Consumer Surplus, Producer Surplus jjyazar/econ110/ Surplus, Producer Surplus What is willingness to

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Transcript of Consumer Surplus, Producer Surplus jjyazar/econ110/ Surplus, Producer Surplus What is willingness to

ConsumerSurplus,ProducerSurplusWhatiswillingnesstopay?Howdoesitrelatetothedemandcurve?Whatisconsumersurplus?Whatdoesitmeasure?

Writetheformulaforconsumersurplus.Supposetheconsumeriswillingtopay$20.00foraparticulargoodbutonlyhadtopay$14.00forit.Whatistheconsumersurplus?Ifaconsumeriswillingtopay$15.00foraparticulargoodbutthepriceofthegoodis$17.00,thenwhatwouldbetheconsumersurplus?Belvaiswillingtopay$65.00forapairofshoesforaformaldance.Shefindsapairatherfavoriteoutletshoestorefor$48.00.CalculateBelvasconsumersurplus. Janinewouldbewillingtopay$50toseeLesMisrables,butbuysaticketforonly$30.HowmuchdoesJaninevaluestheperformance?Denisevaluesastainlesssteeldishwasherforhernewhouseat$500,butbuysitfor$350.WhatisDeniseswillingnesstopay? Nathanbuysanewsoundsystemforhisdormroomfor$500.Hereceivesconsumersurplusof$400fromthepurchase.HowmuchdoesNathanvaluehissoundsystem?

BUYER

WILLINGNESSTOPAY

MIKE

$50.00

SANDY

$30.00

JONATHAN

$20.00

HALEY

$10.00

Ifthetablerepresentsthewillingnesstopayof4buyersandthepriceoftheproductis$15,thenwhowouldbewillingtopurchasetheproduct?Onagraph,describehowtofindtheconsumersurplusarea.Accordingtothegraphshown,whenthepriceisP1consumersurplusisgivenbywhicharea? Accordingtothegraphshown,atthepriceofP2,consumersurplusisgivenbywhicharea?Whatdopointsalongthesupplycurverepresent?Whatistheformulaforproducersurplus? Onagraph,describehowtofindtheproducersurplusarea.Rogerproducescomputerboards.Hisproductioncostis$10perboard.Hesellstheboardsfor$25each.Whatishisproducersurplus?

Accordingtothegraphshown,attheequilibriumprice,whatistheconsumersurplus? Accordingtothegraphshown,attheequilibriumprice,whatistheproducersurplus?Accordingtothegraphshown,attheequilibriumprice,whatisthetotalsurplus?ThereareonlyfiveconsumersinterestedinHangover3Blueraydiscs.ThemaximumwillingnesstopayoftheseconsumersforHangover3Blueraydiscaregivenbelow:

Emily $10Carter $14Angela $16Greyson $19Jack $20

a) DrawthemarketdemandcurveforHangover3blueraydisc.

b)SupposethepriceofHangover3blueraydiscis$15.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?c)SupposethepriceofHangover3blueraydiscis$14.Howmanyunitswouldbesold?Howmuchwouldbetheconsumersurplus?

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Supposethedemandandsupplycurvesfortomatoesaregivenbelow.

Calculatetheconsumersurplus,producersurplusandtotalsurplusunderfreemarketequilibrium.PriceControlsGovernmentssometimesinterveneinmarketsusingpricecontrolsiftheequilibriumpriceistoohighforconsumersortoolowforproducers.Whatisapriceceiling?Assumethegraphontherightrepresentthemarketforburritos.Supposethegovernmentimposesapriceceilinginthismarketatapriceof$5.00,whatwouldbetheresult?Whatkindofpricecontrolisrentcontrolanexampleof?Listtheconsequencesofrentcontrols.

