Lab 17: Consumer and Producer Surplus

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Lab 17: Consumer and Producer Surplus"

Transcription

1 Lab 17: Consumer and Producer Surplus Who benefits from rent controls? Who loses with price controls? How do taxes and subsidies affect the economy? Some of these questions can be analyzed using the concepts of consumer and producer surplus and the definite integral. 1. Demand and Supply Curves Open the Surplus tool in the Integration Kit and look at examples of linear and non-linear demand and supply curves. Keep checking the screen as you read about consumer and producer surplus. Economists assume that demand curves are never increasing, whereas supply curves are generally assumed to be upward sloping. For the demand curve shown, we see that when the quantity of a good is increased the unit price decreases, or conversely, when the price is lowered the amount demanded increases. For the supply curve we see that when the quantity supplied to the market is increased, the price to the supplier decreases. We see that when the price to the supplier is increased, the quantity producers are willing to supply is increased. The demand curve and supply curves intersect at the equilibrium point ( x eq, ). The price is also called the market price and x eq is the corresponding market quantity. It is generally assumed that the market will operate at the equilibrium point so that the quantity x eq will be supplied and sold at the market price. 2. Consumer and Producer Surplus When we assume that all consumers pay the equilibrium price, there are consumers who are paying less that they were willing to pay. If each consumer bought the commodity at the maximum price they were willing to pay, the total amount spent is represented by the area under the demand curve from zero to x eq. The difference between this amount and the amount spent at the equilibrium price is called the consumer surplus. It can be viewed as the consumers' gain from the trade. Consumer Surplus = area below the demand curve and above the line p = x eq = D( x)dx x eq (1) 0

2 When the commodity is sold at the equilibrium price, there is a gain to the producers also. Various producers were willing to supply the goods at the price given by the supply curve. However the supply price is always less than or equal to the equilibrium price. The difference between the amount received by the producers (i.e., x eq ) and the amount they would have received at the price level determined by the supply curve (the area under the supply curve from zero to x eq ) is called the producer surplus. Producer surplus = area above the supply curve and below the line p = x eq = x eq S( x)dx (2) 0 The sum of the consumer surplus and the producer surplus is called the total trade gain, and considered by economists to be a measure of the benefit to society of the transaction at the equilibrium point. 2.1 In the supply-demand figure shown (in Figure 1), shade in and label the areas that represent the consumer surplus and the producer surplus, respectively. Figure 1

3 2.2 For the linear model, calculate the consumer surplus and the producer surplus by means of a definite integral using the facts that D (x)= -0.5x +500 and S(x)=0.5x +20 in the formulas given in the earlier part of this section. Find the x eq and values from the tool. 2.3 Work through the following example: Find the consumer surplus and the producer surplus for an item whose supply and demand functions are given by: S( x) = 4x + 2 and D( x) = 20 x 2 for x thousands of units and prices in dollars/unit. Solution: First find the equilibrium point ( x eq, ) by equating S( x) and D( x) and solve for x (which will be x eq ). Start with: 3x + 2 = 20 x 2 The positive solution to this equation is x eq = (thousand units). The market price is = S( x eq ) = D( x eq ) = Set up the integrals for the consumer and producer surplus and the evaluate them. Show the intermediate steps. The consumer surplus = The producer surplus =

4 The total trade gain is dollars. 3. The Effect of Price Controls on Consumer and Producer Surplus Sometimes for the best motives, a government will interfere with the operation of the market process. For example price controls above the market can be imposed to insure the survival of marginal producers. The minimum wage and controls on cotton prices are two such examples. Also, prices can be kept artificially low. Rent control is an example of this policy. Select the box for price control to investigate these phenomena. 3.1 Use the price slider to select the controlled price p c to be higher than the market price. Notice that the producer surplus grows as the consumer surplus shrinks. Explain. 3.2 There is a new area on the screen that grows as the controlled price increases beyond the market price. This area (in yellow) represents the dead-weight loss (DWL) which is the difference between the total trade gain for the equilibrium price and quantity and the controlled price and quantity. The dead-weight loss is the loss in potential gains from all those transactions that never took place. On the graph (Figure 2) identify each of these areas.

