Chapter 15 Consumer surplus and producer surplus

Multiple Choice Questions

Question code: B3C15Q001

Consumers will buy a good if
A. they think that the benefit it offers at least equals the market price.
B. they think that the good is cheap.
C. they think there is a positive benefit from market exchange
D. they know that the profits from selling the goods are for charitable purposes.

Answer: A

Question code: B3C15Q002

The benefit from consumption of a good is measured by
A. the price of the good.
B. the quality of the good.
C. the highest-valued option.
D. the consumer’s maximum willingness to pay.

Answer: D

Question code: B3C15Q003

Total benefit refers to
A. a consumer’s maximum willingness to pay for an additional unit of a good.
B. a consumer’s maximum willingness to pay for a given quantity of a different
good.
C. a consumer’s minimum demand-price for a given quantity of a good.
D. a consumer’s maximum demand-price for a given quantity of a good.

Answer: D

Question code: B3C15Q004

Marginal benefit refers to
A. a consumer’s maximum willingness to pay for an extra unit of a good.
B. a consumer’s maximum willingness to pay for an extra quantity of a different
good.
C. a consumer’s minimum demand-price for an extra quantity of a good.

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Question Bank (Chapter 15)
D. a consumer’s maximum demand-price for a given quantity of a good.

Answer: A

Question code: B3C15Q005

*When the consumption of a good increases, the total benefit of a good will probably
increase because
A. marginal benefit may still be positive.
B. marginal benefit decreases with the increase in quantity.
C. marginal benefit will become zero.
D. marginal benefit will not change.

Answer: A
Explanation
Although the marginal benefit decreases with the increase in quantity, marginal
benefit may still be positive so that the total benefit will increase by consuming one
more unit of a good. Options B, C and D cannot explain why the total benefit of a
good will probably increase.

Question code: B3C15Q006

As the consumption of a good increases, the extra satisfaction from that additional
unit usually __________ so that the marginal benefit of a good __________.
A. increases; increases
B. decreases; increases
C. decreases; decreases
D. increases; decreases

Answer: C

Question code: B3C15Q007

Total benefit for a given quantity of a good is the sum of
A. the price of the good.
B. the maximum willingness to pay for the last unit of the good.
C. the maximum willingness to pay for a given quantity of the good.
D. the maximum value of the options forgone.

Answer: C

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Question Bank (Chapter 15)
Question code: B3C15Q008
Average benefit refers to
A. a consumer’s maximum willingness to pay for a different good.
B. a consumer’s maximum willingness to pay for all units of a good.
C. the sum of a consumer’s marginal benefit for a given quantity of a good.
D. a consumer’s maximum willingness to pay for a unit of a good on average.

Answer: D

Question code: B3C15Q009

A downward-sloping marginal benefit curve implies that
A. a consumer’s maximum willingness to pay for a good is increasing.
B. the maximum demand-price for a good decreases as more of the goods are
consumed.
C. a rational consumer will maximise his gain by buying fewer goods.
D. a seller will charge a lower price if more goods are consumed.

Answer: B

Question code: B3C15Q010

A rational consumer will increase his consumption until
A. his marginal benefit is equal to zero.
B. his marginal benefit is lower than the price.
C. his marginal benefit equals his demand.
D. his maximum willingness to pay for an extra unit of a good equals the price.

Answer: D

Question code: B3C15Q011

A consumer’s marginal benefit curve for a good is his demand curve for the good
because
A. a consumer’s quantity demanded at a particular price can be obtained by equating
the marginal benefit with that price.
B. a consumer’s quantity demanded can be obtained by equating the marginal benefit
with the price and demand.
C. marginal benefit is negatively related to price.
D. a consumer will consume less if the marginal benefit is higher.

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Question Bank (Chapter 15)
Answer: A

Question code: B3C15Q012

Consumer surplus refers to
A. the extra amount a consumer is willing to pay above what she actually pays for the
last unit consumed.
B. the extra amount a consumer is willing to pay above what she actually pays for a
given quantity demanded.
C. the extra amount a consumer is willing to pay below what she actually pays for
the last unit consumed.
D. the extra amount a consumer is willing to pay below what she actually pays for a
given quantity demanded.

Answer: B

Question code: B3C15Q013

Consumer surplus can be measured by
A. the difference between average benefit and average cost.
B. the difference between marginal benefit and marginal cost.
C. the sum of the difference between the marginal benefit and the price of all units
bought.
D. the difference between the total benefit and the price of the last unit bought.

Answer: C

Question code: B3C15Q014

Mary says that her marginal benefit of the 11th apple is still greater than the market
price after she buys 10 apples. We may conclude that
A. Mary will buy more than 10 apples.
B. Mary loves to eat apples.
C. Mary should buy fewer apples.
D. Mary will not buy apples anymore.

Answer: A

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Question Bank (Chapter 15)
Question code: B3C15Q015
If Mary’s marginal benefit of the last apple equals its price, then
A. Mary should buy fewer apples to increase her consumer surplus.
B. Mary should buy more and more apples as her marginal benefit is still positive.
C. Mary will buy more apples if the price increases, which means that the marginal
benefit will also increase.
D. Mary will not buy more apples if she is rational.

Answer: D

Question code: B3C15Q016

When Mary’s marginal benefit of the last unit of apple is $4, we observe that she buys
two units of apples. When Mary’s marginal benefit of the last unit of apple is $3, we
observe that she buys three units of apples. We can conclude that
A. if the marginal benefit of apples increases, Mary’s demand for apples will
decrease.
B. Mary must be irrational.
C. Mary’s behaviour can be rational if the market price decreases from $4 to $3.
D. Mary’s demand curve must not be downward sloping.

