4.2 Practice – Flashcards
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Deadweight loss is
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the reduction in economic surplus resulting from a market not being in competitive equilibrium.
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Economic surplus is maximized when
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the marginal benefit of consumption is equal to the marginal costs of production.
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Economic efficiency
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is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production;
is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum.
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Economists define economic efficiency in this way
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to illustrate the benefits of a competitive market equilibrium;
to help policy makers understand the negative consequences of price ceilings, taxes, and price floors.
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Briefly explain whether you agree with the following statement:
"A lower price in a market always increases economic efficiency in that market."
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I disagree, because economic efficiency declines if price falls below the market equilibrium.
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Briefly explain whether you agree with the following statement:
"If at the current quantity marginal benefit is greater than marginal cost, there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."
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The statement is incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweight loss.
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Briefly explain whether you agree with the following statement:
"If consumer surplus in a market increases, producer surplus must decrease."
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The statement is incorrect. Consumer surplus (and producer surplus) could increase by decreasing deadweight loss.
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Does an increase in economic surplus in a market always mean that the economic efficiency in the market has increased? Briefly explain.
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If the marginal cost of production decreases but market output remains unchanged, then economic surplus and deadweight loss would both increase, decreasing economic efficiency.
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A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest."
This statement is false because
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the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.
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When a competitive market is in equilibrium, what is the economically efficient level of output?
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the output level where marginal cost is equal to marginal benefit
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Economic surplus is the sum of consumer surplus and producer surplus.
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True.
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A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest."
This statement is false because
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the level of output where the difference between marginal benefit and marginal cost is largest will
