Ch 7 Problems & Applications

Suppose the demand for garlic bread falls. Illustrate the effect this has on the market for garlic bread. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Producer surplus in the market for garlic bread _____. Illustrate the effect the quantity change in garlic bread has on the market for garlic. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Producer surplus in the market for garlic _____.

(Graph: demand is shifted to the left, supply stays the same, equilibrium line is shifted down; demand is lessened) decreases (area below equilibrium line gets smaller) (Graph: demand is shifted to the left, supply stays the same, equilibrium line is shifted down; demand is lessened) decreases (area below equilibrium line gets smaller)

Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. (The insurance company recoups the $80 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undergo.) Consider the following demand curve in the market for medical care. Use the black point (plus symbol) to indicate the quantity of procedures demanded if each procedure has a price of $100. Then use the grey point (star symbol) to indicate the quantity of procedures demanded if each procedure has a price of $20. (Graph: demand line through points (0,140) and (70,0)) If the cost of each procedure to society is truly $100, the quantity that maximizes total surplus is ___ procedures. Economists often blame the health insurance system for excessive use of medical care. Given your analysis, the use of care might be viewed as excessive because consumers get procedures whose value is _____ than the cost of producing them.

(Graph: plus point at (20,100), star point at (60,20)) 20 (demand line goes through the points (20, $100)) less

A hurricane in Florida destroys half of the orange crop. Illustrate the effect this has on the market for oranges. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Consumer surplus in the market for oranges _____. Illustrate the effect the price change of oranges has on the market for orange juice. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Consumer surplus in the market for orange juice _____.

(Graph: supply is shifted to the left, demand stays the same, equilibrium line is shifted up; supply is lessened) decreases (area above equilibrium line gets smaller) (Graph: supply is shifted to the left, demand stays the same, equilibrium line is shifted up; supply is lessened) decreases (area above equilibrium line gets smaller)

Suppose a tightening of copyright legislation on Internet usage has increased the cost of film streaming services. Show the effect of the increase in production costs on the market for film streaming services. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Prior to the availability of film streaming services, people had to go to the theaters to watch movies; today, many people choose to watch movies at home through film streaming. According to this statement, film streaming services and movie tickets are _____. Show the effect of the price change in the market for film streaming services on the market for movie tickets. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Consider the relationship between film streaming services and Internet services. Show the effect of the price change in the market for film streaming services on the market for Internet services. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) PART 2: The following graph shows the effect of increase in production costs on the market for film streaming services. (Graph: with supply shifted to left) Complete the first two rows of the following table by indicating which areas make up consumer surplus and producer surplus prior to the shift in supply. Then complete the second two rows by indicating which areas represent consumer surplus and producer surplus after the change in production costs. Check all that apply. ------------------------------ A -- B -- C -- D -- E -- F -- G Initial Consumer Surplus -- ? --- ? -- ? --- ? -- ? -- ? --- ? Initial Producer Surplus --- ? --- ? -- ? --- ? -- ? -- ? --- ? New Consumer Surplus --- ? --- ? -- ? --- ? -- ? -- ? --- ? New Producer Surplus ---- ? --- ? -- ? --- ? -- ? -- ? --- ? The following graph shows the effect of a rise in the price of film streaming services on the market for movie tickets. (Graph: demand is shifted to the right) Complete the first two rows of the following table by indicating which areas represent consumer surplus and producer surplus prior to the shift in demand. Then complete the second two rows by indicating which areas represent consumer surplus and producer surplus after the change in demand. Check all that apply. ------------------------------ A -- B -- C -- D -- E Initial Consumer Surplus -- ? --- ? -- ? --- ? -- ? Initial Producer Surplus --- ? --- ? -- ? --- ? -- ? New Consumer Surplus --- ? --- ? -- ? --- ? -- ? New Producer Surplus ---- ? --- ? -- ? --- ? -- ? Theater owners should have been _____ about the tightening of copyright legislation. The following graph shows the effect of a rise in the price of film streaming services on the market for Internet services. (Graph: demand is shifted to the left) Complete the first two rows of the following table by indicating which areas represent consumer surplus and producer surplus prior to the shift in demand. Then complete the second two rows by indicating which areas represent consumer surplus and producer surplus after the change in demand. Check all that apply. ------------------------------ A -- B -- C -- D -- E Initial Consumer Surplus -- ? --- ? -- ? --- ? -- ? Initial Producer Surplus --- ? --- ? -- ? --- ? -- ? New Consumer Surplus --- ? --- ? -- ? --- ? -- ? New Producer Surplus ---- ? --- ? -- ? --- ? -- ? Internet providers should have been _____ about the tightening of copyright legislation.