Answer: C

Question code: B3C15Q017

*Referring to the following table, which one is INCORRECT?

Quantity Total benefit Marginal benefit Average benefit

5 $15 $1 Unknown
4 Unknown $5 $3.5
3 $9 Unknown $3

A. The marginal benefit of the fifth unit of the good cannot be $1 if other data listed
in the table are correct.
B. The average benefit for the first five units of the good should be $3.
C. The total benefit for the first four units of the good should be $14.
D. Options B and C are correct.

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Question Bank (Chapter 15)
Answer: A

Question code: B3C15Q018

Referring to the table below, the values of X,Y and Z should be

Quantity Total benefit Marginal benefit Average benefit

5 $30 $X $6
4 $28 $4 $Y
3 $Z Unknown Unknown

A. 2, 7 and 24.
B. 2, 7 and 21.
C. 3, 7 and 24.
D. 3, 7 and 21.

Answer: A

Question code: B3C15Q019

Referring to the following table, if the price of a good is $4, what will the consumer
surplus be?

Quantity Total benefit Marginal benefit Average benefit

5 $30 $X $6
4 $28 $4 $Y
3 $Z Unknown Unknown

A. $12
B. $24
C. $36
D. $8

Answer: A

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Question Bank (Chapter 15)
Question code: B3C15Q020
*Referring to the diagram below, we may conclude that

$
Apple
Mary’s marginal benefit curve

Pm Market price

Q
0 10

A. Mary is willing to buy unlimited units of apples.

B. We can find Mary’s demand curve for apples by equating the marginal benefit
with price.
C. Mary will buy 10 units of apples.
D. None of the above

Answer: A
Explanation
Option A is correct. Starting from consuming the l0th unit of apples, the marginal
benefit is higher than the market price (i.e., the maximum willingness to pay is higher
than the amount actually paid). Moreover, an upward-sloping MB curve means that
the marginal benefit increases as more units of apples are consumed. With the price
fixed at Pm, Mary is willing to consume unlimited units of apples in order to maximise
her consumer surplus.
Options B and C are incorrect. Since Mary no longer consumes at the point where
MB = P, we cannot find her demand by equating MB and P.

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Question Bank (Chapter 15)
Question code: B3C15Q021
Referring to the diagram below, we may conclude that
$

Apple
5

4 Market price

Mary’s marginal benefit curve

Q
0 10

A. if Mary buys 10 units of apples, her consumer surplus will be minimised.

B. the market price is too high for Mary.
C. if the market price is lower than $4, Mary will buy not fewer than 10 units of
apples.
D. we cannot find Mary’s consumer surplus as we don’t have her demand curve.

Answer: C

Question code: B3C15Q022

*Which of the following diagrams most likely does NOT exist in the real world?

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Question Bank (Chapter 15)
 A. $ B. $

5
4
500,000,000

Marginal benefit curve Marginal benefit curve

0 Q 0 Q
10 3

C. $ D. $
Marginal benefit curve
5 5
4 4
Marginal benefit curve

0 Q 0 Q
70 100 100 200

Answer: D

Question code: B3C15Q023

Which of the following diagrams most likely does NOT exist in reality?
A. $ B. $
Marginal cost curve
2
5
4
1 Marginal cost curve

0 Q 0 Q
5 10 120 200

C. $ D $ Marginal cost curve

.
Marginal cost curve
5
500,000 3

0 Q 0 Q
3 140 200

Answer: A

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Question Bank (Chapter 15)
Question code: B3C15Q024
Referring to the diagram below, which of the following(s) is/are correct?

5
3

Demand curve = Marginal benefit curve

0 Q
10

A. Total expenditure is equal to $30 when 10 units are bought.

B. Consumer surplus is equal to $30 when 10 units are bought.
C. Total benefit is equal to $30 when 10 units are bought.
D. All of the above are correct.

Answer: A

Question code: B3C15Q025

Referring to the diagram below, which part will represent the loss of a consumer
surplus if 15 units of a good are bought when the price is $4?

5
A
4 D
B C Demand curve = Marginal benefit curve

0 Q
10 15

A. Area A
B. Area B
C. Area C
D. Area D

Answer: D

Question code: B3C15Q026

Referring to the diagram below, which part will the consumer surplus represent if 10

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Question Bank (Chapter 15)
 units of a good are bought?
$

5
A
4
D
B C Demand curve = Marginal benefit curve

0 Q
10 15

A. Area A
B. Area B
C. Area C
D. Area D

Answer: A
B
D
C
A

Question code: B3C15Q027

Referring to the diagram below, which part will represent the total benefit if 10 units
of a good are bought?
$

5
A
4
C
B Demand curve = Marginal benefit curve
D

0 Q
10 15

A. Area A
B. Area (A + B + D)
C. Area (A + B)
D. Area D

Answer: C

Question code: B3C15Q028

Referring to the diagram below, which part will represent the consumer surplus if 10
units of a good are bought when price is $4?

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Question Bank (Chapter 15)
 $
A
5 C
A
4
B D Demand curve = Marginal benefit curve

0 Q
10

A. Area A
B. Area B
C. Area C
D. Area D

Answer: A

Question code: B3C15Q029

When measured in terms of money, production cost is the __________ amount of
money that a producer must __________ in order to produce an additional unit of a
good.
A. maximum; receive
B. minimum; receive
C. total; receive
D. average; pay

Answer: B

Question code: B3C15Q030

If the marginal cost of PS4, a game console, is constant at $3,000 per unit, then the
producer
A. will charge $4,000 at most to earn $1,000 in profit.
B. will charge at least $3,500 to earn $500 in profit.
C. will charge at least $3,000 per unit.
D. None of above because no market information is given

Answer: C

Question code: B3C15Q031

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Question Bank (Chapter 15)
Production cost can be measured by
A. marginal benefit minus market prices.
B. marginal revenue minus marginal benefit.
C. opportunity cost, lump sum cost and sunk cost.
D. total cost, marginal cost and average cost.

