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Determining Social Welfare by Total Surplus

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Indicate whether each of the following statements is true or false, and explain why.

A. In competitive market equilibrium, social welfare is measured by the net benefits derived from consumption and production as measured by the difference between consumer surplus and producer surplus.

B. The market supply curve indicates the minimum price required by sellers as a group to bring forth production.

C. Consumer surplus is the amount that consumers are willing to pay for a given good or service minus the amount that they are required to pay.

D. Whereas consumer surplus is closely related to the supply curve for a product, producer surplus is closely related to the demand curve for a product.

E. Producer surplus is the net benefit derived by producers from production.

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A. This is false. Social welfare is maximized when resources are allocated efficiently, which maximizes both consumer and producer surplus. Thus it is the sum of consumer and producer surpluses, not their difference. Note that this outcome occurs only at ...

Solution Summary

Determining social welfare by total surplus. How consumer and producer surplus are determined.

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Social Welfare Implications of Price Discrimination

1) Price discrimination is often defended on the basis of equity (Charge less for the poor than the rich!). Is this the only rationale for price discrimination?

2) If a market price is determined by a dominant price leader, what happens to the price (gets higher or lower) if the number of the followers increase? (First review Figure 11.2 on page 504.)

(See attached diagram).

3) What is transfer pricing? Give an example.

4) Discuss the social welfare implications of price discrimination

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