Microeconomics

Chapter 7

Melissa buys an iPod for $120 and gets consumer surplus of $80.a. What is her willingness to pay?

b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?

c. If the price of an iPod were $250, what would her consumer surplus have been?

Step-by-step solution

Step 1 of 4 Consumer surplus is given by the difference between the willingness of the consumer to pay and the actual price he pays. Consumer surplus= Maximum price willing to pay by the buyer – Actual price paid.

You are watching: Melissa buys an iphone for $120 and gets a consumer surplus of $80.

Step 2 of 4 a) M’s consumer surplus= $80, Actual price paid or market price= 120. Maximum willing price can be calculated by submitting these values in the formula. Consumer surplus= Maximum price willing to pay by the buyer – Actual price paid. $80 = Maximum price willing to pay by the buyer – $ Maximum price willing to pay by the buyer= $80 +$ 120 = $ 200. Maximum price willing to pay by the M is = $

Step 3 of 4 b) When actual price paid is $90. Consumer surplus= Maximum price willing to pay by the buyer – Actual price paid. Actual price paid= $ Maximum willing price =$ 200 Consumer surplus= $200 -$ = $ 110. Thus, when actual price is $90, consumer surplus is $

Step 4 of 4 c) If the actual market price is $250, then the consumer surplus is zero because the price of product is greater than the willingness to pay of the consumer. Thus, consumer surplus is zero.

An early freeze in California sours the lemon crop. Explain what happens to consumer surplus inthe market for lemons. Explain what happens to consumer surplus in the market for lemonade.Illustrate your answers with diagrams.

Step-by-step solution

Step 1 of 6 Market for Lemon crop: If an early freeze in Cal City sours the lemon crop, then this leads to a decrease in the supply of lemon in the market. Therefore, the supply curve will shift upwards implying decreasing supply at every price level. This is illustrated in the figure below. The initial supply of lemon is given by curve S 1 , due to freeze the supply curve shifts towards left to form S 2 and the new equilibrium point is E 2. At this point, the equilibrium price increases to P 2.Step 2 of 6 Consumer surplus: It is the difference between the willingness to pay for the commodity and price of the commodity. In graphical terms, the area above the price line and below the demand curve shows the consumer surplus. In this case, before freeze, the consumer surplus is given by the area A+B+C. Due to a decrease in the supply the new consumer surplus is A. The main reason of this decrease in consumer surplus is increase in price of the lemon due to shortages of lemons in the market. Thus, the consumer surplus in the lemon market decreases by B+C.Step 3 of 6 Market for Lemons

Initially the market of lemon is in equilibrium at point E 1 and the equilibrium price is P 1.The consumer surplus at this price is A+B+C.Now as the supply contracts, the supply curve shifts from S 1 to S 2. The new equilibrium isattained at E 2 and the new equilibrium price is P 2. The consumer surplus also contractsand it becomes A. Decrease in supply leads to decrease in consumer surplus4. Step 4 of 6Market for Lemonade:Lemons are the key ingredient for lemonade. Therefore, a decrease in the supply oflemons will decrease the supply of lemonade. This results in a shift in the supply curve oflemonades towards left forming S 2. Moreover, the new equilibrium is attained ta pointE 2 where the price is P 2 which is higher than the previous level.

Figure (a)

Step 3 of 5

Figure (b)

Step 4 of 5

Figure (a): At price and quantity , the producer surplus equals the area of triangleABC.

Step 5 of 5

Figure (b): When the price rises from to , the quantity supplied rises from toand the producer surplus rises to the area triangle ADF.

It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:

a. From this information, derive Bert"s demand schedule. Graph his demand curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplusdoes Bert get from his purchases? Show Bert"s consumer surplus in your graph.

c. If the price falls to $2, how does quantity demanded change? How does Bert"s consumer surpluschange? Show these changes in your graph.

Step-by-step solution

Step 1 of 6 (a) Bert’s demand scheduleStep 2 of 6

Price Quantity Demanded

More than $7 0 (Bottles)

$5 to $7 1

$3 to $5 2

$1 to $3 3

$1 or less 4

Step 3 of 6 Demand curve of bottled waterStep 4 of 6

a. From this information, derive Ernie"s supply schedule. Graph his supply curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell?

How much producer surplus does Ernie get from these sales? Show Ernie"s producer sur-plus in yourgraph.

c. If the price rises to $6, how does quantity supplied change? How does Ernie"s producer surplus change?Show these changes in your graph.

Step-by-step solution

Step 1 of 4 (a) The supply schedule is a table that represents the quantity supplied at different price level. The person-E’s supply schedule is as follows:

Step 2 of 4 The graph is as follows:

Step 3 of 4

(b) If the price of a bottled water is , person-E will produce and sell 2 bottles. Theproducer surplus is calculated below:

In the above graph, Ernie’s producer surplus is the bounded area ABCDEF.4. Step 4 of 4(c)

If the price rises to , the quantity supplied will increase to 3 bottles. The producersurplus is calculated below:

The person-E’s producer surplus is $9.In the above graph, person-E’s producer surplus is the bounded area ABCDEGHI.

