Quiz#1 key

Quiz#1 key - < Problem Set 1: Answer Keys > (ECON 2:...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
< Problem Set 1: Answer Keys > (ECON 2: Spring 2008) ( Market Imperfection and Policies; Prof. Young-Han Kim ) 1. Assume that the aggregate demand curve and the aggregate supply curve of wheat in the Chicago grain market are given as follows. (Wheat suppliers and consumers are price-takers. Unit of the price is dollar.) Q D = 100 ( P/2 ) Q S = 2P i) Determine the level of consumer surplus and producer surplus and the social welfare level in competitive equilibrium. In addition, explain the economic meaning of the consumer surplus and producer surplus values that you derived, considering how the demand curve and the supply curve are derived and what is meant by those curves. (11 points) Q a b D P With the given inverse demand function (P=200-2Q D ) and the supply function (P=Q S /2), equilibrium output turns out to be 80 ( Í Q*/2=200-2Q*), and the equilibrium price level is 40. Therefore, the level of consumer surplus, denoted as a in the diagram, is: 6400. (the amount of consumption*the average consumer surplus = 80*160/2=6400) The producer surplus is: 80*20 =1600. (the amount of sales*the average producer surplus =1600). Therefore, the social welfare level is: SW=CS+PS=8,000. o Consumer surplus from each unit of consumption is the difference between the demand curve and the market price level. Demand curve represents the level of ‘willingness to pay’ or ‘the level of utility’ from each additional unit of consumption. Therefore, the consumer surplus, which is measured as the difference between the demand curve and market price, represents net consumer utility, i.e., “consumption utility level – consumption cost.’ O In the same way, producer surplus can be measured as the difference between the market price level and the supply curve. The supply curve represents the profit maximizing combination of price and output level. In competitive market, producers are ready to supply the goods as long as it can sell the product at the price equal to marginal cost. Therefore, the supply curve is the marginal cost curve in competitive market. Hence, producer surplus is difference between the market price and marginal cost, which is producers’ net gain. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ii) Assume that the US government imposes a regulation setting the upper limit of wheat price at P=30. What is the impact of the government regulation on social welfare, and what is the source of those impacts? (11 points) P Q a D o With the price control, consumption and production is reduced to 60, resulting in the deadweight loss by the amount of triangle, a . which is 500(=20*50/2). This deadweight loss is caused by the price distortion from the competitive price by the government price control. 2. Assume that Qualcomm Co. in San Diego is a monopolist firm in cell-phone communication technology.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

Quiz#1 key - &lt; Problem Set 1: Answer Keys &gt; (ECON 2:...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online