Econ Chapter 7
1) Melissa buys an iPhone for $240 and gets consumer surplus of $160. A. What is her willingness to pay? B. If she had bought the iPhone on sale for $180, what would her consumer surplus have been? C. If the price of an iPhone were $500, what would her consumer surplus have been?
A. What is her willingness to pay? Purchase Price x Quantity + Consumer Surplus =$240x1+180=$420 B. Consumer Surplus = Willingness to pay - Purchase Price x Quantity of item purchased = $420 - $180 x 1= $240 C. If the iPhone cost $500, quantity demanded is 1 and the willingness to pay is $420, then because the willingness to pay is less than the price of the product per item and quantity purchase, means that no transaction is going to take place. Therefore, in this case, the consumer surplus is zero
John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Emily enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase ?
Between $100 and $200
Consumer surplus
Consumer surplus equals buyers' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price.
Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much as $300 for the massage,but they negotiate a price of $200. In this transaction,
Consumer surplus is $20 larger than producer surplus
An efficient allocation of resources maximizes
Consumer surplus plus producer surplus
When a market is in equilibrium, the buyer are those with the _______ willingness to pay and the sellers are those with the ______ costs.
Highest, lowest
An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade.
If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left. In the market for lemonade, the higher cost of lemons reduces the supply of lemonade, as shown in the figure. The result is an increase in the price of lemonade and a decline in consumer surplus
The demand curve for cookies is downward sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises $3, what happens to consumer surplus?
It falls by less than $100
Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
Market Power and Externalities. This is when a market can no regulate its resources efficiently.
What is efficiency? Is it the only goal of economic policymakers?
Maximizing the total surplus received by all members of society. The total surplus is Total Surplus = Value of buyers - Cost to sellers.
Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyers willingness to pay is
Positive but less than the marginal sellers cost
Producer surplus
Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.
willingness to pay
Purchase Price x Quantity + Consumer Surplus
Explain how sellers' costs, producer surplus, and the supply curve are related.
The Sellers cost is how much they pay to obtain a good. The producers surplus is the amount they pay minus the cost of providing it. The supply curve measures this amount by looking at the area above the supply curve.
What does the invisible hand do?
The invisible hand helps decide what the equilibrium price is for buyers and sellers.
Explain how buyer's willingness to pay, consumer surplus, and the demand curve are related.
They all measure the buyers willingness to pay for a good. The Consumer surplus is just willingness minus amount the buyer actually pays. The demand curve helps use measure this relationship by looking at the area below the demand curve and above the price is the sum of the consumer surplus
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the members of society
welfare economics
the study of how the allocation of resources affects economic well-being
cost
the value of everything a seller must give up to produce a good
