sol_even_7 - Chapter 7 Efficiency and Exchange Q 2 4 6 8 10...

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Chapter 7 Efficiency and Exchange Q. 2, 4, 6, 8, 10
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Chapter 7 Problem 2 1) Refer to problem 1.  Suppose a coalition of students from Lincoln  High School succeeds in persuading the local government to impose  a price ceiling of $7.50 on used DVDs, on the grounds that local  suppliers are taking advantage of teenagers by charging exorbitant  prices. 12 10.5 6 18 48 7.5 2 6 Quantity (DVDs/week) Price ($/DVD) S D
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a) Calculate the weekly shortage of used DVDs that will result from this  policy. With price ceiling of $7.50, the quantity supplied from sellers is 2 DVDs  per week.   By using vertical interpretation, with quantity of 2 DVDs per week,  buyers are willing to pay a higher price for an additional DVDs.  The quantity demanded at the current price of $7.50 is 18 DVDs per  week. Thus, the price ceiling leads to an Excess Demand of 16 DVDs per  week (18 DVDs/wk – 2 DVDs/wk).  Buyers cannot buy as much as  they are willing to at the current price of $7.50. Therefore, the weekly shortage of used DVDs result from the price  ceiling policy is  16 DVDs per week.
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a) Calculate the total economic surplus lost every week as a result of the price  ceiling. 2 methods to find the lost in economic surplus. 12 10.5 18 48 7.5 2 6 6 Quantity (DVDs/week) Price ($/DVD) S D 12 10.5 18 48 7.5 2 6 6 Quantity (DVDs/week) Price ($/DVD) x S D x
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Method 1:   With price ceiling of $7.50, sellers will sell only 2 DVDs/wk.  Therefore, total economic  surplus will be reduced by the shaded area. 12 10.5 18 48 7.5 2 6 6 Quantity (DVDs/week) Price ($/DVD) S D Weekly economic surplus lost  is the area of the shaded  triangle. x To find the area of the shaded triangle, we need to calculate the value of X in the graph. First, derive the Demand Curve: Demand Curve: P = 12 – 0.25Q At Q = 2, P = 12 – 0.25(2) P = 11.5 Weekly economic surplus lost is, (11.5 – 7.5)(6-2) (1/2) =  $8/wk Economic surplus lost
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Method 2:  With price ceiling of $7.50, sellers will sell only 2 DVDs/wk.  12 10.5 18 48 7.5 2 6 6 Quantity (DVDs/week) Price ($/DVD) S D Without Price ceiling, sellers sell 6 DVDs at P = $10.5 . Consumer surplus: $4.5/wk Producer surplus: $13.5/wk Total Economic Surplus = $18/wk With Price ceiling of $7.5, only 2 DVDs/wk will be sold. Consumer surplus: (12-11.5)(2) (1/2) + (11.5-7.5)(2) = $8.5/WK Producer surplus: (7.5-6)(2) (1/2) = $1.5/wk Total Economic Surplus = $10/wk 11.5 Therefore, total economic surplus lost as a result of price ceiling is, $18/wk - $10/wk =  $8/wk
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4)  Suppose the weekly demand for a certain good, in thousands of  units, is given by the equation P = 8 – Q, and the weekly supply of  the good is given by the equation P = 2 + Q, where P is the price in  dollars.
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