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Unformatted text preview: ___________________________________________________________________________________ 1 S I M O N F R A S E R U N I V E R S I T Y D e p a r t m e n t o f E c o n o m i c s Economics 103 Fall 2005 Due: November 14, 2005 at the beginning of lecture Problem Set 2 Please write neatly in the space provided only. You can print either single-sided or double-sided. No electronic and late assignments will be graded. First Name: Last Name: ANSWER KEY Student Number: Tutorial Group: (circle one) D301 D302 D303 D304 D305 Questions: 1. Consider a market in which Bert from problem 3 is a buyer and Ernie from problem 4 is the seller. a. Use Ernies S schedule and Berts D schedule to find the Q S and Q D at prices of $2, $4, and $6. Which of these prices brings S & D into equilibrium? [5 marks] From Ernies supply schedule and Berts demand schedule, the quantity demanded and supplied are: Price Quantity Supplied Quantity Demanded $2 1 3 $4 2 2 $6 3 1 Only a price of $4 brings supply and demand into equilibrium, with an equilibrium quantity of 2. b. What are consumer surplus (CS), producer surplus (PS), and total surplus in this equilibrium? [3 marks] At a price of $4, consumer surplus is $4 and producer surplus is $4, as shown in the tutorial. Total surplus is $4 + $4 = $8. Total Mark ______ 80 ___________________________________________________________________________________ 2 c. If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus? [3 marks] Q =1, cost of 1 st bottle is $1 and value of 1 st bottle is $7. PS = price cost = $4 - $1 = $3 CS = value price = $7 - $4 = $3 Total Surplus = PS + CS = $6 Total surplus declines by $2 (compared to part b) . d. If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus? [2 marks] Q = 3, cost of 3 rd bottle is $5 and value of 3 rd bottle is $3. PS = $4 - $5 = -$1 CS = $3 - $ 4 = -$1 Total surplus declines by $2. . 2. Four consumers are willing to pay the following amounts for haircuts: Jerry: $7 Oprah: $2 Ricki: $8 Montel: $5 Four haircutting businesses have the following costs: Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2 Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair, and which consumers should have their hair cut? How large is the maximum possible total surplus? Use S-D diagram. [10 marks] The figure shows supply and demand curves for haircuts....
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