(Graph: supply is shifted to the left, equilibrium line is shifted up, demand stays the same) substitutes (Graph: demand is shifted to the right, equilibrium line is shifted up, supply stays the same; since movie tickets are substitutes for film streaming services, the rise in the price of film streaming services will shift the demand for movie tickets to the right) (Graph: demand is shifted to the left, equilibrium line is shifted down, supply stays the same; since Internet services and film streaming services are complements, the rise in the price and decrease in the quantity of film streaming services means that the demand for Internet services decreases, shifting the demand for Internet services to the left) PART 2: -------------------------------- A -- B -- C -- D -- E -- F -- G Initial Consumer Surplus -- x -- x -- x --- x -- --- ---- Initial Producer Surplus ---- ----- --- ---- ---- x -- x -- x New Consumer Surplus -- x ---- --- --- ---- --- --- New Producer Surplus ---- --- x --- --- --- x --- --- (initial consumer surplus -> A,B,C,D are all above the equilibrium line for s1, initial producer surplus -> E,F,G are all below the equilibrium line for s1, new consumer surplus -> A is above the equilibrium line for s2, new producer surplus -> B,E are below the equilibrium line for s2 but above s2) -------------------------------- A -- B -- C -- D -- E Initial Consumer Surplus -- x --- --- x ---- -- Initial Producer Surplus ---- ----- ---- ----- ---- x New Consumer Surplus --- x --- x --- --- ---- New Producer Surplus ----- ----- ---- x --- x --- x (initial consumer surplus -> A,C are all above the equilibrium line for s1, initial producer surplus -> E is below the equilibrium line for s1, new consumer surplus -> A,B are all above the equilibrium line for s2, new producer surplus -> C,D,E are below the equilibrium line for s2 but above s2) happy (producer surplus became larger) -------------------------------- A -- B -- C -- D -- E Initial Consumer Surplus -- x -- x --- ---- -- Initial Producer Surplus ----- ----- ---- x --- x --- x New Consumer Surplus ---- --- x -- x --- ---- New Producer Surplus ----- ----- ----- ---- ---- x (initial consumer surplus -> A,B are all above the equilibrium line for s1, initial producer surplus -> C,D,E are below the equilibrium line for s1, new consumer surplus -> B,C are all above the equilibrium line for s2, new producer surplus -> E is below the equilibrium line for s2 but above s2) sad (producer surplus became smaller)

The cost of producing toys has risen as a result of an increase in the minimum wage. Consider some implications of this fact. Show the effect of rising production costs on the market for toys. (Graph: demand is decreasing at a slant, supply is increasing at a slant, equilibrium line is in center) Complete the first two rows of the following table by indicating which areas on the graph represent consumer surplus and producer surplus prior to the shift in supply. Then complete the second two rows by indicating which areas on the graph represent consumer surplus and producer surplus after the change in production costs. Check all that apply. ------------------------------ A -- B -- C -- D -- E -- F -- G Initial Consumer Surplus -- ? --- ? -- ? --- ? -- ? -- ? --- ? Initial Producer Surplus --- ? --- ? -- ? --- ? -- ? -- ? --- ? New Consumer Surplus --- ? --- ? -- ? --- ? -- ? -- ? --- ? New Producer Surplus ---- ? --- ? -- ? --- ? -- ? -- ? --- ? True or False: Consumers are hurt most by rising production costs when the supply of toys is very elastic.

(Graph: supply will shift to the left, equilibrium line will shift up, demand will stay the same) ------------------------------- A -- B -- C -- D -- E -- F -- G Initial Consumer Surplus -- x -- x -- x --- x -- --- ---- Initial Producer Surplus ---- ----- --- ---- ---- x -- x -- x New Consumer Surplus -- x ---- --- --- ---- --- --- New Producer Surplus ---- --- x --- --- --- x --- --- (initial consumer surplus -> A,B,C,D are all above the equilibrium line for s1, initial producer surplus -> E,F,G are all below the equilibrium line for s1, new consumer surplus -> A is above the equilibrium line for s2, new producer surplus -> B,E are below the equilibrium line for s2 but above s2) True