Answer: D

Question code: B3C15Q032

Marginal cost refers to the cost of producing
A. one unit of a good.
B. a given quantity of a good.
C. an extra unit of a good.
D. total units of a good.

Answer: C

Question code: B3C15Q033

Marginal cost refers to a change in
A. total cost resulting from the production of all units of a good.
B. average cost resulting from the production of a good by an extra unit.
C. the quantity of a good resulting from the production of a good by an extra unit.
D. total cost resulting from the production of a good by an extra unit.

Answer: D

Question code: B3C15Q034

When the production of apples increases from one unit to two units, the total cost of
apples increases by $3. We may conclude that
A. the market price of apples will increase by more than $3.
B. the total cost of apples must be $6.
C. the marginal cost of the second unit of apples is $3
D. the marginal cost of the first unit of apples must be higher than $3.

Answer: C

Question code: B3C15Q035

*When the production of apples decreases from 10 units to nine units, the average

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Question Bank (Chapter 15)
cost of apples increases. We may conclude that
A. the marginal cost curve must be upward sloping.
B. the marginal cost of the 10th unit of apple may be positive.
C. the total cost will increase too.
D. None of the above

Answer: B
Explanation
Option A is incorrect. We do not have enough information to determine whether the
marginal cost curve is upward sloping or not.
Option B is correct. As long as the marginal cost of an additional unit of apples is
lower than the average cost, the increase (decrease) in the production of apples will
lead to the decrease (increase) in the average cost. Thus, the marginal cost of the 10th
unit of apples may not be negative.
Option C is incorrect. The increase in the average cost may not lead to the increase in
total cost. We should also take the change in quantity into account.

Question code: B3C15Q036

__________ cost refers to the cost of producing a unit of a good __________.
A. Average; on average
B. Total; at margin
C. Marginal; in total
D. Opportunity; forgone

Answer: A

Question code: B3C15Q037

The marginal cost curve for a good is
A. downward sloping.
B. a marginal benefit curve.
C. a demand curve.
D. the supply curve of the good in a perfectly competitive market.

Answer: D

Question code: B3C15Q038

A producer’s marginal cost curve for a good may be regarded as his supply curve of
the good if and only if

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Question Bank (Chapter 15)
A. the relationship between price and quantity supplied can be found by equating
marginal cost with the price.
B. the relationship between price and quantity demanded can be found by equating
marginal cost with the price.
C. market price is always greater than the marginal cost.
D. marginal cost is equal to demand.

Answer: A

Question code: B3C15Q039

In a perfectly competitive market, the producer surplus can be maximised by
A. equating the marginal benefit with the marginal cost.
B. producing a good until the marginal cost of the last unit equals the price.
C. equating the marginal revenue with the marginal cost and price.
D. equalising the marginal cost curve and supply curve.

Answer: B

Question code: B3C15Q040

Producer surplus refers to the __________ amount that a producer actually receives
above the __________ amount he must receive to produce a given quantity.
A. extra; minimum
B. exact; minimum
C. extra; maximum
D. marginal; maximum

Answer: A

Question code: B3C15Q041

Producer surplus can be measured by the difference between
A. total revenue and total variable cost.
B. marginal revenue and marginal cost of the last unit.
C. average cost and average revenue.
D. fixed cost and fixed revenue.

Answer: A

Question code: B3C15Q042

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Question Bank (Chapter 15)
*When the market price of apples increases from $4 to $5, John’s producer surplus
decreases. Which of the following can explain this situation?
A. John is a profit maximiser.
B. John must be irrational.
C. The apple market is not perfectly competitive.
D. The quantity transacted of apples decreases greatly.

Answer: D
Explanation
When the quantity transacted greatly decreases after an increase in price, the gain
from the increase in price may be smaller than the loss from the decrease in the
quantity transacted. This leads to a decrease in the producer surplus.

Question code: B3C15Q043

Referring to the following table, which of the following is/are INCORRECT?

Quantity Total cost Marginal cost Average cost

5 $15 $A Unknown
4 $10 $X Unknown
3 $6 $Y $Z

A. The value of A is 5.
B. The value of X is 4.
C. The value of Y is 2.
D. The value of Z is 2.

Answer: C

Question code: B3C15Q044

Referring to the table below, how many units of a good will be supplied if the price of
a good is $3?

Quantity Total cost

5 $18

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Question Bank (Chapter 15)
 4 $11
3 $8

A. 5
B. 4
C. 3
D. Cannot be determined

Answer: B

Question code: B3C15Q045

The total gain from market exchange can be measured by the
A. total social surplus.
B. consumer surplus.
C. producer surplus.
D. marginal social surplus.

Answer: A

Question code: B3C15Q046

The marginal social surplus is equal to the difference between the
A. marginal benefit and marginal cost.
B. total benefit and total cost.
C. average benefit and average cost.
D. marginal revenue and marginal cost.

Answer: A

Question code: B3C15Q047

The gain from market exchange is maximised when the
A. marginal benefit is equal to the marginal cost.
B. marginal benefit is greater than the marginal cost.
C. marginal benefit is smaller than the marginal cost.
D. average benefit is greater than the average cost.

Answer: A

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Question Bank (Chapter 15)
Question code: B3C15Q048
When marginal benefit = marginal cost = price,
A. the total social surplus will be maximised.
B. the marginal social surplus will be maximised.
C. the marginal cost will be maximised.
D. the average cost is minimised.

