Questions: A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest." This statement is false because A. the marginal benefit and marginal cost relationship has no relevance to economic surplus. B. the level of output where the difference between marginal benefit and marginal cost is largest will be above the output level needed to have the maximum economic surplus. C. the level of output where the difference between marginal benefit and marginal cost is largest will also have the highest producer and consumer surplus. D. the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

The answer is D: the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

Explanation for each option:

A. The marginal benefit and marginal cost relationship has no relevance to economic surplus.

• This statement is incorrect. The relationship between marginal benefit (MB) and marginal cost (MC) is crucial to understanding economic surplus. Economic surplus is maximized when MB equals MC, as this is the point where the allocation of resources is most efficient.

B. The level of output where the difference between marginal benefit and marginal cost is largest will be above the output level needed to have the maximum economic surplus.

• This statement is incorrect. If the output level is above the point where MB equals MC, the marginal cost will exceed the marginal benefit, leading to a decrease in economic surplus. Therefore, the output level where the difference between MB and MC is largest is not above the optimal level.

C. The level of output where the difference between marginal benefit and marginal cost is largest will also have the highest producer and consumer surplus.

• This statement is incorrect. The highest producer and consumer surplus occurs at the point where MB equals MC, not where the difference between MB and MC is largest. At the point where MB equals MC, the total economic surplus (sum of consumer and producer surplus) is maximized.

D. The level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

• This statement is correct. The difference between MB and MC is largest at a point where the output level is below the optimal level (where MB equals MC). At this point, increasing output would still increase economic surplus until MB equals MC. Therefore, the maximum economic surplus is not achieved at the point where the difference between MB and MC is largest, but rather where MB equals MC.