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CHAPTER 14—ECONOMIC EFFICIENCY AND THE COMPETITIVE IDEAL
MULTIPLE CHOICE
1) In an efficient economy,
a. no one could be made better off by a change in the way goods are allocated
b. revenue for all firms is maximized
c. a change in the way goods are allocated could make someone worse off
d. goods are allocated fairly among individuals
e. no one would be made worse off if there is a change in the way goods are allocated
Answer: C
2) Economic efficiency is achieved
a. when all resources are fairly allocated
b. when an economy is producing the maximum possible amount of goods and services
c. when production or allocation of goods cannot be rearranged to make one person better off
while harming no one else.
d. if production or allocation of goods cannot be rearranged to make at least one person better
off
e. if production or allocation of goods cannot be rearranged in a way the benefits more people
than it harms
Answer: C
3) An efficient economy
a. is a fair economy
b. can only be a capitalist economy
c. is not necessarily a fair economy
d. would never experience air or water pollution
e. would not have a government sector
Answer: C
4) A Pareto improvement is any action that makes at least one individual better off, and
harms no one.
a. True
b. False
Answer: A
5) A Pareto improvement is any action that makes everyone better off.

a. True
b. False
Answer: B
6) Economic efficiency is achieved
a. automatically in a capitalist economy
b. when every possible Pareto improvement is exploited
c. when all markets are monopolized
d. if income is fairly distributed
e. whenever a voluntary transaction takes place
Answer: B
7) Taking money from a wealthy individual in order to feed a destitute family would be a
Pareto improvement.
a. True
b. False
Answer: B
8) If Bill Gates voluntarily gives some of his money to a destitute family, it would be a Pareto
improvement.
a. True
b. False
Answer: A
9) In real-world markets
a. economic efficiency is rare because making voluntary transactions is difficult
b. economic efficiency is rare because Pareto improvements are difficult to make
c. economic efficiency is best thought of as a continuum
d. perfect competition is an impediment to economic efficiency
e. every possible Pareto improvement is exploited
Answer: C
10) Instead of throwing away a worn-out pair of jeans, a cowboy trades them in for $12. The
jeans are resold for $45 to someone who likes to project a rugged image. These transactions
are Pareto improvements.
a. True
b. False

Answer: A
11) A mutually advantageous trade leads a Pareto improvement.
a. True
b. False
Answer: A
12) Economic efficiency requires that Pareto improvements still be possible.
a. True
b. False
Answer: B
13) Economic efficiency requires that no more Pareto improvements are still possible.
a. True
b. False
Answer: A
14) In order for a Pareto improvement to occur, someone must suffer a loss so that others
may benefit from the improvement.
a. True
b. False
Answer: B
15) Economic efficiency requires all Pareto improvements to be made.
a. True
b. False
Answer: A
16) A Pareto improvement is
a. an action in which the gains to the gainers outweigh the losses to the losers
b. any action that does not harm a third party
c. an action that makes at least one person better off, and no one worse off
d. any action that involves a side payment to a third party
e. the typical outcome of government action
Answer: C
17) Economic efficiency
a. should be society's main goal

b. means that no Pareto improvements are possible
c. cannot coexist with Pareto efficiency
d. requires that income be distributed fairly
e. implies that goods can be reallocated in a way that benefits someone
Answer: B
18) A government program would impose a 25-cent tax on each pack of cigarettes in order to
fund welfare programs. Such a policy
a. is not a Pareto improvement
b. is an example of an economically inefficient economy
c. would clearly not increase tax revenues
d. is a Pareto improvement
e. could only occur in a fair economy
Answer: A
19) If a firm changed its fringe benefit program so that no employee suffered a loss in
benefits and some employees enjoyed an increase in benefits, then
a. this could not be a Pareto improvement
b. the firm's policies are economically efficient
c. this could be a Pareto improvement
d. the firm's policies are fair
e. the firm is losing money
Answer: C
20) When individuals trade in open markets,
a. Pareto improvements occur
b. Pareto improvements cannot occur
c. the markets are economically efficient
d. the markets are Pareto efficient
e. there are barriers to trade
Answer: A
21) Pareto improvements occur
a. through the tax system
b. rarely in the real world

