Unit 7 & 8 Extra Practice Questions

Consumer Surplus and Producer Surplus Analysis

Page 2: Calculation of Consumer Surplus

• Consumer Surplus (CS): Represents the difference between what consumers are willing to pay (WTP) and what they actually pay.

• Market Price: Set at $17.

• Calculate: Individual Consumer Surplus

  • Consumer A: $0 (WTP < $17)

  • Consumer B: $10 (WTP of $27 - $17)

  • Consumer C: $0 (WTP < $17)

  • Consumer D: $4 (WTP of $21 - $17)

  • Consumer E: $16 (WTP of $33 - $17)

  • Consumer F: $18 (WTP of $35 - $17)

  • Consumer G: $0 (WTP < $17)

  • Consumer H: $0 (WTP < $17)

  • Consumer I: $5 (WTP of $22 - $17)

• Total Consumer Surplus Calculation: Total = 0 + 10 + 0 + 4 + 16 + 18 + 0 + 0 + 5 = $53.

Page 4: Impact of Supply Changes on Surplus

• Initial Supply of Oranges: Represented by curve S1.

• Impact of Frost: Inward shift to S2 reduces supply.

• Questions:

  • Identify initial and new consumer/producer surpluses.

  • Show loss in total surplus due to frost.

Page 7: Producer Surplus Calculation

• Market Price: $9, with consumers willing to purchase only 20 units.

• Producer surplus calculation:

  • Area of the rectangle: (Price - Supply Price) * Quantity = (9 - 5) * 20 = $80.

  • Area of the triangle: 0.5 * base(20) * height((5-3)) = 0.5 * 20 * 2 = $20.

• Total Producer Surplus: $80 + $20 = $100.

Page 8: Market Dynamics for Football Tickets

• Demand Equation: QD = 80,000 - 500P, and supply is QS = 20,000.

• Equilibrium Price: Set at $120.

• Total Surplus in Market: $2,800,000.

Page 12: Economic Concepts**

• Diminishing Marginal Returns vs. Diseconomies of Scale:

  • Diminishing Marginal Returns: In short-run with at least one fixed input, explaining increased marginal cost.

  • Diseconomies of Scale: In the long run, affecting average cost with additional outputs.

• Returns to Scale Estimation:

  • a. Constant returns if output increases by 15% with 15% input increase.

  • b. Diseconomies if output increase < 15%.

  • c. Economies if output increase > 15%.

Page 25: Natural Monopoly and Network Externalities

• Natural Monopoly: Arises due to economies of scale, benefits from lower average costs.

• Network Externalities: Product utility increases with more users, serves as a market entry barrier, but can be surmountable by superior products.

Page 30: Deadweight Loss in Monopoly

• Monopoly Outputs: Causes deadweight loss due to production inefficiency. Marginal benefit exceeds marginal cost at certain outputs.

• Consumer Surplus: Transferred to monopolist causing market distortion and inefficiency.

Page 32: Monopolistic Competition**

• Price Setting (McDonald's): Similar to monopolist behavior; maximizes profit where MR=MC.

• Jimmy Choo Shoes: Faces many competitors but holds unique brand value as a monopolist for high-end products.

Practice Problem Insights**

• Responses to demand changes illustrate market dynamics:

  • Cartel impact shows consumer surplus decrease, producer surplus increase, and deadweight loss.

  • Analyzing supply elasticity influences producer advantage; digital goods have highly elastic supply, affecting market pricing behavior.