ECON 103 Lecture Notes - Lecture 7: Economic Surplus, Demand Curve, Marginal Utility

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ochregrasshopper884

11 Apr 2018

School

University of Victoria

Department

Economics

Course

ECON 103

Professor

Emma Hutchinson

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Document Summary

1st part- change in price multiplied by the new q= 10. If you used to buy two beers for 5 dollars each, now you buy two at 10 dollars each, so you are spending 10 dollars more. 2nd part lost cs due to decrease in q. Demand curve: demand curve is smooth unless you create divisibility. If you sell beer in a half pint instead of a pint, then you have created divisibility: think about your willingness to pay for a half pint of beer instead of a full pint. These marginal benefits of full pints could be split up into marginal benefits for half pints. These add up to price of a full pint but seem like less because you are paying less for the second half pint. If you are willing to pay for 1st half pint then hypothetically you are wtp for a full pint.

Related Questions

Suppose you are the proprietor of the only bar in Dallas. Since you are the only place in town for people to get drinks you exercise some market power and face a downward sloping demand curve for drinks given by P = 10 - (3/2)Q for each individual. Your total costs are given by TC = Q. There are 100 individuals with identical demand.

Assuming that you must follow a uniform pricing strategy, what is the profit maximizing price and quantity and the associated profit? What is consumer surplus? Is the market efficient?
If each person is charged their reservation price, what type of price discrimination is this? Assuming you can engage in this pricing scheme, what is your profit maximizing price and quantity and the associated profit? What is consumer surplus? Is the market efficient?
Now assume that you decide to try a two-part tariff scheme instead, charging a price per drink and a cover charge at the door. What is the optimal two-part tariff charged to each person? How many drinks will be sold to each person? What is your total profit associated with this scheme? What is the total consumer surplus? Is the market efficient?
Assume that your clientele is composed of two types: 50 customers are heavy drinkers with individual demand described by P_H = 15 - Q_H and 50 customers are light drinkers with individual demand described by P_L = 10 -3Q_L. Which group would you rather charge a higher price? Why?
Assume that the market is split as described before. There is no constraint on the number of drinks you can sell. You can charge a different price to each group. What is the optimal price and corresponding quantity for each segment of the market? What is your total profit under this scheme? What type of price discrimination is this?
Assume that the market is split as described before. The city of Dallas tells you that can only sell 325 drinks in total. You can charge a different price to each group. What is the optimal price and corresponding quantity for each segment of the market? What is your total profit under this scheme?

whitebutterfly93

Use your knowledge about price-searching firms and two-part pricing to advise the company below. A company has a bar and is trying to decide on the cover charge (if any) and price for each drink. It has done a modest regression study in which it asked customers to classify themselves as light drinkers or heavy drinkers and to indicate the number of drinks they would typically consume during the evening. The estimate from the regression study is that a change in the price equal to $1 per drink causes light drinkers to change their consumption on average by 0.5 drinks per night. However, a change in the price of $1 causes heavy drinkers to change their consumption on average by 1.0 drinks per night. For both groups, a typical consumer will not consume anything once the price reaches $9 per drink. (They may instead go to another bar or not go to a bar at all.) Draw a demand curve for a typical light drinker and for a typical heavy drinker on the same diagram. Explain your diagram. Write equations for the curves in slope-intercept form.

If 300 people visit the bar on a typical evening, with 200 people being light drinkers and 100 people being heavy drinkers, draw an overall demand curve for all of the consumers combined. What is the slope and what is the intercept for this demand curve? Write an equation in slope-intercept form. If the marginal cost of making drinks (the alcohol, the bartender's labor, and the amortized cost of purchasing glasses and cleaning them repeatedly) is constant at $5 per drink, and if no cover charge is assessed, what is the best price to charge for drinks? How many drinks would be sold on a typical evening? What would your profits be? If you cut your price by $1 per drink and assess the maximum possible cover charge without causing a typical light drinker to refuse to enter the bar, would your profits improve? How high would the cover charge be? Calculate both the cover charge and your total profits. Would the new pricing increase profit?

