Dis3_key - Econ 101 Principles of Microeconomics Fall 2009...

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S Econ 101: Principles of Microeconomics Fall 2009 Discussion Section #3 Solution Key Answers: Problem 1 a. Price $25, Quantity 2: Only Phoebe and Chandler buy the book and Ross gets one at the shipping price and one at the discounted price. b. PS=(25-5)+0=20, CS=(50-25)+(50-15)=40, TS=60. c. Price $45, Quantity 1: Only Phoebe buys the book and Ross gets one at the shipping price. PS=45-5=40, CS=50-45=5, TS=45. d. Price $35, Quantity 2: Only Phoebe and Chandler buy the book and Ross gets one at the shipping price and one at the discounted price. PS=(35-5)+(35-25)=40, CS=(50-35)+(40- 35)=20, TS=60. TS does not change from the equilibrium (i), because they trade the same quantity as the equilibrium. e. Price $5, Quantity 3: All but Joey buy the book and Ross gets one at the shipping price and two at the discounted price. PS=(5-5)+(5-25)*2=-40, CS=(50-5)+(40-5)+(15-5)=90, TS=50. Problem 2 a. Q d =1150-500*1=650 and Q s =500*1+250=750. Thus, the surplus is Q s -Q d =100 million. b. In order to sustain this price floor, the government would have to buy up the surplus of the milk. The cost to the government would be 100 million * $1 = $100 million. Problem 3 Demand for leaf blowers in Madison is given by the equation Q D 90 ± P ; supply is given by Q S 2 P . a. At the equilibrium price, quantity demanded equals quantity supplied: Q D 90 ± P 2 P Q S . Solve for the equilibrium price: 90 3 P P * 30. Plug the eqm. price back into either supply or demand equation to get equilibrium quantity: Q * 2 ² 30 ³ 60. First graph the equilibrium market outcome. Put the demand and supply equations into slope intercept form. 1 Demand: P 90 ± Q D , supply: P Q . 2 Now graph these two equations: Page 1 of 4
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Econ 101: Principles of Microeconomics Fall 2009 Discussion Section #3 Solution Key The triangular area underneath the demand curve (representing how much the consumers are willing to pay) and above the market price (current market price is the equilibrium price = $30) represents the consumer surplus (CS).
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