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Determining Social Welfare by Total Surplus

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.