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ECON 1B03 Lecture Notes - Lecture 7: Economic Surplus, Reservation Price, Economic Equilibrium

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plumfrog530
18 Oct 2018
School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Aleksandra Gajic

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ECON 1B03 Lecture Notes - Lecture 7: Economic Surplus, Reservation Price, Economic Equilibrium

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Document Summary

Econ 1b03 lecture 7- welfare, externalities, public goods, and government policies. Consumer surplus: everyone has a reservation price, or the highest price that they are willing to pay for a good. It"s also everything above the price but below the demand curve: cs=wtp-p, where cs is consumer surplus, P is the price, and wtp is the reservation price (willingness to pay) Producer surplus: sellers will not sell products for less than it costs them to make. It"s also everything above the supply curve and below the selling price (see figure 2. : a supply curve is used to measure producer surplus because it reflects the marginal seller"s cost. Total surplus: total surplus is consumer surplus + producer surplus, total surplus is maximized at equilibrium. Positive and negative externalities: externalities: uncompensated impacts of one person"s decisions on the wellbeing of others, positive externalities: when someone benefits for something that they didn"t pay for.

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Related Questions

Efficiency in a market is achieved when

a. social planner intervenes and sets the quantity of output after evaluating buyers willingness to pay and sellers' costs

b. the sum of producer surplus and consumer surplus is maximized

c. all firms are producing the good at the same low cost per unit.

d. no buyer is willing to pay more than the equilibrium price for any unit of the good.

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

PLEASE ANSWER EACH QUESTION WITH A, B, C, and D. NOT ANSWERING ALL QUESTIONS OR INCORRECT ANSWERS WILL RESULT IN A THUMBS DOWN.

Question 1: Which of the following is not needed for price discrimination to be possible?

Ā  Ā 

A. The firm must have market power.
Ā  Ā 

B. The firm must be able to prevent resale and arbitrage.
Ā  Ā 

C. The firm must eventually learn about its customers' demands.
Ā  Ā 

D. The firm's customers must have different demand curves.

Ā 

Question 2: Relative to standard monopoly pricing, first-degree price discrimination results in:

Ā  A.

higher consumer surplus, higher producer surplus, and higher total surplus.
Ā  B.

lower consumer surplus, higher producer surplus, and higher total surplus.
Ā  C.

lower consumer surplus, higher producer surplus, and lower total surplus.
Ā  D.

lower consumer surplus, lower producer surplus, and lower total surplus.

Ā 

Question 3: Relative to perfect competition, first-degree price discrimination results in:

Ā  Ā 

A. higher consumer surplus, higher producer surplus, and higher total surplus.
Ā  Ā 

B. lower consumer surplus, higher producer surplus, and equal total surplus.
Ā  Ā 

C. lower consumer surplus, higher producer surplus, and equal total surplus.
Ā  Ā 

D. lower consumer surplus, lower producer surplus, and lower total surplus.

Question 4: If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:

A.

$800.
B.

$1,600.
C.

$2,400.
D.

$3,200.

Question 5: For third-degree discrimination to be possible, which of the following features is not required?

Ā  Ā 

A. market power
Ā  Ā 

B. prevention of resale
Ā  Ā 

C. identification of each customer's demand before purchase
Ā  Ā 

D. customers with different demand curves

Ā 

Question 6: A golf course has frequent players whose demand is Qf = 260 - 0.4P and infrequent players whose demand is Qi = 10 - 0.1P. The combined market demand is Q = 34 - 0.4P. The marginal cost and average total cost of providing a round of golf are $20. How much higher will the profit be if the golf course uses third-degree price discrimination instead of charging all golfers the same price?

A.

$0
B.

$7.50
C.

$10
D.

$110

Ā 

Question 7: An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and vacation travelers whose demand is QV = 150 - 0.5P. The combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?

A.

$0
B.

$250
C.

$400
D.

$1,000

Ā 

Question 8: If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:

Ā  A.

Higher.
Ā  B.

Lower.
Ā  C.

More price elastic.
Ā  D.

Less price is elastic.