5 Figure Now look at the effect of rent controls when the price (the rent) is kept artificially low. When the rent cannot be greater than p c (for p c lower than ), the quantity of rental units supplied x c is less than x eq. The producer (landlord) surplus is the area above the supply curve and below y =. Notice that it appears to be reduced. This effect is balanced somewhat by the fact that those renters who have rental units have a greater consumer surplus. What does the dead-weight-loss represent in terms of renters and landlords? 4. The Effect of a Tax per Unit on Producer and Consumer Surplus Select the unit tax option at the top left of the tool. Suppose the government wishes to tax the producers a set amount for each item produced. This kind of tax is called a unit tax t. The unit tax adds a production cost equal to tx where x is the quantity of items produced. We can see from this that there is an additional marginal cost t (since

6 (t x) = t ). In the short run, the marginal cost curve is quite close to the supply curve (because dx in the short run, suppliers are willing to produce up to the point where the price they will receive for an additional item is equal to their marginal cost.) Consequently on the tool you can see that as you move the tax slider t, the supply curve moves up or down by the amount t. 4.1 Select the unit tax t = $60/item. Label the areas in the graph shown in Figure 3. Identify the areas that correspond to the consumer surplus, producer surplus, dead-weight loss and the amount of money accrued by the government by means of the tax. Figure Experiment with various values of the tax t. Is it true that for positive t (that is, t is a tax, not a subsidy), the greater the unit tax t, the greater the dead-weight loss? Explain why tax increases might have this effect.

7 4.3 Now try negative values for the unit tax t. A negative unit tax is called a subsidy. The government is paying the producer for each item producer. Note that the big rectangle that contains the equilibrium point is the amount of money that the government pays out. Also see that part of this rectangle is filled in with yellow when the tax slider is released. That area represents the dead-weight loss (as before). What does the dead-weight loss mean in this context? 5. The Effect of a Sales Tax on Producer and Consumer Surplus A sales tax affects the demand curve as seen by the producers. Note that the price per item that the consumers see is p consumer = p producer + tp producer which lowers their demand according to their demand curve p = D(x) and gives a net price to the producer of p producer = p consumer 1 + t = D(x) 1 + t (3) In effect the producers see a lower demand curve. 5.1 Select the sales tax option on the tool and increase the tax t to verify this phenomenon for positive values of t. Select the option for the linear supply and demand curves. Note that the original equations are D(x)= -0.5x+500 and S(x)=0.5x+20. Determine the following slopes: Slope of the demand curve for 0% sales tax. (Recall that x is on thousands of units.) Slope of the demand curve (as seen by the producers) for a 50% sales tax. Recall that 50% =.5.

8 5.2 Now select the nonlinear case and set t =50%. Label the areas in Figure 4 that correspond to the producer and consumer surplus, the tax received by the government and the dead weight loss. Figure 4

Eco 200 Group Activity 4 Key Chap 13 & 14 & 15

Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Chapter 13: 1. 4 th Edition: p. 285, Problems and Applications, Q4 3 rd Edition: p. 286, Problems and Applications, Q4 a. The following table shows the marginal

More information

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Price Floor: Regulated price, cannot charge below this price. A price floor will be binding if it is set above the true equilibrium

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

CHAPTER 11 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 1 st Edition (Study Guide 2008)

CHAPTER 11 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 1 st Edition (Study Guide 2008) CHAPTER 11 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 1 st Edition (Study Guide 2008) Chapter Summary This chapter presents the traditional, idealized model of perfect competition.

More information

Review for the Midterm Exam.

Review for the Midterm Exam. Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make

More information

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction We have already established that taxes are one of the reasons that supply decreases. Subsidies, which could be called

More information

MARKETS IN ACTION. Chapter. Housing Markets and Rent Ceilings

MARKETS IN ACTION. Chapter. Housing Markets and Rent Ceilings Chapter 6 MARKETS IN ACTION Housing Markets and Rent Ceilings Topic: Market Response to a Decrease in Supply 1) The short-run impact of the San Francisco earthquake on the housing market shifted the A)

More information

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes

More information

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd ) (Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

More information

Q D = 100 - (5)(5) = 75 Q S = 50 + (5)(5) = 75.

