Week

6 Revision Questions

Question 1
Assume that a perfectly competitive market has reached its equilibrium. Which of the
following statements describes efficiency in that market?
(a) Consumers are maximising benefits while producers are maximising revenues
(b) The price of the good is equal to the lowest point on the short-run average variable cost
curve
(c) The price of the good is equal to the wages of the workers used to produce it
(d) The total economic surplus is maximised

Question 2
When both the supply and the demand curve shift to the right:
(a) The equilibrium price remains unchanged
(b) The equilibrium price always rises
(c) The equilibrium price might rise or fall or remain unchanged
(d) The equilibrium prices always fall

Question 3
Assuming that we are in a perfectly competitive market, the supply and demand curves
measure the:
(a) Total benefit divided by the level of the activity
(b) The cost of producing the product
(c) Marginal cost of producing the product and the reservation price (willingness to pay)
for consuming the product
(d) The total benefit resulting from an extra unit of the activity

Question 4
What does equilibrium mean?
(a) The point where there is no excess supply or demand
(b) The point where consumer surplus is always maximised
(c) The point where produce surplus is always maximised
(d) None of the above

Question 5
Explain the concepts of Producer and Consumer Surplus.

Question 6
Consider a perfectly competitive market. What is the impact on equilibrium price and
quantity of an increase in the marginal cost of production for all firms? Explain the process
of adjustment to equilibrium in your answer.

Question 7

Use a supply and demand model to explain how buyers and sellers behave when the price
of a good is below the equilibrium level.

Question 8
Assume the demand curve for a product is approximated by the equation
QD = 30 5P

(QD is measured in millions of units)

and supply is given by:

QS = P

(QS is measured in millions of units)

Suppose the price for this product falls from $4 to $3.

a) Calculate the estimated gain in the total consumer surplus. In your calculation assume
that consumers can buy as many units of the good they want at the indicated prices.
b) Calculate the loss in total producer surplus. In your calculation assume that
producers can sell as many units of the good they want at the indicated prices.
c) Calculate the net gain/loss in total surplus. Is this total surplus going to be realised in
the market?

Question 9
Consider the following information to answer the following question.
The demand curve is:
! = 200 5
The supply curve is:
! = 5
Using this information:
a) Graph the supply and demand curve below:

Price
40

30

20

10

100

200

Qty

300

400

b) What is the equilibrium price and quantity in this market?

c) Calculate the total consumer surplus.
d) Calculate the total producer surplus.
e) Calculate the total surplus.