Consider a market in which Bert from Problem 3 is the buyer and Ernie from Problem 4 isthe seller.

a. Use Ernie"s supply schedule and Bert"s demand schedule to find the quantity sup-plied andquantity demanded at prices of $2, $4, and $6. Which of these prices brings sup-ply and demandinto equilibrium?

b. What are consumer surplus, producer sur-plus, and total surplus in this equilibrium?

c. If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus?

d. If Ernie produced and Bert consumed one additional bottle of water, what would hap-pen to totalsurplus?

Step-by-step solution

Step 1 of 7 Supply and demand schedules of Ernie and Bert can be summarized as under the below table,

Step 2 of 7 From the above table we can see that the quantity demanded equals to quantity supplied at a price of $4. Therefore, $4 is the market clearing price or equilibrium price. In addition, the quantity demanded at this price is the equilibrium quantity. Thus, equilibrium price is $4 and equilibrium quantity is two bottles.

Step 7 of 7 Thus, the total surplus will be sum of consumer and producer surpluses of all the three bottles.

Thus, the total surplus will be $6. Thus, the total surplus fall by $2.

The cost of producing flat-screen TVs has fallen over the past several decades. Let’sconsider some implications of this fact.

a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price andquantity of flat-screen TVs sold.

b. In your diagram, show what happens to consumer surplus and producer surplus.

c. Suppose the supply of flat-screen TVs is very elastic. Who benefits most from falling productioncosts—consumers or producers of these TVs?

Step-by-step solution

Step 1 of 7 A fall in production costs of flat TV screens will increase the supply consequently making a shift in the supply curve towards its right as shown in the below diagram. S 1 is the initial supply curve, and due to decrease in cost of production supply increases forming S2. The new equilibrium point is formed at a lower level at E 2 than the previous point of equilibrium E 1. At this new level of equilibrium E 2 , the quantity increases from Q 1 to Q 2 and the price reduces from P 1 to P 2.Step 2 of 7 Demand – Supply of Flat TVStep 3 of 7

Thus, falling production costs decreases the equilibrium price of TV’s and thus, increasesthe equilibrium quantity.

Step 4 of 7

b)Consumer Surplus:Initial Consumer surplus is given by the area under demand curve and above the price P 1 ;that is the area under M. Furthermore, final Consumer surplus due to decreased cost ofproduction is given by the area under demand curve and above the price P 2 ; thatis (M+N+O+P).Thus, the consumer surplus rises by (N+O+P).Consumer and Producer surplus:

Step 5 of 7 Producer Surplus: Similarly initial producer surplus is given by the area above the supply curve S 1 and below the price P 1 ; that is N+Q. However, due to a production cost decline, the area above the new supply curve S2 and below the new price P2; that is, (Q + R + S) give the producer surplus Thus, the producer surplus changes by the amount (R + S – N); in fact, the change in producer surplus may be positive or negative, it depends on the increase in quantity versus decline in price, an increase in quantity increases producer surplus, while the decline in the price reduces producer surplus.Step 6 of 7 Total Surplus: Furthermore, as the consumer surplus rises by N+O+P and producer surplus rises by R + S – N, total surplus rise is calculated as shown below;

Thus, the total surplus rises by (O+P +R + S).7. Step 7 of 7

c)If the supply of flat TV screens is very elastic, then the shift of the supply curve benefitsthe consumers.

Table 1

Price Quantity demanded Quantity supplied

$2 4 1

$3 3 2

$4 3 3

$6 2 4

Step 3 of 6

As above table shows that market for haircut is in equilibrium when price is $4 per hair cutas at this price quantity demanded is equal to quantity supplied.When market is in equilibrium, it is efficient as well. Since, quantity supplied atequilibrium is 3 haircuts therefore for efficiency 3 haircuts should be given.Firm A, C, and D should give haircut as their cost is less than the price while customer 1,3 and 4 should have their hair cuts as their willingness to pay is more than price charged.

Step 4 of 6 Calculating Producer Surplus – Producer Surplus of Firm A –

Thus, producer surplus of Firm A is $1.Producer Surplus of Firm C –

Thus, producer surplus of Firm C is $0.Producer Surplus of Firm D –

Thus, producer surplus of Firm D is $2.

Thus, total producer surplus is $3.

Step 5 of 6 Calculating Consumer Surplus – Consumer Surplus of buyer 1 –

Thus, consumer surplus of buyer 1 is $3.Consumer Surplus of buyer 3 –

Thus, consumer surplus of buyer 3 is $4.Consumer Surplus of buyer 4 –

Thus, consumer surplus of buyer 4 is $1.