Q D = 100 - (5)(5) = 75 Q S = 50 + (5)(5) = 75. 4. The rent control agency of New York City has found that aggregate demand is Q D = 100-5P. Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured

More information

7.5 SYSTEMS OF INEQUALITIES. Copyright Cengage Learning. All rights reserved.

7.5 SYSTEMS OF INEQUALITIES. Copyright Cengage Learning. All rights reserved. 7.5 SYSTEMS OF INEQUALITIES Copyright Cengage Learning. All rights reserved. What You Should Learn Sketch the graphs of inequalities in two variables. Solve systems of inequalities. Use systems of inequalities

More information

Economic Efficiency, Government Price Setting, and Taxes

Economic Efficiency, Government Price Setting, and Taxes CHAPTER 4 Economic Efficiency, Government Price Setting, and Taxes Modified by: Changwoo Nam 1 Economic Efficiency, Government Price Setting, and Taxes A legally determined maximum price that sellers may

More information

3.3 Applications of Linear Functions

3.3 Applications of Linear Functions 3.3 Applications of Linear Functions A function f is a linear function if The graph of a linear function is a line with slope m and y-intercept b. The rate of change of a linear function is the slope m.

More information

Economics 165 Winter 2002 Problem Set #2

Economics 165 Winter 2002 Problem Set #2 Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs

More information

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

More information

Chapter 3 Answers to End-of-Chapter Questions:

Chapter 3 Answers to End-of-Chapter Questions: Chapter 3 Answers to End-of-Chapter Questions: 3-1 Explain the law of demand. Why does a demand curve slope downward? What are the determinants of demand? What happens to the demand curve when each of

More information

chapter >> Consumer and Producer Surplus Section 4: Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

chapter >> Consumer and Producer Surplus Section 4: Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax chapter 6 >> Consumer and Producer urplus ection 4: Applying Consumer and Producer urplus: The fficiency Costs of a Tax The concepts of consumer and producer surplus are extremely useful in many economic

More information

Chapter 9 The Analysis of Competitive Markets

Chapter 9 The Analysis of Competitive Markets Chapter 9 The Analysis of Competitive Markets Review Questions 1. What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss? Deadweight loss refers to the benefits

More information

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

More information

ECON 1100 Global Economics (Fall 2013) Surplus, Efficiency, and Deadweight Loss

ECON 1100 Global Economics (Fall 2013) Surplus, Efficiency, and Deadweight Loss ECON 11 Global Economics (Fall 213) Surplus, Efficiency, and Deadweight Loss Relevant Readings from the Required Textbooks: Economics Chapter 5, Surplus, Efficiency, and Deadweight Loss Definitions and

More information

CH 7. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

CH 7. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: CH 7 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A price ceiling a. is an illegal price. b. is the price that exists in a black market.

More information

1. Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves?

1. Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves? Chapter 03 Demand, Supply, and Market Equilibrium Questions 1. Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves? LO1

More information

Monopoly. Chapter 13. Monopoly and How It Arises. Single-price Monopoly. Monopoly and Competition Compared. Price Discrimination

Monopoly. Chapter 13. Monopoly and How It Arises. Single-price Monopoly. Monopoly and Competition Compared. Price Discrimination CHAPTER CHECKLIST Monopoly Chapter 13 1. Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly. 2. Explain how a single-price monopoly determines its

More information

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 14 Elasticity of Supply We will continue our discussion today, on few more concept of

More information

Problem Set #5 (Due in Class on June 2, 2011)

Problem Set #5 (Due in Class on June 2, 2011) Name: Problem Set #5 (Due in Class on June 2, 2011) Date: 1. The table below represents a demand and supply schedule for a small-country producer of iron ore. It sells output in its home market and on

More information

Economics 352: Intermediate Microeconomics

Economics 352: Intermediate Microeconomics Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter Twelve: The Partial Equilibrium Competitive Model and Applied Competitive Analysis This chapter will investigate perfect competition

More information

Math 1526 Consumer and Producer Surplus

Math 1526 Consumer and Producer Surplus Math 156 Consumer and Producer Surplus Scenario: In the grocery store, I find that two-liter sodas are on sale for 89. This is good news for me, because I was prepared to pay $1.9 for them. The store manager

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

How to measure the total economic well-being of a society?

