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ECON101 Lecture Notes - Economic Surplus, Profit Maximization, Price Elasticity Of Demand

123 views9 pages
lemonmanatee20
12 Mar 2014
School
University of Alberta
Department
Economics
Course
ECON101
Professor
Gordon Lee

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ECON101 Full Course Notes
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Document Summary

Market demand is derived by horizontally summing individual demand curves. (red line is market demand) Market demand is more elastic than individual demand curves. Consumer "s surplus is the difference between what a consumer is willing to pay, and what the consumer has to pay; essentially, it is a benefit to the consumer. Calculating consumer surplus depends on the type of good: discrete good: Cs = (9-5)+(7-5)+(6-5) = i. e. the consumer saves . He is willing to pay more than that () but doesn"t need to. General formula for consumer surplus in a discrete good case: Cs = (wtp1 p1)+(wtp2-p1)+: continuous good: ex. P = 32 4q, p = 8. Solved for q, q = 6 (in diagram, 2) Solved for p, p = 32 (in diagram, 1. 50) The management of the park is trying to choose a price strategy.

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Related Questions

Consider a market where demand is: P = 6 - Q and supply is S: P = Q.

1)Equilibrium quantity Qe is

a)2

b)3

c)4

d)5

2)Equilibrium price Pe is

a)$2

b)$3

c)$4

d)$5

3)Consumer surplus CS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

4)Producer surplus PS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

5)Total surplus TS is

a)$5

b)$7

c)$8

d)$9

6)Construct a budget-neutral subsidy in the above market.

Quantity Q’ is

a)2

b)3

c)4

d)5

7)Post-subsidy producer price Pp is

a)$2

b)$3

c)$4

d)$5

8)Consumer surplus CS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

9)Producer surplus PS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

10)Total surplus TS is (do not forget to account for the subsidy expenditure SE)

a)$5

b)$7

c)$8

d)$9

I understand the first half but get stuck with the budget nuetral subsidy (6-10)

Consider a market where demand is: P = 70 – Q and supply is S: P = Q.

1. Equilibrium quantity Qe is a. 35 b. 36 c. 45 d. 56

2. Equilibrium price Pe is a. $34 b. $35 c. $36 d. $37

3. Consumer surplus CS is a. $610 b. $612.5 c. $615 d. $648

4. Producer surplus PS is a. $610 b. $612.5 c. $615 d. $648

5. Total surplus TS is a. $1,222 b. $1,223 c. $1,224 d. $1,225

Construct a budget neutral subsidy in the above market.

6. Post-subsidy quantity Q’ is a. 35 b. 36 c. 45 d. 56

7. Post-subsidy price P’ is a. $34 b. $35 c. $36 d. $37

8. Consumer surplus CS’ is a. $610 b. $612.5 c. $615 d. $648

9. Producer surplus PS’ is a. $610 b. $612.5 c. $615 d. $648

10. Total surplus TS is (do not forget to account for the subsidy expenditure SE) a. $1,222 b. $1,223 c. $1,224 d. $1,225

A local gym knows the demand for gym memberships for the typical consumer is given by P = 32 - 3Q, where Q is the number of visits per month. The gym offers two membership plans: Plan 1: $150/month and no fee per visit; Plan 2: $100/month and a $5 per visit. a) Is the $100 monthly fee a reasonable amount to pay? In other words, is $100 less than the maximum a rational consumer would be willing to pay given the $5 per visit fee? (Hint: how many visits would our consumer demand at $5?) b) How many visits per month would make this consumer indifferent between the two plans? Which is more preferred if she is over this number? Under this number? c) Consider a variation of Plan 2: our typical consumer knows for certain exactly how often she will use the gym each month and pays a per visit fee according to the demand curve with a monthly membership price equal to the full associated consumer surplus. Should our consumer go with Plan 1 or Plan 2 if she knows she will use the gym 10 times per month?