Answer: A

Question code: B3C15Q049

Refer to the table below. What are equilibrium price and quantity, respectively?

Marginal Marginal Marginal social Total social

Quantity
benefit cost surplus surplus
1 $10 $8 $X $Y
2 $Z $9 $0 $2
3 $8 $R -$2 $S

A. $9; 2
B. $8; 3
C. $10; 1
D. Cannot be determined

Answer: A

Question code: B3C15Q050

Referring to the following diagram, which part is the consumer surplus?
$

5 Supply curve = Marginal cost curve

A
4
B
Demand curve = Marginal benefit curve
C

0 10 Q
A. Area A
B. Area B
C. Area (B + C)

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Question Bank (Chapter 15)
D. Area (A + B)

Answer: A

Question code: B3C15Q051

Referring to the following diagram, which part is the producer surplus?

4 Supply curve = Marginal cost curve

A
3
B
Demand curve = Marginal benefit curve
C

0 16 Q

A. Area (A + B)
B. Area (B + C)
C. Area B
D. Area A

Answer: C

Question code: B3C15Q052

Referring to the following diagram, which part is the total benefit?

$
12
Supply curve = Marginal cost curve
A
7
B

C Demand curve = Marginal benefit curve

0 20 Q

A. Area (A + B)
B. Area (B + C)
C. Area B
D. Area (A + B + C)

Answer: D

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Question Bank (Chapter 15)
Question code: B3C15Q053
Referring to the diagram below, which part is the total social surplus?

5 Supply curve = Marginal cost curve

A
4
B
Demand curve = Marginal benefit curve
C

0 10 Q

A. Area A
B. Area (A + B)
C. Area B
D. Area (B + C)

Answer: B

Question code: B3C15Q054

The schedule below shows the marginal benefit of consumers and the marginal cost of
firms in a perfectly competitive market.

Quantity (Units) Marginal benefit ($) Marginal cost ($)

1 110 70
2 100 80
3 90 90
4 80 100

Suppose the fixed cost of the firms is $20. Which of the following statements are
INCORRECT?
(1) The equilibrium price is $100.
(2) Producer surplus is maximised when three units of output are produced.
(3) The efficient output level will be three units if and only if the fixed cost
becomes zero.
(4) The total social surplus is $60.
A. (1) and (2) only
B. (1) and (3) only

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Question Bank (Chapter 15)
C. (2) and (4) only
D. (3) and (4) only

Answer: B

Question code: B3C15Q055

Referring to the diagram below, which part is the new consumer surplus?
$
A S

B
F
C
E
G

D2 D1
Q
0

A. Area ACF
B. Area E0G
C. Area BEG
D. Area C0F

Answer: C

Question code: B3C15Q056

Referring to the diagram below, which part is the new producer surplus?
$
A S

B
F
C
E
G

D2 D1
Q
0

A. Area ACF
B. Area C0F
C. Area BEG
D. Area E0G

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Question Bank (Chapter 15)
Answer: D

Question code: B3C15Q057

*The schedule below shows the marginal benefit of consumers.

Quantity (Units) Marginal benefit ($)

1 100
2 90
3 80
4 70

Suppose the market price is $90. Which of the following statements are
INCORRECT?
(1) At this price level, the consumer surplus is maximised when two units of the
good are consumed.
(2) We cannot find the consumer surplus as we do not have information about the
marginal cost.
(3) If there is an increase in supply so that the price decreases to $70, the
consumer surplus will increase by $60.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

Answer: C
Explanation
Option (3) is incorrect. The old consumer surplus is $10 (= $100 + $90 – $180). The
new consumer surplus is $60 (= $100 + $90 + $80 + $70 – $280). Thus, the consumer
surplus will increase by $50 (= $60 – $10).

Question code: B3C15Q058

The schedule below shows the marginal cost of a producer in a perfectly competitive
market.

Output (Units) Marginal cost ($)

1 70

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Question Bank (Chapter 15)
 2 80
3 90
4 100

Suppose the market price is $80 and the fixed cost is $10. Which of the following
statement(s) is/are correct?
(1) The producer will sell two units of the good.
(2) Producer surplus is maximised when three units of goods are produced.
(3) The producer can charge a higher price if he is willing to sell four units of
output.
(4) When the price increases to $100 due to an increase in demand, the producer
surplus will increase to $60.
A. (1) only
B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

Answer: B

Question code: B3C15Q059

An increase in the consumer surplus may be caused by
A. an increase in demand.
B. a decrease in supply.
C. an increase in price.
D. a decrease in quantity transacted.

Answer: A

Question code: B3C15Q060

A decrease in the producer surplus may be caused by
A. an increase in demand.
B. a decrease in supply.
C. a decrease in price.
D. an increase in quantity supplied.

Answer: B

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Question Bank (Chapter 15)
Question code: B3C15Q061
If the demand for a good increases, other things being equal,
A. consumers’ income must increase.
B. the consumer surplus will increase as the price will decrease.
C. the producer surplus will increase as the cost of production will decrease.
D. the total social surplus will increase.

Answer: D

Question code: B3C15Q062

If the demand for a good decreases, other things being equal,
A. income must decrease.
B. the producer surplus will increase as the price will decrease.
C. the total cost of production will decrease.
D. the price will increase as the quantity transacted will decrease.

Answer: C
Explanation
In a perfectly competitive market, a positive price implies a positive marginal cost.
When there is a decrease in demand, the quantity transacted will decrease. This will
lead to a decrease in total cost.
Question code: B3C15Q063
*If the supply of a good decreases, other things being equal, the
A. consumer surplus will decrease.
B. average cost will decrease.
C. marginal cost will decrease.
D. total cost must decrease.

