Quiz: Demand Supply and Market Welfare — 15 questions

1. If a buyer values an item at $V=80$ and pays $P=50$, what is her gain from trade?

A. 50

B. 30

C. 80

D. 130

Answer: (B)

Explanation

The buyer’s gain equals valuation minus price, so it is $V-P=80-50=30$. The amount 50 is the price paid, not the buyer’s gain.

2. A seller with cost $C=25$ sells an item for $P=60$. What is the seller’s gain from trade?

A. 25

B. 85

C. 60

D. 35

Answer: (D)

Explanation

The seller’s gain is the price received minus the cost incurred, giving $P-C=60-25=35$. The cost of 25 is an input to the calculation, not the resulting gain.

3. A buyer values a good at $V=100$, a seller’s cost is $C=40$, and the transaction price is $P=70$. What is the total gain from trade?

A. 70

B. 30

C. 60

D. 40

Answer: (C)

Explanation

Total gain from trade is $V-C=100-40=60$, which also equals the buyer’s gain of 30 plus the seller’s gain of 30. The transaction price affects how the gain is divided, not the total amount.

4. What does a downward-sloping demand curve represent?

A. The quantity sellers want to sell at each price

B. The price sellers receive at each quantity sold

C. The cost buyers incur at each quantity purchased

D. The quantity buyers want to purchase at each price

Answer: (D)

Explanation

A demand curve records the quantity buyers want at each price and slopes downward. The upward-sloping relationship between price and quantity supplied describes supply instead.

5. What does an upward-sloping supply curve represent?

A. The gain buyers receive from each transaction

B. The valuation buyers assign to each unit purchased

C. The quantity buyers want to purchase at each price

D. The quantity sellers want to sell at each price

Answer: (D)

Explanation

A supply curve shows the quantity sellers want to sell at each price and slopes upward. Quantity buyers want at each price is represented by the downward-sloping demand curve.

6. What condition defines market equilibrium?

A. The market produces a shortage

B. A government imposes a price ceiling

C. Quantity supplied equals quantity demanded

D. A government imposes a price floor

Answer: (C)

Explanation

Market equilibrium is the price and quantity at which quantity supplied equals quantity demanded. A price ceiling or floor is a regulation, while a shortage occurs when supplied and demanded quantities differ.

7. At an equilibrium price $P^*$ and quantity $Q^*$, which relationship must hold?

A. $D>S$

B. $S>D$

C. $S+D=0$

D. $S=D$

Answer: (D)

Explanation

Equilibrium requires supply and demand to be equal, expressed as $S=D$ at $P^*$ and $Q^*$. If supply exceeds demand or demand exceeds supply, the market has a surplus or shortage rather than equilibrium.

8. Which expression correctly represents consumer surplus when total valuation is $v(Q)$ and expenditure is $PQ$?

A. $CS=v(Q)+PQ$

B. $CS=PQ-v(Q)$

C. $CS=\frac{v(Q)}{PQ}$

D. $CS=v(Q)-PQ$

Answer: (D)

Explanation

Consumer surplus measures the difference between what buyers value the purchased quantity and what they spend. The expression $PQ-v(Q)$ instead reverses this relationship and does not represent buyers’ surplus.

9. A firm sells quantity $Q$ at price $P$ and has total cost $c(Q)$. Which expression measures its producer surplus?

A. $PS=PQ-c(Q)$

B. $PS=c(Q)-PQ$

C. $PS=P+c(Q)Q$

D. $PS=\frac{c(Q)}{PQ}$

Answer: (A)

Explanation

Producer surplus equals the firm’s revenue from sales minus its total production cost. The reversed expression describes a cost shortfall rather than the surplus earned by the producer.

10. Why does the market equilibrium promote economic efficiency in a competitive market?

A. It makes tax revenue equal to producer surplus.

B. It maximizes total surplus from mutually beneficial trades.

C. It prevents firms from facing production costs.

D. It guarantees that every buyer pays the same valuation.

Answer: (B)

Explanation

At the market equilibrium, the quantity traded maximizes the combined gains received by consumers and producers. Tax revenue and production costs remain distinct from total surplus, so they do not explain this efficiency result.

11. How is total surplus calculated in a market?

A. By adding the market price to tax revenue.

B. By subtracting producer surplus from consumer surplus.

C. By adding consumer surplus and producer surplus.

D. By multiplying quantity traded by the market price.

Answer: (C)

Explanation

Total surplus is the combined economic benefit captured by consumers and producers, so it equals consumer surplus plus producer surplus. Multiplying price by quantity gives revenue or expenditure, not the total gains from trade.

12. What happens to the supply and demand curves when a per-unit tax is imposed on sellers?

A. Demand shifts upward by the amount of the tax.

B. Supply shifts upward by the amount of the tax.

C. Supply shifts downward by the amount of the tax.

D. Demand shifts downward by the amount of the tax.

Answer: (B)

Explanation

A seller tax raises the amount sellers require for each quantity, which shifts the supply curve upward by the tax. A downward demand shift instead represents a tax imposed on buyers.

13. What is the main welfare consequence of a per-unit sales tax?

A. It transfers all producer surplus into consumer surplus.

B. It expands mutually beneficial trade and raises total surplus.

C. It creates unrealized gains from trade and deadweight loss.

D. It leaves the efficient quantity unchanged while collecting revenue.

Answer: (C)

Explanation

A per-unit sales tax reduces the quantity traded, so some mutually beneficial exchanges no longer occur and total welfare falls through deadweight loss. Tax revenue may be collected, but it does not eliminate the lost gains from trades that are forgone.

14. What happens when a price floor is imposed above the equilibrium price?

A. It raises demand while reducing the regulated market price.

B. It leaves the traded quantity unchanged at the equilibrium level.

C. It creates a surplus because quantity supplied exceeds quantity demanded.

D. It creates a shortage because quantity demanded exceeds quantity supplied.

Answer: (C)

Explanation

A price floor sets a legal minimum above equilibrium, encouraging suppliers to offer more while buyers demand less, which produces a surplus. A shortage instead results from a price ceiling imposed below equilibrium.

15. A government sets a maximum legal price below the market equilibrium for a product. What market outcome is most likely?

A. A stable quantity exchanged because the legal price matches equilibrium.

B. A shortage because quantity demanded exceeds quantity supplied.

C. A higher equilibrium price caused by unrestricted market adjustment.

D. A surplus because quantity supplied exceeds quantity demanded.

Answer: (B)

Explanation

A price ceiling below equilibrium keeps the price artificially low, increasing quantity demanded and reducing quantity supplied, so a shortage emerges. A surplus is associated with a binding price floor above equilibrium rather than with this policy.