Principles_HWsolution_ch7 - Suggested Answers for Mankiw...

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1 Suggested Answers for Mankiw, Chapter 7, Problem 5, 8, 9, 10 5. a. From Kelly’s supply schedule and Regis’s demand schedule, the quantity demanded and supplied are: Price Quantity Supplied Quantity Demanded $2 2 4 $3 3 3 $4 4 2 Only a price of $3 brings supply and demand into equilibrium, with an equilibrium quantity of three. b. At a price of $3, consumer surplus is $3 and producer surplus is $3, as shown in Problems 3 and 4 above. Total surplus is $3 + $3 = $6. c. If Kelly produced one less cupcake, her producer surplus would remain at $3. If Regis consumed one less cupcake, his consumer surplus would remain at $3. So total surplus would remain at $3 + $3 = $6. d. If Kelly produced one additional cupcake, her cost would be $4, but the price is only $3, so her producer surplus would decline by $1. If Regis consumed one additional cupcake, his value would be $2, but the price is $3, so his consumer surplus would decline by $1. So total surplus declines by $1 + $1 = $2. 8. a. The effect of falling production costs in the market for computers results in a shift to the right in the supply curve, as shown in Figure 13. As a result, the equilibrium price of computers declines and the equilibrium quantity increases. The decline in the price of computers increases consumer surplus from area A to A + B + C + D, an increase in the amount B + C + D. Figure 13
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2 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
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