Answer: A
Explanation
Option A is correct. When the supply decreases, the quantity transacted will decrease.
Both the consumer surplus and producer surplus will decrease.
The decrease in supply implies an increase in the marginal cost of each unit. The total
cost and average cost may increase or decrease with the drop in quantity transacted
and the increase in marginal cost.

Question code: B3C15Q064

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Question Bank (Chapter 15)
If the supply of a good increases, other things being equal, the
A. consumer surplus will decrease.
B. producer surplus will decrease because the price will be lower.
C. consumer surplus will increase because consumers can enjoy more of the good at
a lower price.
D. the change in producer surplus will be uncertain because the price will be lower
while the quantity transacted is higher.

Answer: C

Question code: B3C15Q065

*When both the demand for and supply of a good change, we can predict that the total
social surplus will increase if
A. the quantity transacted remains unchanged while the price increases.
B. the quantity demanded decreases while the quantity supplied increases.
C. the price of the good increases.
D. the quantity transacted increases.

Answer: D

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Question Bank (Chapter 15)
Short Questions

Question code: B3C15Q301

Study the following table and answer the questions below:

Quantity
Total benefit Marginal benefit
(units)
4 $70
3 $45
2 $25
1 $10

(a) Complete the table above. (2 marks)

(b) Given that the market price is $25, what will the quantity demanded be? (1 mark)

Answers:
(a)
Quantity (units) Total benefit Marginal benefit
4 $70 $25
3 $45 $20
2 $25 $15
1 $10 $10

(0.5 × 4 = 2 marks)
(b) The quantity demanded will be four units. (MB = P = $25) (1 mark)

Question code: B3C15Q302

Study the following table and answer the questions below:

Quantity (units) Average benefit Marginal benefit

4 $13.5
3 $14
2 $14.5
1 $15

(a) Complete the table above. (2 marks)

(b) Given that the market price is $14, what will the quantity demanded be? (1 mark)

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Question Bank (Chapter 15)
Answers:
(a) Quantity (units) Average benefit Marginal benefit
4 13.5 $12
3 14 $13
2 $14.5 $14
1 $15 $15

(0.5 × 4 = 2 marks)
(b) The quantity demanded will be two units. (MB = P = $14) (1 mark)

Question code: B3C15Q303

Study the following table and answer the questions below:

Quantity (units) Total benefit

4 $10
3 $9
2 $7
1 $4

(a) Based on the information provided, draw the demand curve. Explain your steps
briefly. (6 marks)
(b) What will the consumer surplus be if the price is $3? (1 mark)

Answers:
(a) A rational consumer will increase his consumption until the marginal benefit of
the last unit equals the price. (1 mark)
Thus, a consumer’s quantity demanded at a particular price can be obtained by
equating the marginal benefit with that price. (1 mark)
A demand curve relates price to quantity demanded. (1 mark)
Thus, we can convert the marginal benefit schedule into a demand schedule and
draw the demand curve accordingly. (1 mark)

MB = Price Quantity demanded

$1 4
$2 3
$3 2

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Question Bank (Chapter 15)
 $4 1
(2 marks)
P

4
3
2
1
D
Q
0 1 2 3 4

(b) The consumer surplus will be $1 (i.e., $7 – $6) (1 mark)

Question code: B3C15Q304

Study the following table and answer the questions below:

Quantity Total Marginal Average

(units) benefit benefit benefit
5 $1
4 $11
3 $39
2 $30 $13 $15

(a) What is the relation between marginal benefit and total benefit? Total benefit and
average benefit? Complete the table. (5 marks)
(b) Given that the market price is $5, what will the quantity demanded, total
expenditure and consumer surplus be? (3 marks)
(c) If the market price falls from $5 to $1, what will the change in the consumer
surplus be? (2 marks)

Answers:
(a) Marginal benefit of the nth unit = Total benefit of nth unit – Total benefit of
(n – 1)th unit (Or: Total benefit = Σ Marginal benefit) (1 mark)
Total benefit = Average benefit × Quantity (Or: Average benefit = Total benefit ÷
Quantity) (1 mark)

NSS Exploring Economics 3 28 © Pearson Education Asia Limited 2010

Question Bank (Chapter 15)
 Quantity
Total benefit Marginal benefit Average benefit
(units)
5 $45 $1 $9
4 $44 $5 $11
3 $39 $9 $13
2 $30 $13 $15
(0.5 × 6 = 3 marks)
(b) Quantity demanded = 4 units (at MB = P = $5) (1 mark)
Total expenditure = $20 (= $5 × 4) (1 mark)
Consumer surplus = $24 (= $44 – $20) (1 mark)
(c) The new consumer surplus will be $40 [= $45 – (5 × $1)]. Thus, the consumer
surplus will increase by $16 ($40 – $24). (2 marks)

Question code: B3C15Q305

‘To find a consumer surplus, we only need information about the price and marginal
benefit of the last unit of a good.’ Do you agree? Explain your answer. (3 marks)

Answers:
No. (1 mark)
To find the consumer surplus, we also need to know the quantity transacted and the
marginal benefit of each unit of the good bought. (2 marks)

Question code: B3C15Q306

*A farmer who studied Economics said, ‘Under a competitive market, the price of
each apple must be the same as the marginal cost for each apple. Thus, there is no
difference between the price and marginal cost, and the amount I can receive is
exactly my cost of production. Thus, a competitive market is not good for farmers.’
Do you agree? Explain your answer. (3 marks)

Answers:
The farmer is not correct. (1 mark)
Under a competitive market, only the marginal cost of the last unit of apples is the
same as the price. Thus, farmers can gain a producer surplus equal to the sum of the
difference between the price and the marginal cost for the units sold. (2 marks)

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Question Bank (Chapter 15)
Question code: B3C15Q307
*Mary works in a firm which operates in a perfectly competitive market. Mary is very
careless and not good at Maths and Economics. Below is the marginal cost and
average cost she worked out based on the total cost.