A friend of yours is considering two cell phone service providers. Provider A charges $100 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend's monthly demand for minutes of calling is given by the equation Qd=120−30P, where P is the price of a minute. With Provider A, the cost of an extra minute is $___. With Provider B, the cost of an extra minute is $___. Given your friend's demand for minutes and the cost of an extra minute with each provider, if your friend used Provider A, he would talk for ___ minutes, and if he used Provider B, he would talk for ___ minutes. This means your friend would pay $___ for service with Provider A and $___ for service with Provider B. Use the following graph to draw your friend's demand curve for minutes. Then use the green triangle to help you answer the questions that follow. Your friend would obtain $___ in consumer surplus with Provider A and $___ in consumer surplus with Provider B. Given this information, which provider would you recommend that your friend choose? ? Provider A ? Provider B

0 (provider A has a flat charge of $100), 1 (provider B charges $1 per min) 120 (120 - 30 x 0 = 120), 90 (120 - 30 x 1 = 90) 100 (flat rate of $100), 90 (90 x $1 = $90) (Graph: demand line hits points (0,4) and (120,0); Qd=120−30P, find P, Qd = 0 = 120-30P => 30P = 120 => P = 4 -> (0,4)) 140 ((120x4)/2 = 240, 240 - 100 = 140), 135 (((4-1)x90)/2) Provider A (140 > 135, has a greater consumer surplus)

There are four consumers willing to pay the following amounts for haircuts, and there are four haircutting businesses with the following costs: Consumers' Willingness to Pay -------- Firms' Costs Ana: $35 ------------------------------- Firm A: $40 Dina: $15 ------------------------------- Firm B: $20 Yakov: $45 ----------------------------- Firm C: $10 Charles: $25 --------------------------- Firm D:$30 Each firm has the capacity to produce only one haircut. For efficiency, _____ should be given. Which businesses should cut hair? Check all that apply. ? Firm A ? Firm B ? Firm C ? Firm D Which consumers should have their hair cut? Check all that apply. ? Ana ? Charles ? Dina ? Yakov The maximum possible total surplus is $___.

2 (there is only 2 firm's cost that is < consumer's willingness to pay) Firm A x Firm B (second lowest cost < second highest consumer's willingness to pay) x Firm C (lowest cost < highest consumer's willingness to pay) Firm D x Ana (second highest willingness > second lowest firm's cost) Charles Dina x Yakov (highest willingness > lowest firm's cost) 50 (($45-$10)+($35-$20))

Poornima buys an iPhone for $300 and gets a consumer surplus of $60. Her willingness to pay for an iPhone is $___. If she had bought the iPhone on sale for $220, her consumer surplus would have been $___. If the price of the iPhone had been $380, her consumer surplus would have been $___.

360 (Consumer Surplus = Willingness to Pay − Price; 60 = x - 300; x = 360) 140 (Consumer Surplus = Willingness to Pay − Price; x = 360 - 220; x = 140) 0 (380 > 360 willingness to pay)

Suppose Shen is the only seller in the market for bottled water and Manuel is the only buyer. The following lists show the value Manuel places on a bottle of water and the cost Shen incurs to produce each bottle of water: Manuel's Value -------------------------- Shen's Costs Value of first bottle: $7 ------------- Cost of first bottle: $1 Value of second bottle: $5 ------- Cost of second bottle: $3 Value of third bottle: $3 ------------ Cost of third bottle: $5 Value of fourth bottle: $1 ---------- Cost of fourth bottle: $7 The following table shows their respective supply and demand schedules: Price ------------ Quantity Supplied --------- Quantity Demanded More than $7 ----------- 4 ----------------------------- 0 $5 to $7 ----------------- 3 ----------------------------- 1 $3 to $5 ----------------- 2 ----------------------------- 2 $1 to $3 ------------------ 1 ----------------------------- 3 $1 or less ---------------- 0 ----------------------------- 4 Use Shen's supply schedule and Manuel's demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Enter these values in the following table. Price ----------- Quantity Supplied ---------- Quantity Demanded 2 ------------------------- ? ----------------------------- ? 4 ------------------------- ? ----------------------------- ? 6 ------------------------- ? ----------------------------- ? A price of _____ brings supply and demand into equilibrium. At the equilibrium price, consumer surplus is $___, producer surplus is $___, and total surplus is $___. If Shen produced and Manuel consumed one less bottle of water, total surplus would _____. If instead, Shen produced and Manuel consumed one additional bottle of water, total surplus would _____.

