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econ1001_endofchapter07

econ1001_endofchapter07 - Chapter 7 Efficiency and exchange...

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Chapter 7 Efficiency and exchange
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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
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Problem #1, Chapter 7 (2) S D 48 18 2 6 0 6 7.5 10.50 12 Quantity (DVDs/week) Price ($/DVD)
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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
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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
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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
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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
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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.
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