ch3b - Chapter 3 (Supply and Demand), part 2 Wednesday,...

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Chapter 3 (Supply and Demand), part 2 Wednesday, June 23
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QUESTION 1 (demand for snails) If the price of snails is $2, how many snails should Ricky buy? A) 1 B) 2 C) 3 D) 4 E) 5 snails total benefit 1 $7 2 $12 3 $15 4 $16 5 $16 Ricky is a consumer of snails. He would be willing to pay a maximum of $7 for 1 snail, a maximum of $12 for two snails, and so on.
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answer to question 1 If the price of snails is $2, how many snails should Ricky buy? A) 1 B) 2 C) 3 D) 4 E) 5 snails total benefit 1 $7 2 $12 3 $15 4 $16 5 $16 marginal cost marginal benefit $2 $7 $2 $5 $2 $3 $2 $1 $2 $0
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further explanation Ricky should stop buying snails once the marginal benefit is no longer greater than the marginal cost. Notice that this is also the choice that gives him the greatest possible surplus (total benefit total cost). snails total benefit 1 $7 2 $12 3 $15 4 $16 5 $16 marginal benefit marginal cost $7 $2 $5 $2 $3 $2 $1 $2 $0 $2 total cost surplus $2 $5 $4 $8 $6 $9 $8 $8 $10 $6
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DERIVING A DEMAND SCHEDULE We assume that Ricky will buy snails until the price is greater than his marginal benefit. snails total benefit 1 $7 2 $12 3 $15 4 $16 5 $16 marginal benefit $7 $5 $3 $1 $0 price quantity demanded $0-$1 4 $1-$3 3 $3-$5 2 $5-$7 1 >$7 0
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Like most demand curves, Ricky’s demand for snails is downward-sloping. price quantity demanded $0-$1 4 $1-$3 3 $3-$5 2 $5-$7 1 >$7 0 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 quantity demanded price
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QUESTION 2 (supply of snails) If the price of snails is $7, how many snails should Stan sell? A) 1 B) 2 C) 3 D) 4 E) 5 snails total cost 1 $1 2 $3 3 $7 4 $13 5 $21 Stan is a supplier of snails. It costs him $1 to find 1 snail, $3 to find 2 snails, and so on.
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answer to question 2 If the price of snails is $7, how many snails should Stan sell? A) 1 B) 2 C) 3 D) 4 E) 5 snails total cost 1 $1 2 $3 3 $7 4 $13 5 $21 marginal cost marginal benefit $1 $7 $2 $7 $4 $7 $6 $7 $8 $7
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further explanation Stan should stop selling snails once the marginal benefit is no longer greater than the marginal cost. Notice that this is also the choice that gives him the greatest possible surplus (total benefit total cost). This is because, as he adds each unit, his surplus changes by the difference between the marginal benefit and the marginal cost. snails total cost 1 $1 2 $3 3 $7 4 $13 5 $21 marginal cost marginal benefit $1 $7 $2 $7 $4 $7 $6 $7 $8 $7 total benefit surplus (profit) $7 $6 $14 $11 $21 $14 $28 $15 $35 $14
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QUESTION 3 (find the correct supply schedule) Which is the correct supply schedule? snails total cost 1 $1 2 $3 3 $7 4 $13 5 $21 marginal cost $1 $2 $4 $6 $8 (A) price QS $0-$1 0 $1-$2 1 $2-$3 2 $3-$4 3 $4-$5 4 >$5 5 (B) price QS $0-$1 0 $1-$2 1 $2-$4 2 $4-$6 3 $6-$8 4 >$8 5 (C) price QS $0-$2 0 $2-$4 1 $4-$8 2 $8-$16 3 $16-$32 4 >$32 5 (D) price QS $0-$1 0 $1-$3 1 $3-$7 2 $7-$13 3 $13-$21 4 >$21 5
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answer to question 3 Which is the correct supply schedule? snails total cost 1 $1 2 $3 3 $7 4 $13 5 $21 marginal cost $1 $2 $4 $6 (B) price QS $0-$1 0 $1-$2 1 $2-$4 2 $4-$6 3 $6-$8 4 >$8 5 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 quantity supplied price
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price QD $0-$1 4 $1-$3 3 $3-$5 2 $5-$7 1 >$7 0 price QS $0-$1 0 $1-$2 1 $2-$4 2 $4-$6 3 $6-$8 4 >$8 5 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 quantity price S D
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QUESTION 4 (reading supply and demand graph) 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 quantity price S D When the price is $1.50, then. ..
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This note was uploaded on 08/03/2010 for the course ECON 1 taught by Professor Bergstrom during the Summer '07 term at UCSB.

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ch3b - Chapter 3 (Supply and Demand), part 2 Wednesday,...

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