Econ 101 Winter 2010 Problem Set 4

Econ 101 Winter 2010 Problem Set 4 - Economics 101...

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Problem Set 4 February 4 & 5 University of Michigan Winter 2010 Economics 101 Microeconomics
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Econ 101.400 Winter 2010 Question One Explain why, in the diagram above, neither P 1 nor P 2 is a very sensible prediction of the market price if the depicted market is allowed to operate freely. Explain why the equilibrium price P* makes more sense as a prediction of the price in the market. Question Two Consider the market demand and supply curves depicted in the previous question. (a) If the market is in equilibrium, how do we measure the net benefits that this particular market provides to consumers and to producers? How are these measures represented in the diagram? (b) How can you identify the marginal valuation and marginal opportunity cost curves on your diagram? Use these curves to identify the efficient output level in this market. How does it compare to the output level observed in the market equilibrium? (c) If output is at the efficient level, what is total social surplus? Show this measure on your diagram. How does social surplus relate to consumer and producer surpluses attained in market equilibrium? quantity price Demand Supply P 1 P 2 P*
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Econ 101.400 Winter 2010 Question Three Using the supply and demand model, predict what will happen to prices in each of the
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Econ 101 Winter 2010 Problem Set 4 - Economics 101...

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