Chapter 5: Homework

In general, increasing price above the market equilibrium price will (decrease) consumer surplus and (increase) producer surplus. Total surplus will (decrease). Reducing price below market equilibrium will increase (consumer) surplus and (decrease) producer surplus. Total surplus will (decrease). Thus regulators (can) increase benefits to one group or the other, but the market (will not) be efficient.

( ) = right answer

Which of the following could cause there to be a missing market?

- Lack of information - Public policy that prevents a market from existing - The lack of technology needed to make exchanges - Inability of buyers and sellers to communicate

1) What area(s) are consumer surplus at the market equilibrium price? 2) What area(s) are producer surplus at the market equilibrium price? 3) Compared to the equilibrium, what area(s) do consumers lose if price is P2? 4) Compared to the equilibrium, what area(s) do producers lose if the price is P2? 5) Compared to the equilibrium, what area(s) do producers gain if the price is P2? 6) Compared to the equilibrium, total surplus decreases by what area(s) if the price is P2?

1) A,B,C 2) D,E 3) B,C 4) E 5) B 6) C,E

Based on the table below, calculate consumer surplus for each consumer when the price is $17 (Willingness to pay) A) $6 B) $27 C) $13 D) $21 E) $33 F) $35 G) $12 H) $13 I) $22

A) $0 B) $10 C) $0 D) $4 E) $16 F) $18 G) $0 H) $0 I) $5 Total Consumer surplus at this price: Sum of A-I = $53

Calculate producer surplus for each producer when the price is $20 (Willingness to sell) A) $21 B) $4 C) $30 D) $14 E) $12 F) $15 G) $51 H) $9 I) $23

A) $0 B) $16 C) $0 D) $6 E) $8 F) $5 G) $0 H) $11 I) $0 Total producer surplus at this price Sum of A-I = $46

_____ surplus is the net benefit that a consumer receives from purchasing a good or service.

Consumer

Suppose that the market for pizza is in equilibrium. If regulators decrease the price below the equilibrium price, which of the following would be true?

Consumer surplus might or might not increase

Deadweight loss results from:

a price that is either too high or too low, relative to the equilibrium price.

Suppose a market is initially in equilibrium and supply increases. The consumer surplus will:

be higher since the price is lower and equilibrium moves down along the demand curve. Correct

Your grandmother likes old fashioned yard sales and doesn't understand why everyone is so excited about eBay. You explain to her that the creation of this online marketplace enables people who don't live in the same town to buy and sell used goods, which increases total surplus over the yard sale market. This is because:

buyers have more chances of locating the object they want and sellers have more buyers bidding on an object.

At Zooey's elementary school, children are not allowed to trade lunches or components of their lunches with other students. Lunchroom monitors watch closely and strictly enforce this policy. If Zooey prepares an argument about the inefficiency of this policy to her principal, she can say that the school policy is:

preventing a market that would generate mutually beneficial trades.

Deadweight loss is defined as:

the loss of total surplus resulting from a quantity that is less than the equilibrium quantity.