c. when the economy has reached the point of economic efficiency
d. when market exchanges take place
e. when consumers are not perfectly informed
Answer: D
22) If all opportunities for Pareto improvements have been exhausted,
a. economic efficiency has been achieved
b. the allocation of goods and services is fair
c. perfect competition has been achieved
d. the economy is in disequilibrium
e. economic inefficiency has been achieved
Answer: A
23) If an action creates more total benefits for gainers than total harm to losers,
a. that action would be a Pareto improvement.
b. taking that action would improve efficiency
c. the government should step in to take that action
d. a side payment exists that would make the action a Pareto improvement
e. any side payment would make the action inefficient
Answer: D
24) Tom carries on loud cellphone conversations in public places. He values such
conversations at $1 per minute. Steve prefers piece and quiet. He would pay $2 per minute to
avoid overhearing Tom's conversations. In this situation
a. Tom should quit using his cellphone because that would be a Pareto improvement
b. Tom should quit using his cellphone because that would be efficient
c. If Steve made a side payment of $3 to Tom, that would be a Pareto improvement
d. If Steve paid Tom 50 cents per minute to quit talking, that would be a Pareto improvement
e. If Steve paid Tom $1.50 per minute to quit talking, that would be a Pareto improvement
Answer: E
25) Pareto improvements that require the use of side payments typically are easy to
coordinate and tend to enhance economic efficiency.
a. True
b. False

Answer: B
26) The market demand curve indicates
a. the minimum price someone would be willing to pay for each unit of a good
b. the cost of producing each unit of a good
c. the price someone pays for each unit of a good
d. how many people will purchase a good at each possible price
e. the maximum price someone would be willing to pay for each unit of a good
Answer: E
27) The height of the demand curve at any quantity indicates
a. total expenditure on the good or service
b. total revenue to the seller of the good or service
c. whether the price is fair or not
d. how much that particular unit is worth to the person who buys it
e. how much the person who buys that unit actually pays for it
Answer: D
28) The height of the market demand curve
a. at any quantity shows the value — to someone — of the last unit of the good consumed
b. shows the market value of a good or service
c. increases as more of a good or service is consumed
d. shows the cost of producing each unit of a good or service
e. measures the side payment necessary to achieve economic efficiency
Answer: A
29) The benefit to some consumer of the last unit of a good consumed is
a. represented by the height of the supply curve at that quantity
b. negative if the producer is suffering economic loss
c. decreases at an increasing rate in a competitive product market
d. is zero
e. represented by the height of the demand curve at that quantity
Answer: E
30) The height of the market supply curve

a. at any quantity shows the value -- to someone -- of the last unit of the good consumed
b. at any quantity shows the cost -- to someone -- of purchasing the last unit of the good
c. at any quantity shows the marginal cost of producing the last unit of a good
d. shows the market value of a good or service
e. measures the size of the side payment necessary to achieve a Pareto improvement
Answer: C
31) The supply curve indicates
a. the price that will be charged for each unit of a good or service
b. how much people are willing to pay for a good or service
c. the minimum price some seller must receive in order to supply each unit of a good or
service
d. the value of each unit of a good or service
e. the maximum price some seller can expect to receive from supplying each unit of a good or
service
Answer: C
32) If 10 units of a good are sold at a market price of $40 each, then
a. the value to some individual of the tenth unit of output is $40
b. the economy is efficient
c. selling an 11th unit would be a Pareto improvement
d. a side payment of $40 is needed to ensure that the good is produced
e. the market must be perfectly competitive
Answer: A
33) At the output level corresponding to the efficient quantity of a good,
a. the value of the last unit can be negative for some consumer
b. the value of the last unit to some consumer equals the minimum price some seller must
receive for producing it
c. the distribution of the good is fair
d. the minimum price some consumer must pay for the last unit equals the value of the unit to
some producer
e. the price is the lowest that a typical firm would ever be willing to accept
Answer: B
34) At any quantity at which the demand curve lies above the supply curve,

a. economic efficiency is achieved
b. the cost of producing the last unit exceeds its value to some consumer
c. marginal cost exceeds the market price
d. the market is Pareto efficient
e. the value of the last unit to some consumer exceeds the cost of producing it
Answer: E
35) The efficient quantity of a good
a. is achieved whenever the marginal cost of producing the last unit exceeds its value to some
consumer
b. is achieved whenever the value of the last unit to some consumer exceeds the minimum
price its producer would be willing to accept for it
c. will not be produced unless a side payment is made
d. is the quantity at which the market supply and demand curves intersect
e. is usually a fair quantity
Answer: D
36) Of the four major market structures, perfect competition is the best at achieving economic
efficiency.
a. True
b. False
Answer: A
37) Of the four major market structures, oligopoly is the worst at achieving economic
efficiency.
a. True
b. False
Answer: B
38) Competitive pricing
a. ensures that goods will be allocated evenly
b. ensures that goods will be allocated efficiently
c. guarantees a fair distribution of goods
d. only occurs in an oligopolistic market
e. occurs at any quantity at which the demand curve is higher than the supply
Answer: B