Quantity
Total cost Total variable cost Marginal cost Average cost
(units)
4 $52 $51 $13 $36
3 $16 $12 $5.3 $7
2 $9 $8 $4.5 $5
1 $4 $3 $4 $3
0 $1 $0 — $1

(a) Mary’s boss found that the total cost of four units should be $25. He also found
there were other mistakes in the table concerning total variable costs, marginal
cost and average cost. Help him correct all of the mistakes and rewrite the table.
(6 marks)
(b) If the market price is $5, what will the output level of the firm be? Explain your
answer. (3 marks)

Answers:
Quantity
Total cost Total variable cost Marginal cost Average cost
(units)
4 $25 $24 $9 $6.25
3 $16 $15 $7 $5.33
2 $9 $8 $5 $4.5
1 $4 $3 $3 $4
0 $1 $0 — —
(a)

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Question Bank (Chapter 15)
 (0.5 × 12 = 6 marks)
(b) The firm will take the market price as it operates in a perfectly competitive market
(1 mark)
and produce at the level where MC = P. (1 mark)
Thus, the output level of the firm will be two units. (1 mark)

Question code: B3C15Q308

Study the following table and answer the questions below:

Quantity (units) Total variable cost Marginal cost

4 $100
3 $60
2 $30
1 $10

(a) Complete the table above. (2 marks)

(b) Given that the market price is $30, what will the quantity supplied be? (1 mark)

Answers:
(a) Quantity (units) Total variable cost Marginal cost
4 $100 $40
3 $60 $30
2 $30 $20
1 $10 $10

(0.5 × 4 = 2 marks)
(b) The quantity supplied will be three units (at MC = P = $30). (1 mark)

Question code: B3C15Q309

Study the following table and answer the questions below:

Quantity (units) Average cost Marginal cost

NSS Exploring Economics 3 31 © Pearson Education Asia Limited 2010

Question Bank (Chapter 15)
 4 $12.5
3 $12
2 $12
1 $13

(a) Suppose the fixed cost is $3. Complete the table above. (2 marks)
(b) Given that the market price is $12, what will the quantity supplied, profit and
producer surplus be? (3 marks)
*(c) In light of the answer in (b), explain whether the firm will produce the good when
the price is $12 using the concepts of fixed cost, variable cost and producer
surplus. (4 marks)

Answers:
(a) Quantity (units) Average cost Marginal cost
4 $12.5 $14
3 $12 $12
2 $12 $11
1 $13 $10

(0.5 × 4 = 2 marks)
(b) The quantity supplied will be three units. (1 mark)
The profit will be $0 [∵Profit = Total revenue – Total cost = $12  3 – $12  3 =
$0]. (1 mark)
The producer surplus will be $3 [$36 – ($12 + $11 + $10)]. (1 mark)

(c) In the short run, a fixed cost must be paid even if the output is zero. Thus, the
fixed cost will not affect the firm’s decision to produce or not. (1 mark)
The variable cost will change according to the change in output. Thus, to
determine the output, the firm will take account of its variable cost. (1 mark)
The producer surplus is equal to the total revenue minus the total variable cost.
Even if the profit is equal to zero when the price is $12, as the producer surplus is
positive, the total variable cost can be covered. Then, it is worthwhile for the firm
to produce some units of the good. (2 marks)

Question code: B3C15Q310

Study the following table and answer the questions below:

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Question Bank (Chapter 15)
 Quantity (units) Total cost
4 $10
3 $6
2 $3
1 $1

(a) Based on the information provided, draw the supply curve. Explain briefly why
we can derive the supply curve from the information provided. (6 marks)
(b) What will the producer surplus be if the price is $3? (1 mark)

Answers:
(a) A rational producer will increase his production until the marginal cost of the last
unit equals the price. (1 mark)
Thus, a producer’s quantity supplied at a particular price can be obtained by
equating the marginal cost with that price. (1 mark)
A supply curve relates price to the quantity supplied. (1 mark)
Thus, we can convert the marginal cost schedule into a supply schedule and draw
the supply curve accordingly. (1 mark)

MC = Price Quantity supplied

$4 4
$3 3
$2 2
$1 1
(2 marks)
P
S
4
3
2
1
Q
0 1 2 3 4

(b) The producer surplus will be $3 ($9 – $6). (1 mark)

Question code: B3C15Q311

‘To find a producer surplus, we need information about total revenue and total cost of
production only.’ Do you agree? Explain your answer. (2 marks)

NSS Exploring Economics 3 33 © Pearson Education Asia Limited 2010

Question Bank (Chapter 15)
Answers:
No. (1 mark)
To find the producer surplus, we should know the total variable cost, rather than the
total cost. (1 mark)

Question code: B3C15Q312

‘Under a perfectly competitive market, when the total social surplus is maximised,
both the consumer surplus and producer surplus will be maximised too.’ Do you
agree? Explain your answer. (5 marks)

Answers:
Agree. (1 mark)
The condition for the maximisation of consumer surplus is P = MB. (1 mark)
In a perfectly competitive market, the condition for the maximisation of the producer
surplus is P = MC. (1 mark)
The total social surplus is maximised when MB = P = MC. (1 mark)
When total social surplus is maximised, both the conditions for the maximisation of
the consumer surplus and producer surplus will be fulfilled. (1 mark)

Question code: B3C15Q313

*‘If there is an increase in the demand for a good, the total social surplus of this good
must increase.’ Draw a diagram with a brief explanation to show that
(a) the statement is true if ‘other things being constant’ is assumed and the supply
curve is upward sloping; (5 marks)
(b) the statement may NOT be true if there is a change in supply. (5 marks)

