Dis3 - Econ 101: Principles of Microeconomics Fall 2009...

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Discussion S ec tion #3 Handout Econ 101: Principles of Microeconomics Fall 2009 Consumer Surplus and Producer Surplus On the following graph, S denotes initial supply curve, and D denotes initial demand curve. P [$] S C S Pe PS D Qe Q Consumer surplus (CS) = the difference between the value of the good and its price. Producer surplus (PS) = the difference between producer’s revenue and the opportunity cost of the production. Price Control A price ceiling is a maximum legal price which sellers can charge for a product. A price floor is a minimum legal price which buyers must pay for a product. Note that price controls are not always binding . That is, they may not have an effect on the market. For example, if a price floor is set below the market equilibrium price then the price floor is not binding. Price controls are a crude form of government intervention. When price controls are binding they prevent market clearing (i.e. they cause excess supply (surplus) or excess demand (shortage)). Consumer & Producer Surplus Problem 1 Ross Geller wants to sell his book "Wonder of Paleontology" to his friends, Monica, Phoebe, Joey and Chandler. Ross can get a copy of the book from the publisher only at the shipping cost ($5 per copy), and two more copies at the author's discounted price ($25 per copy); however he has to buy it at the regular retail price ($45 per copy) if he needs more. Because his textbook has not been sold well, any bookstores don't stock it now; thus his friends have to buy it through Ross, if they want. For Phoebe, who is so curious about evolution, the textbook is worth $50. Chandler is willing to pay at most $40 for his best friend's book. Monica, who has already been bored with her brother's endless talk about dinosaurs, is willing to pay only $15. Joey will pay at most $3, because his purpose to buy the book is only to stop the sales call from Ross. No one will buy more than one copy. a. Find the equilibrium. (Here Ross is the only supplier of the books.) b. Calculate the producer surplus (i.e. Ross's profit) and the consumer surplus at the equilibrium.
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Discussion S ec tion #3 Handout Econ 101: Principles of Microeconomics Fall 2009 c. The publisher of Ross's book prohibits Ross from selling the book under the regular retail price
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This note was uploaded on 11/27/2011 for the course ECONOMICS 101 taught by Professor Kelly during the Fall '10 term at University of Wisconsin.

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Dis3 - Econ 101: Principles of Microeconomics Fall 2009...

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