chp 11 instructor manual

chp 11 instructor manual - Chapter 11 PERFORMANCE AND...

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Chapter 11 PERFORMANCE AND STRATEGY IN COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q11.1 Your best income-earning opportunity appears to be an offer to work for a local developer during the month of June and earn $2,000. However, before taking the job, you accept a surprise offer from a competitor. If you actually earn $2,600 during the month, how much producer surplus have you earned? Explain. Q11.1 ANSWER $600. Producer surplus is the amount a seller is paid minus the seller’s marginal cost of production. In this case, the opportunity cost of $2,000 is the relevant marginal cost of deciding to work for the competitor, and producer surplus is the amount received above and beyond that amount. The amount received, $2,600, represents a $600 premium over the amount that would have been received from your next-best employment opportunity and represents the value of your producer surplus. Q11.2 Assume that you are willing to pay $1,100 for a new personal computer that has all the “bells and whistles.” On the Internet, you buy one for the bargain price of $900. Unbeknownst to you, the Internet retailer’s marginal cost was only $750. How much consumer surplus, producer surplus, and net addition to social welfare stems from your purchase? Explain. Q11.2 ANSWER Consumer surplus is the amount that consumers are willing to pay for a good or service minus the amount that they are required to pay. Consumer surplus represents value derived from consumption that consumers are able to enjoy at zero cost. It also describes the net benefit derived by consumers from consumption, where net benefit is measured in the eyes of the consumer. If you are in the market for a new personal computer and willing to pay up to $1,100, but you buy one for the bargain price of $900, you realize consumer surplus of $200. Consumer surplus represents the difference between the price you were willing to pay and the price paid. Whereas consumer surplus is closely related to the demand curve for a product, producer surplus is closely related to the supply curve for a product. Producer surplus is the amount paid to sellers minus the cost of production. It represents the amount paid to sellers above and beyond the required minimum and is the net benefit derived by producers from production. If you paid $900 and the Internet retailer’s marginal cost was $750, the amount of producer surplus is $150, or the difference
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64 Chapter 11 between the minimum price a seller would be willing to accept and the price received. In competitive market equilibrium, social welfare is measured by the sum of net benefits derived from trade by consumers and producers. Social welfare is the sum of consumer surplus and producer surplus. In this case, the total gains from trade are $350. The gain from trade realized by the consumer is $200; the gain from trade realized by the producer is $150. Q11.3
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This note was uploaded on 03/08/2011 for the course ECONABA 635 taught by Professor Leiter during the Summer '10 term at Andrew Jackson.

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chp 11 instructor manual - Chapter 11 PERFORMANCE AND...

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