The equilibrium price of Frisbees is $8 and the equilibrium quantity is six million Frisbees. CS = .5*6,000,000*$(11-8) = $9 million per period PS = .5*6,000,000*$(8-6) = $6 million per period b. Frisbee manufacturers persuade the government that Frisbee production improves scientists’ understanding of aerodynamics and thus important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold? What is the deadweight loss from this policy? Who wins and who loses from the policy? With a price floor of $10, the new market price is $10 because the price floor is binding. At that price, only two million Frisbees are sold, because that is the quantity demanded. CS = .5*2,000,000*$(11-10) = $1 million per period PS = .5*2,000,000*$(6.67-6)+(2,000,000*(10-6.67)) = $667000+ $6,660,000 = $7,327,000 per period The deadweight loss is the loss in CS+TS = 15,000,000 -8,327,000 = $6,673,000 Consumers are worse off because of this policy by $8 million per period Producers are better off by $1.327 million per period. c. Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold? What is the deadweight loss from this policy? Who wins and who loses from the policy? If there’s a price ceiling of $9, it has no effect, because the market equilibrium price is $8, which is below the ceiling. So the market price is $8 and the quantity sold is six million Frisbees.
4. A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of calling per month is given by the equation Q D =150-50P, where P is the price of a minute. a. With each provider, what is the cost to your friend of an extra minute on the phone? With Provider A, the cost of an extra minute is $0. With Provider B, the cost of an extra minute is $1 b. In light of your answer to (a), how many minutes would your friend talk on the phone with each provider? With Provider A, my friend will purchase 150 minutes [= 150 – (50)(0)]. With Provider B, my friend would purchase 100 minutes [= 150 – (50)(1)]. c. How much would he end up paying each provider every month? With Provider A, he would pay $120. The cost would be $100 with Provider B d. How much consumer surplus would he obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle) The figure above shows the friend’s demand. With Provider A, he buys 150 minutes and his consumer surplus is equal to (1/2)(3)(150) – 120 = 105. With Provider B, his consumer surplus is equal to (1/2)(2) (100) = 100.
e. Which provider would you recommend that your friend choose? Why?
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