Maybe the best price cut is not exactly $1. Write a profit equation. Profits equal to total revenue minus total cost. Total cost equals $5 times the number of drinks sold. Total revenue equals the price for drinks times the number of drinks sold, plus 300 people times the cover charge. The cover charge equals, for a light drinker, the triangle of consumer surplus above the price but below the demand curve for a light drinker. (The area of a triangle equals one half the base times the height.) You will take the derivative of the profit equation with respect to P or Q and set it equal to zero. For example, use the equation for the total demand curve and solve for Q in terms of P. Then in the profit equation substitute in an expression involving P in place of every Q that was in the original profit equation. Now you can take a derivative of profits with respect to P and set the derivative equal to zero. Eventually, you can solve for the exact best P, Q, and cover charge.

Review of the slope-intercept form: Y= a - bX; a = the intercept on the Y-axis and b = the absolute value of the slope (slope=(change in Y)/(change in X)) For a demand curve: P=a-b Q. The intercept on the vertical axis would indicate a price that is so high that the quantity demanded becomes zero. The slope is the ratio of a change in price divided by the change in quantity demanded; the extra credit problem gives you information to determine the slope for a light drinker and the slope for a heavy drinker.

fuchsiasnail971

THE PARTS IN BOLD ARE MARKED AS THE PARTS NEEDED HELP. ATTACHED IS THE ENTIRE ASSIGNMENT FOR ONLY PURPOSE THAT ALL INFORMATION IS INCLUDED. IF YOU COULD PLEASE ONLY HELP WITH PART 15 AND 17. PE=? QE=? AND PART 17 SITUATIONS OCCURING SIMULTANEOUSLY! THANK YOU!

Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be

Qd =15-2P+0.05M+0.10R

where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month.

New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function?

New housing and three-bedroom apartments are _________________ (substitutes, comple- ments) in New Orleans. How can you tell from the general demand function?

If average monthly income is $1,500 and the monthly rental rate for three-bedroom apart- ments is $700, then the demand function for new housing in New Orleans is

Qd = _____________________________________.

Graph the demand curve for new housing in New Orleans on the axes provided below. Label

the demand curve D0.

What happens to demand when the following changes occur?

a. b. c. d. e.

The price of the commodity rises.
Income decreases and the commodity is normal. Income decreases and the commodity is inferior.

The price of a complement good increases. The price of a substitute good decreases.

The general supply function for new housing in New Orleans is estimated to be Qs =96+2P-10PL -4PK

where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.

Does it make sense for PL and PK to have negative coefficients in the general supply func- tion? Explain why or why not.

If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is

Qs = ______________________.

Graph the supply curve for new housing in the graph below. Label supply S0.

Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur?

The price of the commodity increases.

Government regulators outlaw the use of a technology that enables the good to be

produced at a significantly lower cost.

The prices of inputs used to produce the commodity decrease.

The price of a commodity that is a substitute in production increases.

Managers expect the price of the good to fall in the near future.

As the cost of capital rises, firms in the industry stop purchasing plant and equip-

ment, which allows depreciation to diminish the productive capacity in the indus- try.

Solve mathematically for equilibrium price and quantity. Show your work:

PE = $__________ per square foot.
QE = __________ square feet per month (in 1,000s).

Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they?

In equilibrium found in question 8, compute total consumer, producer, and social surpluses:

CS = $____________ PS = $____________ SS = $____________

13. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new hous- ing in New Orleans is now:

Qd = _______________________. Plot this new demand curve in the figure below. Label it D'.

Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orle- ans is now:

Qs = _______________________.
Plot this new supply curve in the figure. Label the new supply curve S'.

After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot
QE = __________ square feet per month (in 1,000s)

Determine the effect upon equilibrium price and quantity sold if the following events occur in a particular market:

The price of a substitute good (in consumption) decreases.

Consumersâ income increases and the good is inferior.

Government regulators decide to outlaw a cost-reducing technological

process in order to protect the environment.

The price of a complement good (in production) increases.

The price of inputs used to produce the good decrease.

Consumers expect that the price of the good will fall in the near future.

It is widely publicized that consumption of the good is helpful in prevent-

ing cancer.

The price of a substitute good (in production) decreases.

17. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate.

Both a and h in problem 15 occur simultaneously.

Both b and e in problem 15 occur simultaneously.

Both d and g in problem 15 occur simultaneously.

Both f and c in problem 15 occur simultaneously.

ECON 103 Lecture Notes - Lecture 7: Economic Surplus, Demand Curve, Marginal Utility

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