Answers:
(a) When there is an increase in demand, the demand curve will shift from D1 to D2.
Other things being constant, the quantity transacted will increase from Q1 to Q2.
(2 marks)
The total social surplus will increase (from CA0 to FB0). Thus, the statement is
true. (1 mark)

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Question Bank (Chapter 15)
 (2 marks)
$
F S = MC
Old total social surplus: CA0

C
New total social surplus: FB0
B
P2
A
P1

D1 D2
Q
0 Q1 Q2

(b) Suppose there is a decrease in supply. Even if the demand increases, if the extent
of the decrease in supply is greater than or equal to that of the increase in demand,
the quantity transacted will decrease [from Q1 to Q2 in case (i)] or remain
unchanged [Q1 = Q2 in case (ii)], respectively. (2 marks)
Thus, if the condition ‘other things being constant’ does not hold, the statement
may not be true. (1 mark)
(2 marks)
Case (i)
$
S2 S > D
F S1
B Old total social surplus: CA0
P2
C New total social surplus: FBE
E
A Old TSS > New TSS
P1

D1 D2
Q
0 Q2 Q1

Or

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Question Bank (Chapter 15)
 (2 marks)
Case (ii)
$
S2 S = D
F S1
Old total social surplus: CA0
B
C New total social surplus: FBE

E A Old TSS = New TSS

D1 D2
Q
0 Q1 = Q2

[Note: You are required to explain only one case: either Case (i) or Case (ii).]

Question code: B3C15Q314

*‘In a perfectly competitive market, when there is an increase in quantity transacted
due to changes in demand and supply, the total social surplus must increase.’
Assuming that the demand curve is downward sloping and the supply curve is upward
sloping, show that the statement is true. (6 marks)

Answers:
Consumers will buy more goods if the additional units of goods bought can provide
them with an extra consumer surplus. (1 mark)
Producers will sell more goods if the additional units of goods sold can provide them
with an extra producer surplus. (1 mark)
An increase in the quantity transacted implies that consumers have bought more
goods and producers have sold more goods. (1 mark)
This implies that both the consumer surplus and the producer surplus increase.
(1 mark)
The total social surplus is equal to the sum of the consumer surplus and the producer
surplus. Thus, the increase in both the consumer surplus and the producer surplus
means that the total social surplus will also increase. (2 marks)

Question code: B3C15Q315

Study the following table and answer the questions below:

Quantity (units) Total benefit Total cost

4 $180 $150
3 $150 $100

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Question Bank (Chapter 15)
 2 $110 $60
1 $60 $30

(a) Given that the fixed cost is $10, find the marginal cost and marginal benefit.
(4 marks)
(b) What are the equilibrium price and quantity transacted? (1 mark)

Answers:
(a) Quantity (units) Marginal benefit Marginal cost
4 $30 $50
3 $40 $40
2 $50 $30
1 $60 $20

(0.5 × 8 = 4 marks)
(b) The equilibrium price is $40 (1 mark)
and the quantity transacted is three units. (1 mark)

Question code: B3C15Q316

Study the following table and answer the questions below:

Quantity (units) Average cost Average benefit

4 $16.25 $16.5
3 $16 $17
2 $16 $17.5
1 $17 $18

*(a) Given that the fixed cost is $3, find the marginal cost and marginal benefit.
(4 marks)
(b) What are the equilibrium price and quantity transacted? (2 marks)
(c) Define consumer surplus and producer surplus. What are the consumer surplus
and producer surplus in the market? (4 marks)

Answers:
(a) Quantity (units) Marginal cost Marginal benefit
4 $17 $15
3 $16 $16
2 $15 $17
1 $14 $18
NSS Exploring Economics 3 37 © Pearson Education Asia Limited 2010
Question Bank (Chapter 15)
 (0.5 × 8 = 4 marks)
(b) The equilibrium price is $16. (1 mark)
The quantity transacted is three units. (1 mark)
(c) Consumer surplus refers to the extra amount a consumer is willing to pay above
what he actually pays for a given quantity demanded. (1 mark)
Producer surplus refers to the extra amount a producer actually receives above the
minimum amount he must receive to produce a given quantity. (1 mark)
Consumer surplus = $18 + $17 + $16 – ($16 × 3) = $3 (1 mark)
Producer surplus = ($16 × 3) – ($16 + $15 + $14) = $3 (1 mark)

Structured Questions

Question code: B3C15Q501

To fight against bird flu, the government in Country A decided to ban the sale of live
chickens. It considered paying compensation to live chicken traders so that they
would cease doing business.
(a) Suppose news of bird flu led to a large decrease in both the demand for and supply
of live chickens. What would the changes in quantity transacted, the consumer
surplus and the producer surplus of live chickens be? Draw a diagram to show
your answer. (3 marks)
(b) What would the change in equilibrium price be? (2 marks)
*(c) To encourage traders to surrender their businesses, what would the minimum
amount of compensation to the traders be? Explain. (4 marks)

Answers:
(a)

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Question Bank (Chapter 15)
 $ S2

S1 Decrease in consumer surplus

Decrease in producer surplus

D2 D1
Q
0 Q2 Q1

(3 marks)
(b) The decrease in supply would lead to an increase in price while the decrease in
demand would lead to a decrease in price. Thus, the overall effect on price would
be uncertain. (2 marks)
(c) The amount of compensation should at least cover the cost of surrendering the
business. The cost of surrendering is the value of selling live chickens. (2 marks)
The value of selling live chickens is the expected net gain from selling live
chickens, which is equal to the expected total producer surplus. (2 marks)