39) If the printed circuit board market is perfectly competitive,
a. too many printed circuit boards will be produced
b. printed circuit boards will be allocated efficiently
c. too few printed circuit boards will be produced
d. economic efficiency will not be achieved
e. printed circuit boards will be evenly distributed among consumers
Answer: B
40) Economic efficiency
a. is guaranteed in perfectly competitive and monopolistically competitive markets
b. is achieved in any market where firms are free to maximize profits
c. leads to a fair distribution of income
d. leads to a fair distribution of goods
e. is most likely to be achieved in perfectly competitive markets
Answer: E
41) A buyer's consumer surplus on a unit of a good is its value to that buyer minus what the
buyer actually pays for it.
a. True
b. False
Answer: A
42) A buyer's consumer surplus on a unit of a good is its value to that buyer minus the market
price.
a. True
b. False
Answer: A
43) Market consumer surplus at any quantity -- measured in dollars -- is the area above the
market demand curve and below the market price.
a. True
b. False
Answer: B
44) Because the market demand curve slopes downward
a. each unit of a good is worth more than the market price

b. each unit of a good is worth the market price paid for each
c. each unit of a good is worth less than the previous units are worth
d. diminishing marginal returns have set it
e. the market is efficient
Answer: C
45) The total consumer surplus enjoyed by all consumers in a market
a. exceeds the market price
b. is measured by the area under the market demand curve
c. is measured by the area beneath the market price
d. is a Pareto improvement
e. is called market consumer surplus
Answer: E
46) Market consumer surplus at any price
a. is the area above the market supply curve and below the market demand curve
b. is the area below the market supply curve and above the market demand curve
c. is the area under the demand curve and above the market price
d. is that price multiplied by the number of units demanded
e. is the number of units demanded multiplied by the cost of producing them.
Answer: C
47) Producer surplus for a particular unit of a good is the price the seller receives for that unit
minus the largest amount the seller would accept for it.
a. True
b. False
Answer: B
48) Market producer surplus is the area above the market price and below the market supply
curve.
a. True
b. False
Answer: B
49) If the market supply curve slopes upward
a. each unit of the good costs more to produce than previously produced units did

b. each unit of the good is worth more than the market price
c. each unit of the good is worth the market price paid for it.
d. the market is efficient
e. the market must be imperfectly competitive
Answer: A
50) The total producer surplus enjoyed by all sellers in a market
a. exceeds the market price
b. is measured by the area below the market supply curve
c. is called market producer surplus
d. is the area below the market demand curve minus the area below the market supply curve
e. is the area below the market supply curve minus the area below the market price
Answer: C
51) An individual seller's producer surplus on a unit of a good is
a. zero in perfect competition
b. zero in monopoly
c. greater than the buyer's consumer surplus on that unit
d. an example of a side payment
e. the difference between the price the seller receives and the cost of producing that unit.
Answer: E
52) Total net benefits gained in a market
a. minus any side payments equals total revenue from producing the good (or, equivalently,
total expenditure on the good)
b. is the sum of producer and consumer surplus in that market
c. is the difference between consumer surplus and producer surplus in that market
d. are maximized when the market price equals zero
e. always exceeds the sum of total expenditure on the good and the total cost of providing it
Answer: B
53) A Pareto improvement
a. cannot take place unless a side payment is made
b. cannot take place unless a market is perfectly competitive
c. cannot occur unless both parties to a transaction enjoy positive net benefits