How to measure the total economic well-being of a society? Welfare Economics continued Market efficiency How to measure the total economic well-being of a society? Suppose there is a all-powerful, well-intentioned dictator called a social planner who can allocate

More information

The Analysis of Markets

The Analysis of Markets The Analysis of Markets Evaluating the Gains and Losses from Government Policies Consumer and Producer Surplus In this chapter, we return to supply demand analysis and show how it can be applied to a wide

More information

MODULE 70: THE MARKETS FOR

MODULE 70: THE MARKETS FOR MODULE 70: THE MARKETS FOR LAND & CAPITAL SCHMIDTY SCHOOL OF ECONOMICS THE PURPOSE OF THIS MODULE IS TO SHOW HOW WE CAN USE SUPPLY AND DEMAND TO MODEL THE MARKETS FOR THE LAND AND CAPITAL INPUTS. Learning

More information

Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003

Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003 Rutgers University Economics 102: Introductory Microeconomics Professor Altshuler Fall 2003 Answers to Problem Set 10 Chapter 15 1. The following table shows revenue, costs, and profits, where quantities

More information

Find the competitive equilibrium. The competitive equilibrium is where supply equals demand. Since MC=S, where MC = 2Q/3

Find the competitive equilibrium. The competitive equilibrium is where supply equals demand. Since MC=S, where MC = 2Q/3 Problem Set #13-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr. Cuellar (1) Consider the following demand and cost functions for a monopolistic firm. The industry demand

More information

1 Mathematical Models of Cost, Revenue and Profit

1 Mathematical Models of Cost, Revenue and Profit Section 1.: Mathematical Modeling Math 14 Business Mathematics II Minh Kha Goals: to understand what a mathematical model is, and some of its examples in business. Definition 0.1. Mathematical Modeling

More information

Student Name: Date: Teacher Name: Heather Creamer. Score:

Student Name: Date: Teacher Name: Heather Creamer. Score: Economics EOC Quiz Answer Key Microeconomic Concepts - (SSEMI1) Flow Of Goods, (SSEMI2) Law Of Demand, (SSEMI3) Economic Behavior, (SSEMI4) Organization And Role Of Business Student Name: Teacher Name:

More information

Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price

Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price Cost functions model the cost of producing goods or providing services. Examples: rent, utilities, insurance,

More information

Midterm Exam #1 - Answers

Midterm Exam #1 - Answers Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

More information

Chapter 10. Perfect Competition

Chapter 10. Perfect Competition Chapter 10 Perfect Competition Chapter Outline Goal of Profit Maximization Four Conditions for Perfect Competition Short run Condition For Profit Maximization Short run Competitive Industry Supply, Competitive

More information

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus Consumer and Consumer and February 6, 2007 Reading: Chapter 6 Introduction Consumer surplus Producer surplus Efficiency and the gains from trade s 2 Introduction Connections to: Opportunity costs to consumers

More information

Week 1: Functions and Equations

Week 1: Functions and Equations Week 1: Functions and Equations Goals: Review functions Introduce modeling using linear and quadratic functions Solving equations and systems Suggested Textbook Readings: Chapter 2: 2.1-2.2, and Chapter

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) It is efficient to produce an additional shirt if A) the marginal benefit of producing the shirt

More information

DEMAND AND SUPPLY IN FACTOR MARKETS

DEMAND AND SUPPLY IN FACTOR MARKETS Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.

More information

C H A P T E R 8. Profit Maximization and Competitive Supply CHAPTER OUTLINE

C H A P T E R 8. Profit Maximization and Competitive Supply CHAPTER OUTLINE C H A P T E R 8 Profit Maximization and Competitive Supply CHAPTER OUTLINE 8.1 Perfectly Competitive Markets 8.2 Profit maximization 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization 8.4 Choosing

More information

In following this handout, sketch appropriate graphs in the space provided.

In following this handout, sketch appropriate graphs in the space provided. Dr. McGahagan Graphs and microeconomics You will see a remarkable number of graphs on the blackboard and in the text in this course. You will see a fair number on examinations as well, and many exam questions,

More information

Price per Bushel. a. Graph the demand and supply curves in the figure below. Indicate the equilibrium price and quantity.