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Supposethefollowingtablerepresentsthedemandandthesupplyofbicycles.Whathappensifgovernmentimposesapriceceilingof$100perbicycle?Price Quantitydemanded Quantitysupplied$160 20 80$120 40 40$100 50 20$80 60 0Supposethefiguresshownbelowrepresentthemarketfor3Dprinters.Ononeofthemarketsaneffectivepriceceilingisimposed.Theothermarkethasanineffectivepriceceiling.Identifywhichoneiswhich.(Note:effectivepriceceilingisabindingpriceceilingthatwouldaltertheinitialmarketequilibrium.Ineffectivepriceceilingisnotabindingonewhichwouldnothaveanyeffectontheinitialmarketequilibrium)

Inwhichpanel(s)inthefigureshownabove,wouldtherebeashortagefor3Dprintersattheceilingprice?Whatisapricefloor?Whatkindofpricecontrolisminimumwageanexampleof?Supposethegraphshowsthemarketforunskilledlabor.Ifthegovernmentimposesaminimumwageof$14.00inthismarket,whatwouldbetheresult?

ExplicitandImplicitCosts,AccountingandEconomicProfitWhatdoweassumeineconomicsthattheaimofthefirmsis?Howisprofitcalculated?Howistotalrevenuecalculated?Whatisthedifferencebetweenaccountingprofitandeconomicprofit?Whatisexplicitcost?Giveexamplesofexplicitcosts.Whatisimplicitcost?Giveexamplesofimplicitcosts.Wolfgangcurrentlyworksforalawfirmforayearlysalaryof$125,000.Heisconsideringquittinghisjobandopeninghisownlawpractice,whereheexpectstobring$200,000revenueperyear.Tostarthisownfirm,hewouldneedanofficespaceandalawclerk.Theofficespacehefoundrentsfor$50,000peryear.Alawclerkcouldbehiredfor$35,000peryear.ListWolfgangsexplicitcosts.Howmuchishisexplicitcosts?CalculateWolfgangsaccountingprofit.ListWolfgangsimplicitcosts.Howmuchishisimplicitcosts?ShouldWolfgangopenhisownlawpractice?Toanswerthisquestion,whatelsewouldyouwanttoknow?ThenegativeeconomicprofitwouldmeanthatWolfgangwouldbeearning$10,000lessthanifheworkedforthecorporatefirm.Sohewouldbebetteroffstayingatthiscurrentjob.Supposeyouhavesecuredyourselfasummerjob,cuttinggrass.Youcharge$40perlawnandyoumow400lawnsoverthesummerbreak.Youspend$1,000onequipmentand$2,000ongasoline.YoucouldhaveworkedatMcDonaldsandearned$8,000overthesummer.Calculateyouraccountingprofitandeconomicprofit.WhichoptionisbetterforyoutoworkatMcDonaldsortocutgrass?

Nexttoeachstatement,writeTfortrueorFforfalse.__________1.TotalRevenue=PricexQuantity__________2.Thedifferencebetweenaccountingprofitandeconomicprofitisimplicitcosts.__________3.Economicprofitisusuallybiggerthanaccountingprofit.KeyTermsMatcheachtermwithitsdefinition.

A.AccountingProfit________Incomefromsellingafirmsproduct;definedaspricetimesquantitysoldB.EconomicProfit________TotalrevenueminusexplicitcostsC.ExplicitCosts________Totalrevenueminus(explicitplusimplicitcosts)D.ImplicitCosts________TheprocessofcombininginputstoproduceoutputE.Production_______Anorganizationthatcombinesinputs(labor,capital,land,rawmaterials)toproduceoutputF.Revenue________OpportunitycostofresourcesalreadyownedbythefirmandusedinbusinessG.Profit________Outofpocketcostsforafirm;suchaspaymentsforwages,rent,etc.H.Firm________Thedifferencebetweenrevenueandcost,calculatesasRevenueminuscost

ProductionintheShortRunWhatarefixedinputs?Whatarevariableinputs?Howdowedefineshortrunineconomics?Howdowedefinelongrunineconomics?Supposeyouhaveapizzarestaurant.Yourrestaurantisbecomingpopularandyouneedto

increaseyourproduction.Intheshortrunwhichofyourinputswouldbefixedandwhichwouldbevariable?Definemarginalproduct.Definethelawofdiminishingmarginalproduct.Youhaveasmallbusinesswherelumberjackscuttreeswithatwoperson-saw.Yourproduction

dataisgiveninthetablebelow.Fillinthemarginalproductcolumn.

