WELFARE MEASURES
(Consumer Surplus and Producer Surplus)
Practice Problems

1. When the stores reduce the prices of the goods sold, we can state that
a) sellers behave irrationally.
b) consumer surplus decreases.
c) sellers expect the buyers to behave irrationally.
d) producer surplus decreases.

2. Principle of rationality implies that
a) consumers will buy the good only if its price exceeds marginal utility.
b) people prefer to save money rather than to spend them.
c) firms will produce goods only if their costs are higher than the price.
d) sellers will sell the good only if the consumer surplus is negative.
e) trade occurs only if both sides benefit from it.

3. Jack decided to sell the house he built. He advertised it for $220,000, but decided he would take no less than $200,000, since that's what the construction cost him. After some negotiation, a local priest (all shaven and shorn, of course) purchased the house for $205,000. What was the priest's consumer surplus from this transaction?
a) $5,000.
b) $15,000.
c) $20,000.
d) We don't have enough information to answer this question.

4. In the story above, what was Jack's producer surplus?
a) $5,000.
b) $15,000.
c) $20,000.
d) We don't have enough information to answer this question.


 

 

The correct answers are: 1d, 2e, 3d, 4a.

 


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