Price per Bushel. a. Graph the demand and supply curves in the figure below. Indicate the equilibrium price and quantity. Price 18 17 16 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 Practice Homework Farm Policy Economics 11 The Economic Way of Thinking 1. The table below shows the demand and supply for Kiwi in the U.S. Quantity Demanded

More information

a) Find the equilibrium price and quantity when the economy is closed.

a) Find the equilibrium price and quantity when the economy is closed. Economics 102 Fall 2007 Answers to Homework 2 Problem 1: In Schulzland, a small closed economy, the supply and demand for bushels of peanuts are given by D: P = 200 5Q and S: P = 40 + 3Q. The world price

More information

Practice Questions and Answers from Lesson I-6: The Market Strikes Back. Practice Questions and Answers from Lesson I-6: The Market Strikes Back

Practice Questions and Answers from Lesson I-6: The Market Strikes Back. Practice Questions and Answers from Lesson I-6: The Market Strikes Back Practice Questions and Answers from Lesson I-6: The Market Strikes Back The following questions practice these skills: Identify the effective and ineffective price ceilings and floors. Compute the shortage

More information

Tutorial 6 - Perfect Competition

Tutorial 6 - Perfect Competition Tutorial 6 - Perfect Competition March 2014 Problem 1 In a small, but perfectly competitive market for pineapples, there are 8 identical growers. Each grower has the following cost function: C = 2 + 2q

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY REVIEW QUESTIONS 1. Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs.

More information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

More information

Demanded per year a. Graph this demand curve in Figure 1. Label the axes. Figure 1

Demanded per year a. Graph this demand curve in Figure 1. Label the axes. Figure 1 Practice Homework Supply & Demand Economics 101 The Economic Way of Thinking 1. MULTI-PART QUESTION: Suppose the demand curve for MSU sweatshirts is given by: Price Quantity Demanded per year 10 4000 20

More information

6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3

6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3 Exercise 2 Multiple Choice Questions. Choose the best answer. 1. If a change in the price of a good causes no change in total revenue a. the demand for the good must be elastic. b. the demand for the good

More information

Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS

Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS Instructions: Answer 1 question from each of the three sections. I will grade only 3 solutions, so if you answer more

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Answers to Text Questions and Problems in Chapter 7

Answers to Text Questions and Problems in Chapter 7 Answers to Text Questions and Problems in Chapter 7 Answers to Review Questions 1. If a policy is not efficient, then it can, by definition, be altered in a way that benefits at least some people without

More information

Consumers face constraints on their choices because they have limited incomes.

Consumers face constraints on their choices because they have limited incomes. Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.

More information

Firms in Perfectly Competitive Markets

Firms in Perfectly Competitive Markets Chapter 11 Firms in Perfectly Competitive Markets Chapter Outline 11.1 LEARNING OBJECTIVE 11.1 Perfectly Competitive Markets Learning Objective 1 Define a perfectly competitive market, and explain why

More information

Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium 3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price

More information

3.a. The imposition of the import fee would have the following effect on the domestic market:

3.a. The imposition of the import fee would have the following effect on the domestic market: CHAPTER 4 3. A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming

More information

Chapter 8 Application: The Costs of Taxation

Chapter 8 Application: The Costs of Taxation Chapter 8 Application: The Costs of Taxation Review Questions What three factors must be taken into account in order to fully understand the effect of taxes on economic well-being? ANSWER: In order to

More information

12 MONOPOLY. Chapter. Key Concepts

12 MONOPOLY. Chapter. Key Concepts Chapter 12 MONOPOLY Key Concepts Market Power Monopolies have market power, the ability to affect the market price by changing the total quantity offered for sale. A monopoly is a firm that produces a

More information

1.3: Linear Functions and Mathematical Models

1.3: Linear Functions and Mathematical Models c Dr Oksana Shatalov, Summer 2012 1 1.3: Linear Functions and Mathematical Models 1.4: Intersection of Straight Lines Linear Function DEFINITION 1. A function, f, is a rule that assigns to each value of

More information

Monopoly. Problem 1 (APT 93, P3) Sample answer:

Monopoly. Problem 1 (APT 93, P3) Sample answer: Monopoly Problem 1 (APT 93, P3) A single airline provides service from City A to City B. a) Explain how the airline will determine the number of passengers it will carry and the price it will charge. b)

More information

AP MICROECONOMICS 2015 SCORING GUIDELINES

AP MICROECONOMICS 2015 SCORING GUIDELINES AP MICROECONOMICS 2015 SCORING GUIDELINES Question 1 10 points (1+5+1+3) (a) 1 point: One point is earned for stating that the firm s price is equal to the market price because the firm is a price taker.

