Question

Say whether the statement is True or False. If False, supply a reason or correct the statement.

(a) Producer Surplus is the profit that producers get.

(b) Consumer Surplus represents savings.

(c) When price is at equilibrium, producer and consumer surplus are equal

(d) Deadweight Loss represents goods that cannot be bought or sold due to deviations of price from equilibrium

(e) Deviations have a tendency to go back to equilibrium because the government makes price interventions

Answer 1

a) True

Produce surplus is roughly equal to the profit producers make.

It is the amount which producers benefit by selling at a market price which is greater than the minimum that they are willing to sell for.

b) True.

Consumer surplus represents savings.

It is the monetary gain that the consumers get when they can buy a product for a price which is lower than the highest price which they are willing to pay.

C) True.

At equilibrium, consumer surplus and producer surplus are equal.

D) True.

Deadweight loss can also be referred to as allocative inefficiency.

It is the economic inefficiency which can happen due to non attainment of free market equilibrium.