Ā 

Question 9: The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:

Ā  Ā 

A. resale is possible.
Ā  Ā 

B. customers have the same demand curves.
Ā  Ā 

C. firms have market power.
Ā  Ā 

D. firms can identify customers' demand before the customers make a purchase.

Ā 

Question 10: For price discrimination via a quantity discount to work:

Ā  Ā 

A. customers who purchase larger quantities must have relatively elastic demand.
Ā  Ā 

B. customers who purchase larger quantities must have relatively inelastic demand.
Ā  Ā 

C. customers who pay a relatively high price must have relatively elastic demand.
Ā  Ā 

D. customers who pay a relatively low price must have relatively inelastic demand.

Ā 

Question 11: A firm wants to offer a quantity discount to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have a demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for obsessed customers is incentive compatible?

Ā  A.Ā 

60 units at a price of $10 each
Ā  B.

40 units at a price of $10 each
Ā  C.

60 units at a price of $20 each
Ā  D.

40 units at a price of $20 each

Ā 

Question 12: Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?

Ā  Ā 

A.The firm's customers must have different demand curves.
Ā  Ā 

B. The marginal costs of producing each version of the product must be the same.
Ā  Ā 

C. The firm must be able to prevent resale.
Ā  Ā 

D. The firm must have market power.

Ā 

Ā 

Willingness to pay (per month)
Ā 

Weight machines

Indoor pool

Abe

$60

$50

Betty

50

125

Chris

25

140

Ā 

QUESTION 13
This table shows the willingness to pay off the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?

Ā  Ā 

A. $60 for the weight room, $140 for the pool, or $175 for both
Ā  Ā 

B. $50 for the weight room, $125 for the pool, or $165 for both
Ā  Ā 

C. $25 for the weight room, $50 for the pool, or $70 for both
Ā  Ā 

D. $60 for the weight room, $130 for the pool, or $175 for both

Ā 

Question 14: Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?

Ā  Ā 

A. Customers must have identical demand curves.
Ā  Ā 

B. The firm does not learn about customer demand until after purchase.
Ā  Ā 

C. Demand for two products must be negatively correlated.
Ā  Ā 

D. The firm must not have market power.

Ā 

Question 15: Which of the following features is not needed for price discrimination using a two-part tariff to work?

Ā  Ā 

A. The firm must have market power.
Ā  Ā 

B. The firm must be able to prevent resale.
Ā  Ā 

C. The firm must learn about its customers' demands before purchases are made.
Ā  Ā 

D. The firm's customers must have different demand curves.

Ā 

Question 16: A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each, but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?

Ā  Ā 

A. Consumer surplus would decrease by $10, and producer surplus would increase by $20.
Ā  Ā 

B. Consumer surplus would increase by $10, and producer surplus would increase by $20.
Ā  Ā 

C. Consumer surplus would increase by $20, and producer surplus would increase by $10.
Ā  Ā 

D. Consumer surplus would increase by $20, and producer surplus would increase by $20.

Ā 

Question 17: Relative to standard monopoly pricing, block pricing:

Ā  Ā 

A. decreases consumer surplus, increases producer surplus, and increases total surplus.
Ā  Ā 

B. increases consumer surplus, increases producer surplus, and increases total surplus.
Ā  Ā 

C. decreases consumer surplus, increases producer surplus, and decreases total surplus.
Ā  Ā 

D. decreases consumer surplus, decreases producer surplus, and decreases total surplus.

Ā 

Question 18: Which of the following results in the highest amount of producer surplus?

Ā  A.

bundling
Ā  B.

third-degree price discrimination
Ā  C.

block pricing
Ā  D.

two-part tariffs

Ā 

Question 19: Which of the following results in the highest amount of consumer surplus?

Ā  A.

first-degree price discrimination
Ā  B.

third-degree price discrimination
Ā  C.

block pricing
Ā  D.

two-part tariffs

Ā 

Question 20: Which of the following results in the highest amount of total surplus?

Ā  A.

third-degree price discrimination
Ā  B.

block pricing
Ā  C.

first-degree price discrimination
Ā  D.

bundling

Ā