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Exam 7: The Efficiency of Markets

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Question 31

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In a market,

A) buyers and sellers must know how the other group thinks to succeed in maximizing their own group's self-interest.
B) information is unnecessary.
C) trade must take place at a single location or economic coordination breaks down.
D) each individual participant knows only a small fraction of the total information produced in the market.
E) income equality results.

F) A) and D)
G) A) and C)

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Question 32

Multiple Choice

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Realistically speaking, complete income equality can be achieved only when

A) government taxes high incomes and redistributes the money to those with low incomes.
B) all consumers face the same market price.
C) individuals voluntarily give above-average income to below-average income earners to equalize incomes.
D) individuals stop acting in their own self-interest and produce all they can for the common good.
E) every individual receives exactly the same education.

F) A) and E)
G) All of the above

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Question 33

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A market system relies primarily on prices to motivate individuals and coordinate economic activity.

If a market is efficient, then it is possible that an increase in one person's consumption would not lower another person's consumption.

Society achieves Pareto efficiency when individuals can achieve more utility while no one loses any utility.

For a given tax assessed on producers, market price changes the most if demand is perfectly inelastic and supply is perfectly elastic.

Exhibit 7-8 -Refer to the Exhibit 7-8. Suppose that the government imposes a sales tax on a good such that S₁ represents the supply curve without the tax and S₂ represents the supply curve with the tax. The deadweight loss as a result of the tax is the combined area of

Exhibit 7-4 -Refer to Exhibit 7-4. Deadweight loss is greater than zero if price is at all of the following except

Exhibit 7-12 -Refer to Exhibit 7-12. Calculate the deadweight loss of a government program that establishes a minimum price of $7 per unit and requires that the government buy the resulting surplus.

Exhibit 7-12 -Refer to Exhibit 7-12. Calculate the total tax revenue that the government will receive if it imposes a tax of $4 per unit of output.

Suppose there are three buyers (A, B, and C) in a competitive market with the marginal benefit (MB) schedules like those shown in the table below. Calculate the consumer surplus using the market demand curve. Assume that the market price is $10. Show that you get the same answer by adding the consumer surplus for all three buyers. How much does consumer surplus increase for the market as a whole and for each individual when the market price falls to $8?

A market

In a market, price provides information only to sellers but not to buyers.

The deadweight loss from a tax on a good equals the tax revenue that goes to the government.

What happens to the net benefit that is called a deadweight loss when such a loss occurs?

The effects of a tax can be captured by rightward shifts of both the supply and demand curves.

Exhibit 7-2 -Refer to Exhibit 7-2. What would be the total cost of Firm A and Firm B producing 4 units of output each? Is it possible to reduce this total cost and still produce the same total output? How?

Adam Smith wrote a book called

Income equality is usually defined as a state of the world in which all individuals have

Market competition ensures that