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Unformatted text preview: demand curve intersects the yaxis (the price at which no quantity is
demanded).
For good 1: ( )( ) ( )( For good 2: ( )( ) ( )( )
) Total consumer surplus is the surplus from good 1 plus the surplus from good 2:
. 3. Consider the prices in Set 3.
a. What is total revenue under Set 3? What is total cost? Does the firm (approximately) break even?
In order to calculate total revenue, we need to first find the quantity demanded for each good at the given prices. Plug
the prices into the demand equations. For good 1: .
For good 2: .
Now we can plug these quantities into the TR equation. . To get total cost, plus the quantities into the TC equation given in the problem. .
Yes, the firm approximately breaks even. Total cost is a little higher than total revenue, but only by about $1.60. This
difference is insignificant and may be due to rounding error. b. What is consumer surplus?
Consumer surplus is the area under the demand curve above the price, as shown in class. To calculate this area, use the
formula for the area of a triangle where the base is the quantity demanded and the height is the choke price minus the
price. Remember, the choke price is where the demand curve intersects the yaxis (the price at which no quantity is
demanded).
For good 1: ( )( ) ( )( For good 2: ( )( ) ( )( )
) Total consumer surplus is the surplus from good 1 plus the surplus from good 2:
. 4. One of the sets of prices considered above contains the Ramsey prices. Which set is it and why? (HINT: Look at the
handout posted on Blackboard c...
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This note was uploaded on 08/27/2012 for the course ECON 331 taught by Professor Juliebutler during the Spring '12 term at University of Tennessee.
 Spring '12
 JulieButler
 Economics

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