SOLUTION PS3 VS2

# SOLUTION PS3 VS2 - Solutions Problem Set 3 1 Do Problem 3...

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Solutions Problem Set 3 1. Do Problem 3 on page 156 of Mankiw.

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2. Do Problem 4 on page 156 of Mankiw.
Do Problem 5 on page 156 of Mankiw. 4. Do Problem 6 on page 156 of Mankiw. a. The effect of falling production costs in the market for stereos results in a shift to the right in the supply curve, as shown in Figure 11. As a result, the equilibrium price of stereos declines and the equilibrium quantity increases. b. The decline in the price of stereos increases consumer surplus from area A to A+B+C+D, an increase in the amount B + C + D. Prior to the shift in supply, producer surplus was areas B + E (the area above the supply curve and below the price). After the shift in supply, producer surplus is areas E + F + G. So producer surplus changes by the amount F + G – B, which may be positive or negative. The increase in quantity increases producer surplus, while the decline in the price reduces producer surplus. Because consumer surplus rises by B + C + D and producer surplus rises by F + G – B, total surplus rises by C + D + F + G. c. If the supply of stereos is very elastic, then the shift of the supply curve benefits consumers most. To take the most dramatic case, suppose the supply curve were horizontal, as shown in Figure 12. Then there is no producer surplus at all. Consumers capture all the benefits of falling production costs, with consumer

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## This note was uploaded on 07/09/2008 for the course ECO 100 taught by Professor R.willig during the Spring '08 term at Princeton.

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SOLUTION PS3 VS2 - Solutions Problem Set 3 1 Do Problem 3...

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