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Lecture 5

ECON 103 Lecture Notes - Lecture 5: Economic Surplus, Economic Equilibrium


Department
Economics
Course Code
ECON 103
Professor
Junjie Liu
Lecture
5

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Econ 103 Tutorial #5 Week 8
1
1. Melissa buys an iPod for $120 and gets consumer surplus of $80.
a. What is her willingness to pay?
$200
b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?
$110
c. If the price of an iPod were $250, what would her consumer surplus have been?
$0
2. Amy has a demand function for apples given by Q = 200 20P.
a. Graph and calculate her MWTP (or MB) and TWTP (or TB) at a quantity of 60 apples.
MWTP = MB = $7
TWTP = TB = ½ × 60 × $ (10 + 7) = $510
b. Calculate Amy’s consumer surplus (CS) if the price of apples is $1.50.
CS = ½ × 170 × $ (10 - $1.5) = $722.5
c. If the apples are free and Amy could have as many as she wants, what would be her CS?
CS = ½ × 200 × $10 = $1000
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Econ 103 Tutorial #5 Week 8
2
d. If the apples are free but the quantity is restricted to 100 apples, what would be her CS?
CS = ½ × 100 × $ (10 + 5) = $750
3. Ivy grows apples, and her supply function is given by Q = 20P 4.
a. Graph and calculate her MC and TC at a quantity of 20 apples.
MC = $1.2
TC = ½ × 20 × $ (0.2 + 1.2) = $14
b. Calculate Ivy’s producer surplus (PS) if the price of apples is $1.50.
PS = ½ × 26 × $ (1.5 - 0.2) = $16.9
c. If the price of apples remains at $1.50, but Ivy’s MC of producing apples decreases by 20
percent. By how much will Ivy’s PS change?
New Supply Curve: MC = (1 0.20)×(0.2 +0.05Q) P = 0.16 + 0.04 Q
ΔPS = ½ × 33.5 × $ (1.5 - 0.16) - ½ × 26 × $ (1.5 - 0.2) = $5.545
4. A friend of yours is considering two cell phone service providers. Provider A charges $100
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 is given by the equation QD = 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?
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