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Efficiency and Exchange Answers to Text Questions and Problems Answers to Problems 1a. Consumer surplus is the triangular area between the demand curve and the price line. Its area is equal to 0.5bh, where b is the base of the triangle and h is the height. The base is 6 units and the height is 1.5 units, measured in dollars. Therefore, consumer surplus is 0.5(\$1.50/unit)(6 units/wk), or \$4.50 per week. b. Producer surplus is the triangular area between the supply curve and the price line. Using the base-height formula, it is (0.5)(\$4.50/unit)(6 units/wk), or \$13.50 per week. c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in used DVDs is the sum of gains from trading in used DVDs—namely, the total economic surplus generated per week, which is \$18 per week. 2a. At a price of \$7.50, the quantity supplied per week = 2. The quantity demanded at this price is 18 per week, which implies a weekly shortage of 16 used DVDs. b. The weekly economic surplus lost as a result of the price ceiling is the area of the dark-shaded triangle in the diagram, or the sum of the areas of the two triangles ABC and ACD. Using the information given in the graph, this amount is calculated as (0.5)(4)(1) + (0.5)(4)(3) = \$8/wk. 12 48 6 6 Quantity Price P=6+0.75Q P=12-0.25Q 1 6 2 3 A B C D 4 3a. When there is no charge for the tour, the surplus enjoyed by someone who takes it equals his or her reservation price for the tour. If the warden operates the tour on a first-come-first served basis, Faith, Penny, and Fran will be turned away. The combined consumer surplus when the four who arrive first take the tour is \$20 + \$14 + \$30 + \$15=\$79. 123

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b. An offer of \$15 compensation generates 3 volunteers to return another day: Fran, Jack and Jon. The four who go on the tour receive a total consumer surplus of \$40 + \$30 + \$20 + \$17=\$107. The warden pays \$45 in compensation payments to the three volunteers, which causes him a loss in economic surplus of \$45 that is exactly offset by the gain in economic surplus to the three volunteers. Total economic surplus from the tour operation is now \$107—\$28 higher than before. c. The compensation policy is more efficient than the first-come-first-served policy
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