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E202Exam2.10

# E202Exam2.10 - Answer At a price of \$2 consumers would...

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b. Calculate and graph (above) consumer surplus, producer surplus, and total economic surplus. What is the most that consumers and producers together would be willing to pay for the right to be able to buy and sell gasoline? Answer : Consumer surplus is the triangular area between the demand curve and the price line. Consumer surplus is 0.5 (\$3.50 - 2.25) (60) = \$37.50. Producer surplus is the triangular area between the supply curve and the price line. Producer surplus is 0.5 (\$2.25 - 1) (60) = \$37.50. Total economic surplus is the sum of consumer surplus and producer surplus \$37.50 + 37.50 = \$75. Consumers and producers together would be willing to pay 75 dollars for the right to be able to buy and sell gasoline. 5. Refer to Problem 4. Suppose a price ceiling of \$2 is placed on the market for gasoline. a. Calculate the shortage of gasoline that will result from this policy.
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Unformatted text preview: Answer : At a price of \$2, consumers would demand 72 gallons as 2 = 3.5 - (1/48) Q implies Q = (3.5 - 2) (48) = 72. Producers would supply 48 gallons as 2 = 1 + (1/48) Q implies Q = (2 - 1) (48) = 48. There will be a shortage of 72 - 48 = 24 gallons. b. Calculate and graph consumer surplus, producer surplus, and total economic surplus. Would producers support the price ceiling? Would consumers support the price ceiling? Answer : Consumer surplus is 0.5 (\$3.5 - 2) (48) + (\$2.5 - 2) (48) = \$48. Producer surplus is 0.5 (\$2 - 1) (48) = 24. Total economic surplus is \$48 + \$24 = \$72. Producers would not support the price ceiling because producer surplus falls \$13.50 from \$37.50 to \$24. Consumers would support the price ceiling because consumer surplus rises \$10.50 from \$37.50 to \$48....
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