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Principles_OTHERsolution_ch7

# Principles_OTHERsolution_ch7 - Suggested Answers for Mankiw...

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1 Suggested Answers for Mankiw, Chapter 7, “Other” Problems 1. If there is an improvement in the technology of producing DVD recorders, the supply curve for DVD recorders shifts to the right, as shown in Figure 5. The result is a fall in the price of DVD recorders and a rise in consumer surplus from A to A + B + C. So consumer surplus rises by the amount B + C. Figure 5 2. A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread, as shown in Figure 6. The shift of the demand curve leads to an increased price, which increases producer surplus from area A to area A + B + C. Figure 6 The increased quantity of French bread being sold increases the demand for flour, as shown in Figure 7. As a result, the price of flour rises, increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in one market leads to effects on producer surplus in related markets.

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2 Figure 7 3. a. Regis’s demand schedule is: Price Quantity Demanded More than \$5 0 \$4 to \$5 1 \$3 to \$4 2 \$2 to \$3 3 \$2 or less 4 Regis’s demand curve is shown in Figure 8. Figure 8 b. When the price of a cupcake is \$3.50, Regis buys two cupcakes. His consumer surplus is shown as area A in the figure. He values his cupcake at \$5, but pays only \$3.50 for it, so has consumer surplus of \$1.50. He
3 values his second cupcake at \$4, but pays only \$3.50 for it, so has consumer surplus of \$0.50. Thus Regis’s total consumer surplus is \$1.50 + \$0.50 = \$2, which is the area of A in the figure.

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Principles_OTHERsolution_ch7 - Suggested Answers for Mankiw...

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