d. will increase the total net benefits available in a perfectly competitive market
e. occurs whenever the sum of market consumer surplus and market producer surplus is
positive
Answer: D
54) Suppose that a perfectly competitive market is in equilibrium. Then,
a. the equilibrium quantity provides the maximum possible benefit to buyers
b. the equilibrium quantity provides the maximum possible benefit to buyers and sellers
combined
c. total (producer + consumer) surplus is equal to price x quantity.
d. an additional unit, if produced, would produce a benefit that exceeds its cost of production
e. an additional unit could be produced at a cost to some producer that is less than the benefit
to some consumer
Answer: B
55) A price ceiling in a perfectly competitive market
a. creates more harm for sellers than gain for buyers
b. creates more harm for buyers than gain for sellers
c. is effective only it if is set above the equilibrium price
d. can turn an inefficient outcome into an efficient outcome
e. is a Pareto improvement
Answer: A
56) A price ceiling in a perfectly competitive market
a. leads to the same result as if the market were monopolized
b. results in a welfare loss
c. is effective only if it is set above the equilibrium price
d. may result from collusion among the firms selling in that market
e. may result from collusion among the consumers buying in that market
Answer: B
57) A welfare loss in a market
a. is the dollar difference between consumer surplus and producer surplus
b. is measured as the area above the market price and to the left of the market quantity
c. is the dollar value of potential benefits not achieved due to inefficiency in that market

d. is typically due to government intervention in that market
e. is typically minimized when a government sets a ceiling price
Answer: C
58) A price floor in a perfectly competitive market
a. is efficient
b. is a Pareto improvement
c. is effective only if it is set below the equilibrium price
d. transfers some surplus from consumers to producers
e. transfers some surplus from producers to consumers
Answer: D
59) A price floor in a perfectly competitive market
a. creates more harm for sellers than gain for buyers
b. is effective only it is set at the equilibrium price
c. is a Pareto improvement
d. can turn an inefficient outcome into an efficient outcome
e. creates more harm for buyers than gain for sellers
Answer: E
60) The welfare loss due to a price floor
a. is caused by a decrease in quantity
b. is the dollar difference between producer surplus and consumer surplus
c. is measured as the area above the market price and below the demand curve
d. is measured as the area above both the market price and the supply curve
e. is a Pareto improvement
Answer: A
61) Tax shifting
a. is the process by which buyers pass a tax onto sellers
b. is the process that causes some of a tax collected by one side of a market to be paid by the
other side
c. is the process of avoiding taxes and lowering a tax burden
d. is a way of avoiding payment of a tax
e. is illegal in the United States

Answer: B
62) The more elastic the demand for a good,
a. the more of an excise tax is that is collected by sellers
b. the more of an excise tax that is paid by buyers
c. the more an excise that is paid by sellers
d. the more elastic the supply of that good
e. the smaller the burden of a tax on that good
Answer: C
63) For a given supply curve, the more inelastic the demand for a good,
a. the more of an excise tax that is paid by sellers.
b. the less an excise tax is shifted.
c. the smaller the burden of an excise tax.
d. the more of an excise tax that is paid by buyers.
e. the smaller the increase in market price following imposition of an excise tax
Answer: D
64) If the supply curve is perfectly inelastic and an excise tax is imposed
a. all of the tax is paid by buyers
b. all of the tax is paid by sellers
c. the market price will rise by the amount of the tax
d. the market price will fall by the amount of the tax
e. the tax is divided equally between buyers and sellers
Answer: B
65) If the market supply curve is perfectly elastic and an excise tax is imposed,
a. all of the tax is paid by buyers
b. all of the tax is paid by sellers
c. the tax burden is divided equally between buyers and sellers
d. the market price will not change
e. the market price will fall by the amount of the tax
Answer: A

66) Rebecca and Leah are roommates. Rebecca likes to study with the music playing loudly
and Leah needs quiet when she studies. Rebecca would be willing to pay $5 a night to hear
music while Leah would be willing to pay $10 a night for the quiet. In this situation
a. Leah should pay Rebecca $7.50 a night to not listen to music, because that would be a
Pareto improvement
b. Rebecca should stop listening to music because that would be a Pareto improvement
c. There is no action that would create a Pareto improvement
d. Rebecca should pay Leah $7.50 a night to listen to music, because that would be a Pareto
improvement
e. Leah should pay Rebecca $4.50 a night to not listen to music, because that would be a
Pareto improvement
Answer: A
67) If 20 smoothies are sold at a market price of $5.50 each, then
a. there must not be an excess supply of smoothies
b. selling the 21st smoothie would be a Pareto improvement
c. the market must be perfectly competitive
d. the value to some individual of the 20th smoothie is $5.50
e. there must be an excess demand for smoothies
Answer: D
68) A perfectly competitive market usually achieves economic efficiency because
a. there are no barriers to entry
b. there are no barriers to entry and all of the goods are perfect substitutes
c. each of the firms in the industry are profit maximizers
d. it is the most fair
e. most buyers in the market have the same level of income
Answer: B
69) Jordan wants to sell her wedding gown for $250, but her cousin Jessica offered her $375
for it. If the gown is sold for $375, what is Jordan’s producer’s surplus
a. $125
b. $25
c. $625
d. $373

