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Key for Problem set 2 Spring 2007

Key for Problem set 2 Spring 2007 - Economics 100 Key for...

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Economics 100 – Key for Problem Set #2 Spring 2007 Page 1 of 3 1. Let us return to the triple latte market at CSU-LB from Handout 1d (10 total points: 2 points each). Triple Latte Market at CSU-LB 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 0 5 10 15 20 25 30 35 40 45 50 Quantity (cups of coffee) Price ($ per cup) supply curve original demand curve new demand curve CS PS a. On the supply and demand diagram, the original equilibrium is the dotted line ‘----’ where the equilibrium price is $6.00 per cup and the equilibrium quantity is 20 cups. b. The consumer surplus is defined as the willingness to pay ( WTP ) minus the price ( P ). It is the yellow triangle labeled CS . The producer surplus is defined as the price ( P ) minus the marginal cost ( MC ). It is the aqua triangle labeled PS . c. The total revenue ( TR ) earned by the firms is the equilibrium price ($6.00) times the equilibrium quantity (20 cups). In the original equilibrium , the total revenue ( TR ) is $120. d. If the willingness to pay for a triple latte decreases by $2.00 per cup, the price on the demand curve would decrease by $2.00 since household require a $2.00 lower price on each unit bought.
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