More information

Chapter 5 Applications of Supply and Demand

Chapter 5 Applications of Supply and Demand 1. Elasticity of Demand (E d ) Chapter 5 Applications of Supply and Demand Measures the responsiveness of Q d to a change in price. How much does Q d change (%) when P changes (%)? We can use a formula

More information

The Macroeconomy in the Long Run The Classical Model

The Macroeconomy in the Long Run The Classical Model PP556 Macroeconomic Questions The Macroeconomy in the ong Run The Classical Model what determines the economy s total output/income how the prices of the factors of production are determined how total

More information

AP Microeconomics Chapter 3 Outline

AP Microeconomics Chapter 3 Outline I. Learning Objectives In this chapter students should learn: A. What demand is and how it can change. B. What supply is and how it can change. C. How supply and demand interact to determine market equilibrium.

More information

Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price

Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price Math 1314 Lesson 8: Business Applications: Break Even Analysis, Equilibrium Quantity/Price Cost functions model the cost of producing goods or providing services. Examples: rent, utilities, insurance,

More information

Procedure In each case, draw and extend the given series to the fifth generation, then complete the following tasks:

Procedure In each case, draw and extend the given series to the fifth generation, then complete the following tasks: Math IV Nonlinear Algebra 1.2 Growth & Decay Investigation 1.2 B: Nonlinear Growth Introduction The previous investigation introduced you to a pattern of nonlinear growth, as found in the areas of a series

More information

ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 21, 2013

ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 21, 2013 ECON 201: Introduction to Macroeconomics Professor Robert Gordon Midterm Exam 1: October 21, 2013 NAME Circle your TA's name: Arjada Samir Circle your section time: 11:00 am 4:00 pm Directions: This test

More information

Efficiency and Fairness of Markets

Efficiency and Fairness of Markets Efficiency and Fairness of Markets Chapter CHAPTER CHECKLIST Describe the alternative methods of allocating scarce resources and define and explain the features of an efficient allocation. Ways of allocating

More information

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

More information

CHAPTER 1 Linear Equations

CHAPTER 1 Linear Equations CHAPTER 1 Linear Equations 1.1. Lines The rectangular coordinate system is also called the Cartesian plane. It is formed by two real number lines, the horizontal axis or x-axis, and the vertical axis or

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

Tutorial 1. Monopoly and Price Discrimination.

Tutorial 1. Monopoly and Price Discrimination. Tutorial 1. Monopoly and Price Discrimination. Question 1. Suppose there are 10 students in a class and teacher brings a bag with 10 candies. Assume all students have identical preferences and have positive

More information

Learning Objectives. Essential Concepts

Learning Objectives. Essential Concepts Learning Objectives After reading Chapter 16 and working the problems for Chapter 16 in the textbook and in this Workbook, you should be able to: Essential Concepts Define the concept of social economic

More information

Demand, Supply and Elasticity

Demand, Supply and Elasticity Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

More information

Unit 2. Supply and demand

Unit 2. Supply and demand Unit 2. upply and demand Learning objectives to analyse the determinants of supply and demand and the ways in which changes in these determinants affect equilibrium price and output; in particular, to

More information

MATH MODULE 11. Maximizing Total Net Benefit. 1. Discussion M11-1

MATH MODULE 11. Maximizing Total Net Benefit. 1. Discussion M11-1 MATH MODULE 11 Maximizing Total Net Benefit 1. Discussion In one sense, this Module is the culminating module of this Basic Mathematics Review. In another sense, it is the starting point for all of the

More information

Economics 103h Fall 2012: Part 1 of review questions for final exam

Economics 103h Fall 2012: Part 1 of review questions for final exam Economics 103h Fall 2012: Part 1 of review questions for final exam This is the first set of review questions. The short answer/graphing go through to the end of monopolistic competition. The multiple

More information

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3 Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream

More information

i = nominal interest rate earned by alternative nonmonetary assets

i = nominal interest rate earned by alternative nonmonetary assets Chapter 7 Addendum Demand for Money: the quantity of monetary assets people choose to hold. In our treatment of money as an asset we need to briefly discuss three aspects of any asset 1. Expected Return:

More information

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

More information

Chapter 6 Supply, Demand, and Government Policies

Chapter 6 Supply, Demand, and Government Policies Chapter 6 Supply, Demand, and Government Policies Review Questions Using supply-demand diagrams, show the difference between a non-binding price ceiling and a binding price ceiling in the wheat market.