Price ------ Quantity Supplied ----- Quantity Demanded 2 --------------------- 1 ------------------------- 3 4 --------------------- 2 ------------------------ 2 6 --------------------- 3 ------------------------ 1 4 (quantity supplied = quantity demanded = 2) 4 ($7>$4 and $5>$4, $3<$4<$5, area above price line but under curve if price line was at $4, $7-$4=$3, $5-$4=$1, $3+$1=$4); 4 ($1<$4 and $3<$4, $3<$4<$5, area below price line and under curve if price line at $4, $4-$1=$3, $4-$3=$1, $3+$1=$4); 8 ($4 from consumer surplus + $4 from producer surplus) fall (equilibrium = 2, 2-1=1, Shen: quantity supplied = 1 -> $2, Manuel: quantity demanded = 1 -> $6, total surplus = producer surplus + consumer surplus = ($4-$1)+($7-$4)=$6, $8>$6) rise (equilibrium = 2, 2+1=3, Manuel: quantity demanded = 3 -> $2, Shen: quantity supplied = 3 -> $6, total surplus = consumer surplus + producer surplus = ($3-$2)+($7-$6)=$2, $8>$2, $6>$2)

It is a hot day, and Larry is thirsty. Here is the value he places on a bottle of water: Value of first bottle: $7 Value of second bottle: $5 Value of third bottle: $3 Value of fourth bottle: $1 From this information, complete the following table by deriving Larry's demand schedule. Price ----------- Quantity Demanded More than $7 -------------------- ? $5.01 to $7 ----------------------- ? $3.01 to $5 ----------------------- ? $1.01 to $3 ------------------------ ? $1 or fewer ----------------------- ? Based on Larry's willingness to pay, plot Larry's demand curve as a step function on the following graph using blue points (circle symbol) beginning at a quantity of 0 bottles of water. (Graph: x-axis goes from 0->5, y-axis goes from 0->10, increments of 1 for both) Suppose the price of a bottle of water is $4. Use the black line (plus symbol) to draw a price line at $4. Next use the grey point (star symbol) to indicate how many bottles of water Larry will buy at that price. Finally, use the green point (triangle symbol) to shade the area that represents Larry's consumer surplus from his purchases. In this case, Larry receives $___ in consumer surplus from his water purchase. If the price falls to $2, Larry now buys ___ bottles of water. This _____ his consumer surplus to $___.

Price -------------------- Quantity Demanded More than $7 ---------------------- 0 $5.01 to $7 ------------------------- 1 $3.01 to $5 ------------------------- 2 $1.01 to $3 -------------------------- 3 $1 or fewer ------------------------- 4 (Graph: (0,7), (1,7), (1,5), (2,5), (2,3), (3,3), (3,1), (4,1), (4,0)) (Graph: consumer surplus is above the price line) 4 (area of consumer surplus: (7-4)x2 - (2-1)x7-5) 3 (plotted vertical line from (3,3) to (3,1)); increases (area of consumer surplus is greater when price line is at a lesser number); 9 ((7-2)(1-0)+(5-2)(2-1)+(3-2)(3-2)=9)

Lorenzo owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: Cost of first bottle: $1 Cost of second bottle: $4 Cost of third bottle: $7 Cost of fourth bottle: $9 From this information, complete the following table by deriving Lorenzo's supply schedule. Price ------------------- Quantity Supplied More than $9 -------------------- ? $7 to $9 -------------------------- ? $4 to $7 -------------------------- ? $1 to $4 -------------------------- ? $1 or less ------------------------- ? Based on Lorenzo's willingness to sell, plot his supply curve as a step function on the following graph using the orange points (square symbol). Be sure to plot your first point at (0, 0). (Graph: x-axis goes from 0->5, y-axis goes from 0->10, increments of 1 for both) Suppose the price of a bottle of water is $5. Use the black line (plus symbol) to draw a price line at $5. Next use the grey point (star symbol) to indicate how many bottles of water Lorenzo will produce and sell at that price. Finally, use the purple point (diamond symbol) to shade the area that represents Lorenzo's producer surplus. In this case, Lorenzo receives $___ in producer surplus from his water sales. If the price rises to $8, Lorenzo now sells ___ bottles of water. This _____ his producer surplus to $___.

Price -------------------- Quantity Supplied More than $9 -------------------- 4 $7 to $9 -------------------------- 3 $4 to $7 -------------------------- 2 $1 to $4 --------------------------- 1 $1 or less ------------------------- 0 (Graph: (0,0), (0,1), (1,1), (1,4), (2,4), (2,7), (3,7), (3,9), (4,9)) (Graph: producer surplus is the area below the price line) 5 (area of producer surplus: (5-1)x(1-0) + (5-4)x(2-1)) 3 (plotted vertical line from (3,7) to (3,9)); increases (area of producer surplus is greater when price line is at a greater number); 12 (new area of producer surplus: 5+(8-5)(2-0)+(8-7)(3-2) = 12)