which of the following goods is both nonrival and

nonexcludable?

A hot dog at a hot dog stand

A soccer match in a stadium

The light from a lighthouse at a harbor entrance

A tuna in the ocean

Texarkana Electric Company burns coal to heat the water
that drives its electricity-producing turbines. The table
below shows the marginal benefit of annual electricity
consumption and the private marginal cost of annual
electricity production.

Marginal Cost and Marginal Benefit

Quantity (millions of
megawatts) MBprivateMCprivateMCexternalMCsocial
1.0 $145 $85 $ 20 $ 105
2.0 130 90 20 110
3.0 115 95 20 115
4.0 100 100 20 120
5.0 85 105 20 125
6.0 60 110 20 130

Instructions: Enter your answers as a whole number.

a. What is the (apparent) optimal amount of electricity

for Texarkana Electric Company to produce each year?
 4 million megawatts per year

Now assume the production of each million megawatts

of electricity also produces sulfur dioxide (a precursor to
acid rain). The external cost of the sulfur dioxide is $20
per million megawatts of electricity production.

b. Fill in the external marginal cost (MCexternal) and the

social marginal cost (MCsocial) columns in the table
above.

c. What is the socially optimal amount of electricity for

Texarkana to produce if all costs and benefits are
considered?

3 million megawatts per year

b. If electricity production triggers an external cost of

sulfur dioxide of $20 per million megawatts, these
external costs need to be added to private marginal cost
in order to measure social marginal cost.
c. When Texarkana Electric Company produces 3.0
million megawatts per year, an optimum for society is
reached because social marginal benefit equals social
marginal cost.

If some activity creates external benefits as well as

private benefits, then economic theory suggests that the
activity ought to be
Multiple Choice

left alone.

taxed.

prohibited.

subsidized.
Where there are spillover (or external) benefits from
having a particular product in a society, the government
can make the quantity of the product approach the
socially optimal level by doing the following except

Multiple Choice

subsidizing the sellers of the product.

providing the product itself.

taxing the sellers of the product.

subsidizing the buyers of the product.

External benefits in consumption refer to benefits
accruing to those

Multiple Choice

who are consuming the product abroad.

who bought and consumed the product.

who are selling the product to the consumers.

other than the ones who consumed the product.

When the production of a good generates external costs,

a firm’s private supply curve will be

Multiple Choice
vertical.

horizontal.

to the left of the social supply curve.

to the right of the social supply curve.

A negative externality or spillover cost (additional social

cost) occurs when

Multiple Choice

the price of the good exceeds the marginal cost of

producing it.
firms fail to achieve allocative efficiency.

firms fail to achieve productive efficiency.

the total cost of producing a good exceeds the costs

borne by the producer.

If there are external benefits associated with the

consumption of a good or service

Multiple Choice

the private demand curve will overestimate the true

demand curve.

consumers will be willing to pay for all these benefits in

private markets.
the market demand curve will be the vertical summation
of the individual demand costs.

the private demand curve will underestimate the true

demand curve.

A public good

Multiple Choice

is available to all and cannot be denied to anyone.

produces no positive or negative externalities.

can be profitably produced by private firms.

is characterized by rivalry and excludability.

If a good that generates negative externalities were
priced to take these negative externalities into account,
its

Multiple Choice

price would remain constant and output would increase.

price would increase, and its output would decrease.

price would decrease, and its output would increase.

price would increase but its output would remain

constant.
Use the following supply and demand graph for product
X to answer the question below.

What would happen if the government taxed the

producers of this product because it has negative
externalities in production?

Multiple Choice

supply would decrease

demand would decrease

supply would increase

price would decrease

A positive externality or spillover benefit (additional

social benefit) occurs when

Multiple Choice

a firm does not bear all of the costs of producing a good

or service.

product differentiation increases the variety of products

available to consumers.

firms earn positive economic profits.

the benefits associated with a product exceed those that

accrue for consumers.

What are the two characteristics that differentiate private

goods from public goods?

Multiple Choice

marginal cost and marginal benefit

rivalry and excludability

ownership and usage

negative externality and positive externality

A public good

Multiple Choice

can never be provided by a nongovernmental

organization.

generally results in substantial negative externalities.

costs essentially nothing to produce and is thus provided

by the government at a zero price.

cannot be provided to one person without making it

available to others as well.

The two main characteristics of a public good are

Multiple Choice

production at constant marginal cost and rising demand.

nonrivalry and large negative externalities.

nonexcludability and production at rising marginal cost.

nonrivalry and nonexcludability.

If the consumption of a product or service involves

external benefits, then the government can improve
efficiency in the market by

Multiple Choice

imposing a ive tax to for an overallocation of resources.

providing a subsidy to for an overallocation of
resources.

imposing a ive tax to for an underallocation of

resources.

providing a subsidy to for an underallocation of

resources.

If one person’s consumption of a good does not preclude

another’s consumption, the good is said to be

Multiple Choice

excludable.

nonrival in consumption.
rival in consumption.

nonexcludable.