More information

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY

N. Gregory Mankiw Principles of Economics. Chapter 15. MONOPOLY N. Gregory Mankiw Principles of Economics Chapter 15. MONOPOLY Solutions to Problems and Applications 1. The following table shows revenue, costs, and profits, where quantities are in thousands, and total

More information

AP Microeconomics Chapter 5 Outline

AP Microeconomics Chapter 5 Outline I. Learning Objectives In this chapter students should learn: A. How to differentiate demand side market failures and supply side market failures. B. The origin of consumer surplus and producer surplus,

More information

Economics 101 Fall 2011 Homework #3 Due 10/11/11

Economics 101 Fall 2011 Homework #3 Due 10/11/11 Economics 101 Fall 2011 Homework #3 Due 10/11/11 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).

More information

Chapter 5. Market Equilibrium 5.1 EQUILIBRIUM, EXCESS DEMAND, EXCESS SUPPLY

Chapter 5. Market Equilibrium 5.1 EQUILIBRIUM, EXCESS DEMAND, EXCESS SUPPLY Chapter 5 Price SS p f This chapter will be built on the foundation laid down in Chapters 2 and 4 where we studied the consumer and firm behaviour when they are price takers. In Chapter 2, we have seen

More information

Final Exam 15 December 2006

Final Exam 15 December 2006 Eco 301 Name Final Exam 15 December 2006 120 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. Part 1 (10 points each) 1. As

More information

IN business, functions are often used to represent cost, revenue and/or

IN business, functions are often used to represent cost, revenue and/or Section 9 Marginal Profit IN business, functions are often used to represent cost, revenue and/or profit. We ll let our variable be q instead of the more usual x, since we will use it to represent the

More information

Chapter 14: Production Possibility Frontiers

Chapter 14: Production Possibility Frontiers Chapter 14: Production Possibility Frontiers 14.1: Introduction In chapter 8 we considered the allocation of a given amount of goods in society. We saw that the final allocation depends upon the initial

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 12 Monopoly - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Unregulated monopolies A) cannot change the market quantity.

More information

Example 2: A company s car has an original value of $85, 000 and will be depreciated linearly over 6 years with scrap value of $10,000.

Example 2: A company s car has an original value of $85, 000 and will be depreciated linearly over 6 years with scrap value of $10,000. Section 1.5: Linear Models An asset is an item owned that has value. Linear Depreciation refers to the amount of decrease in the book value of an asset. The purchase price, also known as original cost,

More information

Marginal Decisions and Externalities - Examples 1

Marginal Decisions and Externalities - Examples 1 Marginal Decisions and Externalities - Examples 1 Externalities drive the free market away from the socially efficient equilibrium. As microeconomists, we re interested in maximizing social welfare, so

More information

Answer: TRUE. The firm can increase profits by increasing production.

Answer: TRUE. The firm can increase profits by increasing production. Solutions to 1.01 Make-up for Midterm Short uestions: 1. (TOTAL: 5 points) Explain whether each of the following statements is True or False. (Note: You will not get points for a correct answer without

More information

April 4th, 2014. Flow C was 9 trillion dollars, Flow G was 2 trillion dollars, Flow I was 3 trillion dollars, Flow (X-M) was -0.7 trillion dollars.

April 4th, 2014. Flow C was 9 trillion dollars, Flow G was 2 trillion dollars, Flow I was 3 trillion dollars, Flow (X-M) was -0.7 trillion dollars. Problem Session I April 4th, 2014 Reference: Parkin, Introduction to economics, 2011 1. The rm that printed your Introduction to economics textbook bought the paper from XYZ Paper Mills. Was this purchase

More information

Test 3: April 5, 2002

Test 3: April 5, 2002 Test 3: April 5, 2002 Multiple Choice 50 points (1 each) Answer the questions on the Scantron sheet. Select the best answer for each question. (See answers on the last page) 1. If the supply curve shifts

More information

Example 1: Suppose the demand function is p = 50 2q, and the supply function is p = 10 + 3q. a) Find the equilibrium point b) Sketch a graph

Example 1: Suppose the demand function is p = 50 2q, and the supply function is p = 10 + 3q. a) Find the equilibrium point b) Sketch a graph The Effect of Taxes on Equilibrium Example 1: Suppose the demand function is p = 50 2q, and the supply function is p = 10 + 3q. a) Find the equilibrium point b) Sketch a graph Solution to part a: Set the

More information