No.oflumberjacks

No.oftreescut MarginalproductMP

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Atwhichworkerdiminishingmarginalproductivitysetin?

Supposeyouhaveasmallstandwhereyousellsnowcones.Thefollowingtableshowsthenumberofworkersandtheresultingsnowconeoutputthattheyproduce.Numberofworkers(L)

Totaloutput(Q)

MarginalProduct

AverageProduct

0 0 1 20 2 50 3 75 4 90 5 100 6 105 7 100 8 90

a) CalculateMPandAPoflaborandfillinthetable.b) Whendoesdiminishingmarginalproductivitybegin?

Yournewaccountantaccidentlylostsomeofyourdata.Luckilyusingtherelationshipbetweentotalproduct,averageproductandmarginalproductyouareabletofillinthebelowtable.Labor(L) TotalProduct

(Q)AverageProduct(APL)

MarginalProduct(MPL)

0 0 0 -1 19 2 36 3 4 256 64 1035 375 6 1297 637 91 1338 96 Nexttoeachstatement,writeTfortrueorFforfalse.__________1.Marginalproductistheadditionaloutputofonemoreworker.__________2.Laboristypicallyafixedinput.__________3.Marginalproductcanneverbenegative.KeyTermsMatcheachtermwithitsdefinition.

A.Diminishing________FactorsofproductionthatafirmcaneasilyincreaseordecreaseinmarginalproductivityashortperiodoftimeB.Fixedinputs________Asfirmemploysmorelabor,capitalbeingfixed,additionaloutputproducedeventuallydeclinesC.Marginalproduct________SynonymforfirmsoutputD.Shortrun________ResourcesfirmsusetoproducetheirproductsE.Totalproduct________PeriodoftimeduringwhichatleastoneormoreofthefirmsinputsisfixedF.Variableinputs________ChangeinfirmsoutputwhenitemploysonemoreworkerG.Factorsofproduction________PeriodoftimeduringwhichallofthefirmsinputsarevariableH.Longrun________Factorsofproductionthatcanteasilybeincreasedordecreasedinashortperiodoftime

CostsintheShortRunDefinefixedcosts.Definevariablecosts.Definetotalcosts.Supposeyouownalawncarebusinesswhereyouprovidemowingservices.Yourfixeinputis

twolawnmowersthatyourented.Therentforeachlawnmoweris$80permonth.Yourvariableinputisworkersyouhire.Yourtotalcostisprovidedinthetablebelow.Fillinthemissingentries.

Quantity FixedCost(FC) VariableCost(VC) TotalCost(TC)0 $160 10 $160 $20018 $160 $25023 $160 $32029 $160 $40035 $160 $49040 $160 $500Writetheformulasforaveragetotalcost(ATC),averagevariablecost(AVC),averagefixedcost(AFC)andmarginalcost(MC).Pleaserefertothelawncarebusinessproblemgivenabove.Usingthetableyoufilledpleaseanswerthefollowingquestions:Whatistheaveragevariablecostofproducing18lawnservices?Whatistheaveragefixedcostofproducing35lawnservices?Whatistheaveragetotalcostofproducing40lawnservices?DescribetherelationshipbetweenMCandATC.(thesamerelationshipappliestoMCandAVC)WhenMCishigherthanATC,ATCrises.WhenMCislowerthanATC,ATCdecreases.SupposeyouareoperatingabicyclemessengerservicefordowntownColumbus.Thenumberofemployeesandthecorrespondingnumberofparcelsthattheycandeliverinamonthisgivenbythefirsttwocolumnsofthebelowtable.Youleased5bicycleswitha$500leaseoneachthatincludestheliabilityinsurance.Youarealsopaying$3,000permonthtorenttheofficespaceand$500forwebsitehostingandphoneservice.Youpay$800monthlysalarytoeveryworkeryouemploy.Giventhisinformation,fillinthetablebelow.

Numberofworkers(L)

Totaloutput(Q)