e. $250
Answer: A

70) In Figure 14-1, which area represents consumer surplus?
a. A
b. B
c. C
d. D
e. E
Answer: B
71) In Figure 14-1 which area represents producer surplus?
a. A
b. B
c. C
d. D
e. E
Answer: C
72) In figure 14-1, which area represents total net benefits gained in the market
a. A + B
b. B + D
c. A + C

d. B + C
e. A + E
Answer: D
73) If a perfectly competitive market is in equilibrium and then market demand increases,
which of the following would happen?
a. producer surplus would definitely increase and consumer surplus may increase or decrease
b. producer surplus would definitely decrease and consumer surplus may increase or decrease
c. consumer surplus would definitely decrease and producer surplus may increase or decrease
d. consumer surplus would definitely increase and producer surplus may increase or decrease
e. producer and consumer surplus would remain unchanged
Answer: A
74) Suppose a perfectly competitive market is in equilibrium, and then market supply
increases. Which of the following would happen?
a. producer surplus would definitely increase and consumer surplus may increase or decrease
b. producer surplus would definitely decrease and consumer surplus may increase or decrease
c. consumer surplus would definitely decrease and producer surplus may increase or decrease
d. consumer surplus would definitely increase and producer surplus may increase or decrease
e. producer and consumer surplus would remain unchanged
Answer: D
75) If a perfectly competitive market is in equilibrium and market demand decreases, which
of the following would happen?
a. both producer and consumer surplus would increase
b. both producer and consumer surplus would decrease
c. producer surplus would decrease and consumer surplus would increase
d. producer surplus would increase and consumer surplus would decrease
e. producer and consumer surplus would remain unchanged
Answer: B
76) Suppose that a perfectly competitive market is in equilibrium, and then market supply
decreases. Which of the following would happen?
a. both producer and consumer surplus would increase
b. both producer and consumer surplus would decrease
c. producer surplus would decrease and consumer surplus would increase

d. producer surplus would increase and consumer surplus would decrease
e. producer and consumer surplus would remain unchanged
Answer: B
77) If the price floor of a market is raised, which of the following would happen?
a. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would decrease
b. The consumer surplus would decrease, the producer surplus would decrease and the dead
weight loss would increase
c. The consumer surplus, the producer surplus and the dead weight loss would all decrease
d. The consumer surplus, the producer surplus and the dead weight loss would all increase
e. The consumer surplus would decrease, the producer surplus would increase and the dead
weight loss would increase
Answer: E
78) Consider a market with a price floor. If the price floor is lowered, which of the following
would happen?
a. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would decrease
b. The consumer surplus would decrease, the producer surplus would decrease and the dead
weight loss would increase
c. The consumer surplus, the producer surplus and the dead weight loss would all decrease
d. The consumer surplus, the producer surplus and the dead weight loss would all increase
e. The consumer surplus would decrease, the producer surplus would increase and the dead
weight loss would increase
Answer: A
79) Consider a market with a price ceiling. If the price ceiling is lowered which of the
following would happen?
a. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would decrease
b. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would increase
c. The consumer surplus, the producer surplus and the dead weight loss would all decrease
d. The consumer surplus, the producer surplus and the dead weight loss would all increase
e. The consumer surplus would decrease, the producer surplus would increase and the dead
weight loss would increase

Answer: B
80) Consider a market with a price ceiling. If the price ceiling is raised which of the
following would happen?
a. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would decrease
b. The consumer surplus would increase, the producer surplus would decrease and the dead
weight loss would increase
c. The consumer surplus, the producer surplus and the dead weight loss would all decrease
d. The consumer surplus, the producer surplus and the dead weight loss would all increase
e. The consumer surplus would decrease, the producer surplus would increase and the dead
weight loss would decrease
Answer: E

Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056

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