econ1001_endofchapter07

econ1001_endofchapter07 - Chapter 7 Efficiency and exchange...

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Unformatted text preview: Chapter 7 Efficiency and exchange Problem #1, Chapter 7 (1) • Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram. Calculate – The weekly consumer surplus – The weekly producer surplus – The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week Problem #1, Chapter 7 (2) S D 48 18 2 6 0 6 7.5 10.50 12 Quantity (DVDs/week) Price ($/DVD) Solution to Problem #1 (1) • The weekly consumer surplus – Recall consumer surplus refers to the difference between consumer’s reservation price and the actual market price – Graphically, it is the area under the demand curve but above the actual market price – In this problem, the equilibrium is achieved at a a price where Q(D) = Q(S) • The equilibrium price is $10.50 per DVD – At an equilibrium price of $10.50 the corresponding equilibrium quantity is 6 units of DVD per week Solution to Problem #1 (2) • The weekly consumer surplus – (1/2) (Highest consumer’s reservation price – actual market price) * actual market quantity – (1/2) ($12 - $10.50) * 6 = $4.5 • The weekly producer surplus – Recall producer surplus refers to the difference between producer’s reservation price and the actual market price – Graphically, it is the area above the supply curve but under the actual market price Solution to Problem #1 (3) • The weekly producer surplus – (1/2) (Actual market price – lowest producer’s reservation price) * actual market quantity – (1/2) ($10.50 - $6) * 6 = $13.5 • The maximum weekly amount that producers and consumers in Lincoln would be willing to pay in a week – In other words, it refers to the total gains from trading in used DVDs- the total economic surplus – Total economic surplus = consumer surplus + producer surplus – Total economic surplus = $4.5 + $13.5 = $18 per week Chapter 7 Problem 2 2) 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 $7.50 on used DVDs, on the grounds that local suppliers are taking advantage of teenagers by charging exorbitant prices. a) Calculate the weekly shortage that result from this policy. 12 10.5 6 18 48 7.5 2 6 Quantity (DVDs/week) Price ($/DVD) S D 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....
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econ1001_endofchapter07 - Chapter 7 Efficiency and exchange...

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