Problem Set 6
Why is the supply curve referred to as a marginal cost curve?
It shows the willingness of firms to supply a product at different prices.
Tim mows neighborhood lawns for extra money. Suppose that he would be willing to mow one lawn for $10, a second lawn for $18, and a third lawn for $25. Also suppose that three neighbors are interested in having their lawns mowed. Mrs. Jones would be willing to pay $32 to have her lawn mowed, Mr. Wilson would be willing to pay $29, and Ms. Smith would be willing to pay $25. If Tim offers to mow lawns for $25 each, what will be his producer surplus? Considering Mrs. Jones, Mr. Wilson, and Ms. Smith together, what will be their consumer surplus?
$22; $11
Paul goes to Sportsmart to buy a new tennis racquet. He is willing to pay $200 for a new racquet, but buys one on sale for $125. Paul's consumer surplus from the purchase is
$75
Tim mows neighborhood lawns for extra money. Suppose that he would be willing to mow one lawn for $12, a second lawn for $19, and a third lawn for $20. Also suppose that three neighbors are interested in having their lawns mowed. Mrs. Jones would be willing to pay $31 to have her lawn mowed, Mr. Wilson would be willing to pay $29, and Ms. Smith would be willing to pay $20. If Tim offers to mow lawns for $20 each, what will be his producer surplus? Considering Mrs. Jones, Mr. Wilson, and Ms. Smith together, what will be their consumer surplus?
$9; $20
1st hat: $24 2nd: $30 3rd: $38 4th: $46 The table to the right lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the market price of cowboy hats is $35, The Waco Kid will produce
2 hats
________ is maximized in a competitive market when marginal benefit equals marginal cost.
Economic surplus
A student makes the following argument: "When a market is in equilibrium, there is no consumer surplus. We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.
The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.
Tom WTP: $40 Dick WTP: $30 Harriet WTP: $25 The table above lists the highest prices three consumers, Tom, Dick, and Harriet, are willing to pay for a short−sleeved polo shirt. If the price of one of the shirts is $28 dollars
Tom will receive $12 of consumer surplus from buying one shirt, Dick will receive $2, and Harriet will not purchase a shirt.
The figure to the right shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. At the equilibrium price of $15 consumers are willing to buy 80 pounds of tiger shrimp. Is this an economically efficient quantity?
Yes, because $15 is the price where the marginal benefit is equal to the marginal cost.
Economic efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
Producer surplus
above supply curve, below market price
The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market.
above; below
On a shopping trip, Melanie decided to buy a light blue coat made from woven fabric. A tag on the coat stated that the price was $79.95. When she brought the coat to the store's sales clerk, Melanie was told that the coat was on sale, and she would pay 20 percent less than the price on the tag. After the discount was applied, Melanie paid $63.96, $15.99 less than the original price. The value of Melanie's consumer surplus from this purchase is
at least $15.99 since this is the difference between the price Melanie is willing to pay for the coat and the actual price she pays, but she could have be willing to pay more than $79.95 for the coat.
Consumer surplus
below demand curve; above market price
The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called
consumer surplus
As the price of a good rises, consumer surplus __________, and as the price of a good falls, consumer surplus __________.
decreases; increases
Each point on a ________ curve shows the willingness of consumers to purchase a product at different prices.
demand
Economic surplus
is equal to the sum of consumer surplus and producer surplus.
Why is the demand curve referred to as a marginal benefit curve?
it shows the willingness of consumers to purchase a product at different prices.
1st hat: $24 2nd: $30 3rd: $38 4th: $46 The table to the right lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the price of cowboy hats decreases from $38 to $30
producer surplus will fall from $22 to $6.
Marginal benefit is
the additional benefit from consuming one more unit.
Marginal cost is
the additional cost of producing one more unit.
Consumer surplus in a market for a product would be equal to ________ if the market price was zero.
the area under the demand curve
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
A student argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is largest." This statement is false because
the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.
Suppliers will be willing to supply a product only if
the price received is at least equal to the additional cost of producing the product.
Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which
the sum of consumer surplus and producer surplus is at a maximum.
