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Exam 7: Consumers, Producers, and the Efficiency of Markets

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Question 1

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Answer each of the following questions about demand and consumer surplus. a.What is consumer surplus, and how is it measured? b.What is the relationship between the demand curve and the willingness to pay? c.Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve. d.In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

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Producer surplus is the cost of production minus the amount a seller is paid.

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Figure 7-12 ​ -Refer to Figure 7-12. If the government imposed a price ceiling at $20 in this market, how much are consumer surplus, producer surplus, and total surplus?

Table 7-7 ​ ​ $\begin{array} { | c | c | } \hline \text { Seller } & \begin{array} { c } \text { Cost } \\\text { (Dollars) }\end{array} \\\hline \text { Mike } & 1,600 \\\hline \text { Laura } & 1,300 \\\hline \text { Alex } & 1,200 \\\hline \text { David } & 900 \\\hline \text { Codi } & 700 \\\hline\end{array}$ ​ -Refer to Table 7-7. If the price is $1,150, who would be willing to supply the product?

Scenario 7-1 Suppose market demand is given by the equation $Q ^ { D } = 40 - 2 P$ -Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, how much additional consumer surplus do consumers initially in the market at the $10 price receive?

Scenario 7-2 Suppose market demand and market supply are given by the equations: ​ Q^D = 40 - P Q^S = P - 4 -Refer to Scenario 7-2. Suppose a reduction in input prices shifts the market supply curve to $Q ^ { S } = P$ By how much does total consumer surplus increase as a result of this supply shift?

Table 7-4 For each of the three potential buyers of apples, the table displays the willingness to pay for Bob, Sasha, and Eric, who are the only three buyers of apples. Assume that only three apples can be supplied per day. ​ ​ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Willingness to Pay}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {(Dollars) }$ $\begin{array}{|c|c|c|c|} \hline& \text { First Apple } & \text { Second Apple } & \text { Third Apple } \\\hline \text { Bob } & 2.00 & 1.50 & 0.75 \\\hline \text { Sasha } & 1.50 & 1.00 & 0.60 \\\hline \text { Eric } & 0.75 & 0.25 & 0.00 \\\hline\end{array}$ -Refer to Table 7-4. Who experiences the largest loss of consumer surplus when the price of an apple increases from $0.70 to $1.40?

Table 7-1 ​ ​ $\begin{array} { | c | c | } \hline \text { Buyer } & \begin{array} { c } \text { Willingness to Pay } \\\text { (Dollars) }\end{array} \\\hline \text { John } & 150 \\\hline \text { Sam } & 135 \\\hline \text { Andrew } & 125 \\\hline \text { Keira } & 100 \\\hline\end{array}$ ​ -Refer to Table 7-1. If the price of the product is $120, then who would be willing to purchase the product?

Table 7-12 The following table shows the willingness to pay for a good for the only four consumers in a market. $\begin{array} { | l | l | } \hline \text { Consumer } & \text { Willingness to Pay } \\\hline \text { A } & \$ 25 \\\hline B & \$ 40 \\\hline \text { C } & \$ 15 \\\hline \text { D } & \$ 30 \\\hline\end{array}$ -Refer to Table 7-12. If the price of the good is $20, how many units will be demanded?

Table 7-4 For each of the three potential buyers of apples, the table displays the willingness to pay for Bob, Sasha, and Eric, who are the only three buyers of apples. Assume that only three apples can be supplied per day. ​ ​ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Willingness to Pay}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {(Dollars) }$ $\begin{array}{|c|c|c|c|} \hline& \text { First Apple } & \text { Second Apple } & \text { Third Apple } \\\hline \text { Bob } & 2.00 & 1.50 & 0.75 \\\hline \text { Sasha } & 1.50 & 1.00 & 0.60 \\\hline \text { Eric } & 0.75 & 0.25 & 0.00 \\\hline\end{array}$ -Refer to Table 7-4. If the market price of an apple is $0.70, then the market quantity of apples demanded per day is

Wendy is willing to pay $50 for a concert ticket and Bruce would like to receive $25. If the market price is $40 for this transaction, then the total surplus would be $15.

If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is $35.

All else equal, an increase in demand will always increase consumer surplus.

Figure 7-5 -Refer to Figure 7-5. If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus?

Scenario 7-2 Suppose market demand and market supply are given by the equations: ​ Q^D = 40 - P Q^S = P - 4 -Refer to Scenario 7-2. How much is total producer surplus at the equilibrium price in this market?

Figure 7-6 -Refer to Figure 7-6. Suppose producer surplus is larger than C but smaller than A+B+C. The price of the good must be

Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,

Let P represent price; let QS represent quantity supplied; and assume the equation of the supply curve is P = 10 + (1/4)Q^S . If 80 units of the good are produced and sold, then producer surplus amounts to $1,200.

Table 7-11 ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Price } \\\text { (Dollars per unit) }\end{array} & \begin{array} { c } \text { Quantity Demanded } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Quantity Supplied } \\\text { (Units) }\end{array} \\\hline 12.00 & 0 & 36 \\\hline 10.00 & 3 & 30 \\\hline 8.00 & 6 & 24 \\\hline 6.00 & 9 & 18 \\\hline 4.00 & 12 & 12 \\\hline 2.00 & 15 & 6 \\\hline 0.00 & 18 & 0 \\\hline\end{array}$ ​ -Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. If the price is $4 but only 6 units are bought and sold, producer surplus will be

Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost.