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microeconomics book solution 4

# microeconomics book solution 4 -...

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Solution Solution Consumer and Producer Surplus 1. Determine the amount of consumer surplus generated in each of the following situations. a. Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to \$10. He picks out one he likes with a price tag of exactly \$10. When he is paying for it, he learns that the T-shirt has been discounted by 50%. b. Alberto goes to the CD store hoping to find a used copy of Nirvana’s Greatest Hits for up to \$10. The store has one copy selling for \$10, which he purchases. c. After soccer practice, Stacey is willing to pay \$2 for a bottle of mineral water. The 7-Eleven sells mineral water for \$2.25 per bottle, so she declines to purchase it. 1. a. Leon’s consumer surplus is \$5. This is the difference between how much he is willing to pay (\$10) and how much he does pay (\$5). Since Alberto’s willingness to pay is \$10 and the price of the CD is \$10, he gets zero consumer surplus. c. No trade takes place because Stacey’s willingness to pay is less than the price. So no consumer surplus is created. 2. Determine the amount of producer surplus generated in each of the following situations. a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price , of \$75. After five days of bidding, the final high bid is exactly \$75. He accepts the bid. So-Hee advertises her car for sale in the used-car section of the student newspaper for \$2,000, but she is willing to sell the car for any price higher than \$1,500. The best offer she gets is \$1,200, which she declines. c. Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is \$80,000. 2. a. Gordon will receive no producer surplus since the price received for the trains is equal to his cost. No trade takes place because So-Hee’s cost is \$1,500, which is higher than the price of \$1,200 she is offered. So no producer surplus is created. c. Sanjay’s cost is zero. The price he is paid for his time is \$80,000, so his producer surplus is \$80,000. 3. There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay \$40 for a computer game, consumer 2 is willing to pay \$35, consumer 3 is willing to pay \$30, consumer 4 is willing to pay \$25, con- sumer 5 is willing to pay \$20, and consumer 6 is willing to pay \$15. a. Suppose the market price is \$29. What is the total consumer surplus? The market price decreases to \$19. What is the total consumer surplus now? c. When the price fell from \$29 to \$19, how much did each consumer’s individual consumer surplus change? How does total consumer surplus change? S-61 4 chapter: S61-S70_Krugman2e_PS_Ch04.qxp 9/16/08 9:19 PM Page S-61

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Solution 3. a. Consumer 1 buys a game since her willingness to pay is greater than the price. She gains \$40 \$29 = \$11.
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microeconomics book solution 4 -...

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