# Chapter 7 Homework Answer Keys - which costs \$3 to produce...

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Chapter 7 Homework Answer Keys 1. a. Consumer surplus is equal to willingness to pay minus the price paid. Therefore, Melissa’s willingness to pay must be \$200 (\$120 + \$80). b. Her consumer surplus at a price of \$90 would be \$200 - \$90 = \$110. c. If the price of an iPod was \$250, Melissa would not have purchased one because the price is greater than her willingness to pay. Therefore, she would receive no consumer surplus. 5. a. Ernie’s supply schedule for water is: Price Quantity Supplied More than \$7 4 \$5 to \$7 3 \$3 to \$5 2 \$1 to \$3 1 Less than \$1 0 Ernie’s supply curve is shown in Figure 1. Figure 1 b. When the price of a bottle of water is \$4, Ernie sells two bottles of water. His producer surplus is shown as area A in the figure. He receives \$4 for his first bottle of water, but it costs only \$1 to produce, so Ernie has producer surplus of \$3. He also receives \$4 for his second bottle of water,
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Unformatted text preview: which costs \$3 to produce, so he has producer surplus of \$1. Thus Ernie’s total producer surplus is \$3 + \$1 = \$4, which is the area of A in the figure. c. When the price of a bottle of water rises from \$4 to \$6, Ernie sells three bottles of water, an increase of one. His producer surplus consists of both areas A and B in the figure, an increase by the amount of area B. He gets producer surplus of \$5 from the first bottle (\$6 price minus \$1 cost), \$3 from the second bottle (\$6 price minus \$3 cost), and \$1 from the third bottle (\$6 price minus \$5 price), for a total producer surplus of \$9. Thus producer surplus rises by \$5 (which is the size of area B) when the price of a bottle of water rises from \$4 to \$6....
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