problem set answers 4

problem set answers 4 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 15 A NSWERS FOR P ROBLEM S ET 5 Chapter 4 LEARNING OBJECTIVE LEARNING OBJECTIVE 4.1 Distinguish between the concepts of consumer surplus and producer surplus. Review Questions 1.1 Marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service. The demand curve shows consumers’ willingness to pay for a product. The amount that they are willing to pay will equal the extra benefits they will receive from consuming it, thus the demand curve equals the marginal benefit curve for consumers. 1.2 Marginal cost is the additional cost to a firm of producing one more unit of a good or service. Supply curves show the willingness of firms to supply a product at different prices. The willingness to supply a product depends on the cost of producing it. The lowest price a firm is willing to accept is the additional cost of making the good, thus the supply curve equals the marginal cost curve. 1.3 Consumer surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. As the equilibrium price falls, consumer surplus grows both because the gap between the willingness to pay and price grows and because more is purchased. As the price rises, consumer surplus shrinks. 1.4 Producer surplus is the difference between the lowest price a firm would have been willing to accept and the price it actually receives. As the equilibrium price of the good rises, producer surplus rises. As the price falls, producer surplus falls.
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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 2 of 15 Problems and Applications 1.5 a. Because the frost will cause price to increase and quantity to decrease, consumer surplus will decrease. Before the decline in supply caused by the frost, consumer surplus was equal to areas A + B + C + D . After the frost, consumer surplus is equal to area A. b. Price increases, but quantity decreases, so the effect on producer surplus is uncertain. Before the frost, producer surplus was equal to areas E + F + G . After the frost, producer surplus is equal to the areas B + C + E + F . If the value of areas B + C is greater than the value of area G , then producer surplus was increased by the frost. If the value of areas B + C is less than the value of area G , then producer surplus was decreased by the frost. 1.6 The argument is incorrect. The price of the last unit sold price equals the willingness to pay, but on all previous units the willingness to pay exceeds the price, and so there is consumer surplus. 1.7 A vertical demand curve implies that there is no limit to the price consumers are willing to pay, resulting in an infinite consumer surplus. In the markets we have studied up to this point, consumer surplus was always finite. 1.8
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problem set answers 4 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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