Question code: B3C15Q502

Traditionally, when prices are rising, people will buy more gold as a store of value (價
值儲藏). Thanks to global inflation, demand for gold has increased rapidly. In
addition, as income levels in China increase, demand for gold jewellery is increasing
sharply. This trend is expected to continue. On the other hand, as the costs of gold
exploration and mining are increasing rapidly, the supply of gold is declining.
(a) Recently, gold prices hit a record high. With reference to the above information,
explain this phenomenon. (4 marks)
(b) If the quantity transacted of gold decreases, what will the change in the total social
surplus be? Draw a diagram to show your answer. (4 marks)
(c) Paul has $1 million. He can either choose to deposit his money into banks to earn
interest or buy gold. Explain whether the cost will change in the following cases if
he chooses to buy gold.
(i) The interest rate increases rapidly. (2 marks)
(ii) A financial crisis has occurred again. There are massive bank runs (擠提) in
the country. (2 marks)
(iii) There is a rumour that the price of gold will decrease.
(2 marks)
(iv)After Paul has bought gold, interest rates increase and the price of gold

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Question Bank (Chapter 15)
 dramatically decreases. (2 marks)

Answers:
(a) Some demand for gold is derived from the demand for gold jewellery. Thus, the
increase in the demand for gold jewellery will lead to an increase in the demand
for gold. The increase in the demand for gold will lead to an increase in the price
of gold. (2 marks)
The increase in the cost of gold exploration and mining will lead to a decrease in
the supply of gold. This will lead to an increase in the price of gold. (2 marks)
(b) The total social surplus will decrease from Triangle BAC to Triangle B’A’C’.
(1 marks)
$
S2 Old total social surplus: Triangle BAC
New total social surplus: Triangle B’A’C’
S1
C’
A’
C

B’ A

B D1 D2
Q
0 Q2 Q1

(3 marks)

(c) (i) If Paul chooses to buy gold, he will forgo the opportunity to earn interest.
Thus, if interest rates increase, his cost will increase. (2 marks)
(ii) As the risk that banks cannot repay depositors’ money increases, the expected
value of depositing money into a bank decreases. Thus, the cost of buying
gold will decrease. (2 marks)
(iii) The change in expectations about the price of gold will not affect the value of
depositing money into the bank (which is the highest-valued option forgone).
Thus, the cost will remain unchanged. (2 marks)
(iv)When an action has been taken, nothing can affect the cost of the action. When
measuring the cost of an action, we only consider the options available within
the decision-making period. Thus, an increase in interest rates will not be
counted in the cost of buying gold. The cost of buying gold (which is a sunk
cost or historical cost now) will not change. (2 marks)

Question code: B3C15Q503

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Question Bank (Chapter 15)
Due to climate change, dry areas have become drier and water shortages have
worsened. Less land can be used to produce barley, a key ingredient of beer. Thus, it
is expected that barley production will decline and so will beer. Some breweries are
looking for new varieties of barley, which can better cope with climate change.
(a) Explain why beer drinkers will suffer from climate change using the concept of
consumer surplus. Show your answer with the aid of a diagram. (6 marks)
(b) Suppose some breweries find a new variety of barley which can be grown on dry
land at a very low cost. How will this discovery affect the quantity transacted and
price of beer. With the aid of a diagram, explain how drinkers and breweries will
benefit. (7 marks)
(c) Suppose, because of the climate change, the quality of barley declines so that the
demand for beer decreases. What change will there be in the quantity transacted,
price, consumer surplus, producer surplus and total social surplus in the beer
market? Explain with the aid of a diagram. (7 marks)

Answers:
(a) Climate change will lead to a decrease in the supply of barley. (1 mark)
The price of beer will increase from P0 to P1 and the quantity of beer transacted
will decrease (from Q0 to Q1). Drinkers will drink fewer beers and pay a higher
price. (2 marks)
Therefore, the consumer surplus, which measures the gain from consumption, will
decrease (from Triangle CP0A to Triangle CP1A’). (1 mark)
$
S1 Old consumer surplus: Triangle CP0A
New consumer surplus: Triangle CP1A’
S0
C A’
P1
B’ A
P0

B D
0 Q1 Q
Q0

(2 marks)

(b) The discovery of the new variety of barley will lower the cost of producing beer.
This will lead to an increase in the supply of beer. (1 mark)
The quantity transacted will increase (from Q1 to Q2). (1 mark)
The price will decrease (from P1 to P2). (1 mark)

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Question Bank (Chapter 15)
 The consumer surplus will increase from Triangle CP1A to Triangle CP2A’.
(1 mark)
The producer surplus will increase from Triangle P1BA to Triangle P2B’A’.
(1 mark)

$
S1

S2 Old consumer surplus: Triangle CP1A

C New consumer surplus: Triangle CP2 A’
A Old producer surplus: Triangle P1BA
P1
New producer surplus: Triangle P2B’A’
B A’
P2

B’ D
0 Q
Q1 Q2

(2 marks)
(c) The quantity transacted will decrease from Q1 to Q2. (1 mark)
The price will decrease from P1 to P2. (1 mark)
The consumer surplus will decrease from Triangle CP1A to Triangle C’P2A’.
(1 mark)
The producer surplus will decrease from Triangle P1BA to Triangle P2BA’.
(1 mark)
The total social surplus will decrease from Triangle CBA to Triangle C’BA’.
(1 mark)
$

S Old consumer surplus: Triangle CP1A

C New consumer surplus: Triangle C’P2A’.
Old producer surplus: Triangle P1BA
New producer surplus: Triangle P2BA’
A
P1
C’
A’
P2

B D2 D1
0 Q
Q2 Q1

(2 marks)

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Question Bank (Chapter 15)