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ECO101H1 Lecture Notes - Economic Surplus, Price Ceiling

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chocolatewhale65
14 Apr 2014
School
UTSG
Department
Economics
Course
ECO101H1
Professor
James Pesando

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ECO101H1 Full Course Notes
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ECO101H1 Full Course Notes
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Document Summary

4. 2 willingness to pay and steplike demand curves. 1) text, figure 7. 4 and 7. 5 (152-153) 2) sole purpose is to illustrate numerical examples of producer surplus. 2) reading assignment (will not be tested) Ps: area below price and above supply curve. Producer surplus measures the benefit to suppliers of participating in a market. 1) market wage is 20 per hour. 2) individual b will work for 15 per hour. 3) individual b has producer surplus of 5 per hour. 4) individual b would be willing to pay (up to) per hour to participate in this market (i. e, to be able to earn the market wage of 20 per hour) Worse off if he can"t participate in the market. Total surplus = consumer surplus + producer surplus. Key result: equilibrium in a competitive market maximizes total surplus, we then say, competitive market is (allocatively) efficient.

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Related Questions

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?

   

A. The firm must have market power.
   

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

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

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

 

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

  A.

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

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

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

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

 

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

   

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

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

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

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?

   

A. market power
   

B. prevention of resale
   

C. identification of each customer's demand before purchase
   

D. customers with different demand curves

 

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

 

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

 

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

  A.

Higher.
  B.

Lower.
  C.

More price elastic.
  D.

Less price is elastic.

 

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:

   

A. resale is possible.
   

B. customers have the same demand curves.
   

C. firms have market power.
   

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

 

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

   

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

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

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

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

 

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?

  A. 

60 units at a price of $10 each
  B.

40 units at a price of $10 each
  C.

60 units at a price of $20 each
  D.

40 units at a price of $20 each

 

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

   

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

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

C. The firm must be able to prevent resale.
   

D. The firm must have market power.

 

 

Willingness to pay (per month)
 

Weight machines

Indoor pool

Abe

$60

$50

Betty

50

125

Chris

25

140

 

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?

   

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

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

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

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

 

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?

   

A. Customers must have identical demand curves.
   

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

C. Demand for two products must be negatively correlated.
   

D. The firm must not have market power.

 

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

   

A. The firm must have market power.
   

B. The firm must be able to prevent resale.
   

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

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

 

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?

   

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

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

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

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

 

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

   

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

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

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

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

 

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

  A.

bundling
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

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

  A.

first-degree price discrimination
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

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

  A.

third-degree price discrimination
  B.

block pricing
  C.

first-degree price discrimination
  D.

bundling

 

1.

In a perfectly competitive market, in the long run, the marginal cost of a firm becomes equal to its minimum average total cost.

A) True
B) False

2.

Generally, The price a firm charges for its product is equal to its total revenue divided by the number of units sold.

A) True
B) False

3.

In a perfectly competitive firm to maximize profit a firm must make sure that the price it charges does not exceed its marginal cost.

A) True
B) False

4.

Firms in a competitive market can never make economic profits while they may make biasness (accounting) profits.

A) True
B) False

5.

When a perfectly competitive firm is making a positive economic profit its average revenue must be greater than its average total cost.

A) True
B) False

6.

To maximize its profit a firm always produces at the quantity level where it can charge the highest price and earn the greatest revenue; this strategy is consistent with setting is MC equal to price.

A) True
B) False

7.

When a firm in a competitive market is making a positive economic profit its business profit may be positive or negative.

A) True
B) False

8.

In a perfectly competitive market new entries could result in increases in input prices thus making production costs go up.

A) True
B) False

9.

In a perfectly competitive market, in the long run, each firm produces the maximum amount it can produce and charges the lowest price possible. That is why we consider competitive markets efficient.

A) True
B) False

10.

A monopolist always under-produces and charges a price higher than its MC.

A) True
B) False

11.

As the only supplier in the market a monopolist can charge any price it wishes and buyers have no choice but to pay.

A) True
B) False

12.

The marginal revenue is the additional revenue generated by the last unit of labor hired.

A) True
B) False

13.

The price a monopolist charges may or may not be above its average cost but it is always above its MR.

A) True
B) False

14.

When demand curve is a downward-sloping straight line (linear) marginal revenue will be greater than MC at all output leveles.

A) True
B) False

15.

By setting its MR equal to its MC a monopolist determines the output that would maximize its profit.

A) True
B) False

16.

In the long run each competitive firm would produce at the quantity level where its MC is equal to its MR as well as its ATC.

A) True
B) False

17.

A monopoly always makes an economic profit.

A) True
B) False

18.

When a monopoly's ATC is equal to the price it charges it is making normal economic profits.

A) True
B) False

19.

When a monopoly is making a zero economic profit still its MR>ATC.

A) True
B) False

20.

An increase in demand would enable a monopolist to raise its price while reducing its output.

A) True
B) False

21.

The market supply curve in an increasing-cost industry is:

A) a. upward sloping
B) b. downward sloping
C) c. vertical
D) d. horizontal
E) e. none of the above

22.

The total producer surplus is measured by:

A) a. the area between supply and demand curves.
B) b. the difference between the price the consumer is willing and able to pay and the price suppliers wish to charge to maximize their profits.
C) c. the area between the price consumers actually pay and the demand curve.
D) d. the area between the equilibrium market price and the supply curve.
E) e. the consumer willingness to pay as reflected by the equilibrium market price.

23.

. Economists measure economic (social) welfare by the

A) a. net consumer surplus
B) b. sum of consumer and producer surplus
C) c. sum of the net profits made by the industry's competitive firms
D) d. price consumers are willing to pay for one additional unit of a good
E) e. difference between the total consumer surplus and total producer surplus

15. The inverse demand function for bananas is pa=20-9d and the inverse supply function is Ps= 9s, where prices are measured in cents and bananas are measured in pounds. a. If there are no taxes or subsidies, what is the equilibrium quantity? What is the equilibrium market price? (3 marks) b. If a subsidy of 2 cents per pound is paid to banana growers, what is the new equilibrium price and quantity? How much do growers receive per pound? How much do consumers pay per pound? (4 marks) c. Compute the change in the consumer and producer surplus? Show clearly on the graph? Does the subsidy cause a deadweight loss? If so, how large. Explain using a suitable diagram. (5 marks) Express the change in price as a percentage of the original price. If the cross-elasticity of demand between bananas and apples is +0.5, what will happen to the quantity of apples demanded as a consequence of the banana subsidy (assume the price of apples stays constant). State your answer in terms of a percentage change. (4 marks)