Thus, total producer surplus is $8.6. Step 6 of 6Calculating Total Surplus –

Thus, the maximum possible total surplus is $11.

One of the largest changes in the economy over the past several decades is that technologicaladvances have reduced the cost of making computers.

a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, andproducer surplus in the market for computers.

b. Forty years ago, students used typewriters to prepare papers for their classes; today they usecomputers. Does that make computers and typewriters complements or substitutes? Use a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in themarket for typewriters. Should typewriter producers have been happy or sad about the technologicaladvance in computers?

c. Are computers and software complements or substitutes? Draw a supply-and-demand diagram to showwhat happened to price, quantity, consumer surplus, and producer surplus in the market for software.Should software producers have been happy or sad about the technological advance in computers?

Step 4 of 8

Initially, the market for typewriters is in equilibrium at point E with equilibrium pricebeing P per typewriters and equilibrium quantity being Q typewriters. Consumer surplus isequal to area 1+2 and producer surplus is equal to area 3+4+5.As students are using computers in place of typewriters, computers and typewriters aresubstitutes.In case substitute goods, rise in price of one leads to increase in quantity demanded ofother and vice-versa.Price of computer has decreased (as shown in part (a)). Being substitutes, this fall in priceof computers will decrease the quantity demanded of typewriters.This decrease in quantity demanded will shift the demand curve for typewriters from D toD 1. New equilibrium is attained at point E 1 with new equilibrium price being P 1 percomputer and new equilibrium quantity being Q 1 computers. Consumer surplus is equal toarea 2+4 and producer surplus is equal to area 5.5. Step 5 of 8Decrease in demand for typewriters due to fall in the price of its substitute (computer) hasresulted in fall in price of typewriters from P to P 1 , decrease in quantity from Q to Q 1 , fallin both consumer surplus and producer surplus.

As producer surplus of typewriter producers is decreasing due to technologicaladvancement in computer, they will be sad due to such improvement in technology.

Step 6 of 8

(c) Following figure shows the market for software –Figure 3

Step 7 of 8 Initially, the market for software is in equilibrium at point E with equilibrium price being P per unit and equilibrium quantity being Q units. Consumer surplus is equal to area 2+ and producer surplus is equal to area 5. For operating a computer, software is an essential component and therefore computer and software acts as complements. In case of complements, rise in price of one decreases the quantity demanded of other and vice-versa. Being complement, fall in price of computer (as shows in part (a)) will increase the demand for software. This increase in demand for software will shift the demand curve for software rightwards from D to D 1. New equilibrium is attained at point E 1 with new equilibrium price being P 1 per unit and new equilibrium quantity being Q 1 per unit. Consumer surplus is equal to area 1+2 and producer surplus is equal to area 3+4+5. Increase in demand for software due to fall in the price of its complement (computer) has resulted in rise in price of software from P to P 1 , increase in quantity from Q to Q 1 , increase in both consumer surplus and producer surplus. As producer surplus of software producers is increasing due to technological advancement in computer, they will be happy due to such improvement in technology.

Step 8 of 8 (d) Yes, the analysis depicted in part (c) explain the given statement in the sense that with fall in cost of computer, demand for software has increased enabling the software producers to not only sell at higher price but also a larger quantity as well resulting in increase in total revenue and producer surplus describing the reason for their riches.

A friend of yours is considering two cell phone service providers. Provider A charges $per month for the service regardless of the number of phone calls made. Provider B does not have afixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for

minutes of calling is given by the equation , where P is the price of a minute.

a. With each provider, what is the cost to your friend of an extra minute on the phone?

Calculate the consumer surplus obtained from provider A, as follows:

Step 5 of 6 Calculate the consumer surplus obtained from provider B, as follows:

Step 6 of 6 (e) The friend gets a higher consumer surplus from provider A. Therefore, Provider A is recommended.

The supply and demand for broccoli are described by the following equations:

Q is in bushels, and P is in dollars per bushel.

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a. Graph the supply cure and the demand curve. What is the equilibrium price and quantity?

b. Calculate consumer surplus, producer surplus, and total surplus at the equilibrium.

c. IF a dictator who hated broccoli were to ban the vegetable, who would bear the larger burden-thebuyers or sellers of broccoli?

Step-by-step solution

Step 1 of 5 a) The demand curve can be drawn as below:

The demand curve for medical procedure is shown as D1. If the price of each medicalprocedure is $100, the number of medical procedures is Q2.2. Step 2 of 5b)If the consumer pays only $20 per procedure, the quantity of procedures will increase fromQ1 to Q2.If the cost to society is $100 and individuals have health insurance, the number ofprocedures will maximize total surplus since there will be a rightward shift in the demandcurve from D1 to D, thereby increasing consumer and producer surplus.3. Step 3 of 5c)