ECN 104 Chapter Notes - Chapter 7: Economic Surplus, Demand Curve, Marginal Utility

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bronzepig36

23 Jul 2016

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Chapter 7- consumers, producers, and the ef ciency of. Willingness to pay: the maximum amount that a buyer will pay for a good. Consumer surplus: a buyers willingness to pay minus the amount the buyer actually pays. Consumer surplus is closely related to the demand curve for a product. Using the demand curve to measure consumer surplus. Because the demand curve re ects buyers willingness to pay, it can also be used to measure consumer surplus. The area below the demand curve and above the price measures the consumer surplus in a market. The difference between this willingness to pay and the market price is each buyers consumer surplus. The total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service. Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off.

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 Q_f = 260 - 0.4P and infrequent players whose demand is Q_i = 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 Q_B = 300 - P and vacation travelers whose demand is Q_V = 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 Q_U = 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

crimsonbadger400

_____ 1. Suppose you make silver jewelry. If the price of silver falls, we would expect you to:

a. be willing and able to produce less jewelry than before at each possible price.

b. be willing and able to produce more jewelry than before at each possible price.

c. face greater demand for your jewelry.

d. face a weaker demand for your jewelry.

_____ 2. If suppliers expect the price of their product to fall in the future, then they will:

a. increase supply (supply curve shifts out) now.

b. decrease supply (supply curve shifts in) now.

c. increase supply in the future, but not now.

d. decrease supply in the future, but not now.

_____ 3. Consider the market for portable air conditioners, initially in equilibrium. When a heatwave strikes, the equilibrium price:

a. increases and equilibrium quantity decreases.

b. decreases, and the equilibrium quantity increases.

c. and quantity both increase.

d. and quantity both decrease.

_____ 4. Buyers can buy all they want to buy and sellers can sell all they want to sell at:

a. prices at and above the equilibrium price.

b. prices at and below the equilibrium price.

c. prices above and below the equilibrium price, but not at the equilibrium price.

d. the equilibrium price, but not at prices above or below the equilibrium price.

_____ 5. The law of supply and demand states that:

a. demand and supply curves shift out as time goes by.

b. the price of a goodwill rise in response to excess demand for that good.

c. when the supply curve for good shifts, the demand curve for that good shifts in response.

d. the equilibrium price of goodwill be rising more often than it will be falling.

_____ 6. If Doritos and Cheetos are substitutes, a rise in the price of Cheetos will cause:

a. the equilibrium quantity of Doritos to fall and the price of Doritos to rise.

b. the equilibrium quantity and price of Doritos to rise.

c. the equilibrium quantity and price of Doritos to fall.

d. the equilibrium quantity of Doritos to rise and the price of Doritos to fall.

_____ 7. New production technology is perfected that allows auto manufacturers to build an automobile using half the labor hours formerly needed. As a result:

a. the equilibrium quantity of automobiles increases and the price decreases.

b. the equilibrium quantity and price of automobiles increase.

c. the equilibrium quantity and price of automobiles decreases.

d. there is likely no change in the number of automobiles produced.

_____ 8. The U.S. government announces that it will raise the interest rate on college student loans beginning in January of next year. The immediate market impact is:

a. the demand curve for student loans shifts out.

b. the supply curve for student loans shifts out.

c. we anticipate that more student loans will be completed next year than this year.

d. all of the above are correct.

_____ 9. What curve shift produces a fall in price and increase in quantity exchanged?

a. An inward shift in the demand curve.

b. An inward shift in the supply curve.

c. An outward shift in the supply curve.

d. An outward shift in the demand curve.

_____ 10. We note that fewer motorcycles were sold this year than last and that the price is also lower. What event could have caused this outcome?

a. A technological change that improved the fuel efficiency of motorcycles.

b. A rise in the wages paid to motorcycle manufacturing workers.

c. A motorcycle craze due to the popularity of Sons of Anarchy.

d. Increasing concerns about health impacts from breathing motorcycle exhaust.

_____ 11. The price that results in quantity supplied equaling quantity demanded is the optimal (best) price because it:

a. maximizes the combined welfare of buyers and sellers.

b. maximizes the cost of the seller.

c. minimizes the expenditure of buyers.

d. all of the above are correct.

_____ 12. Consumer surplus is the:

a. quantity of good consumers get without paying anything.

b. amount a consumer pays minus the amount the consumer is willing to pay.

c. amount a consumer is willing to pay minus the amount the consumer pays.

d. value of a good to a consumer.

_____ 13. In a market, the marginal buyer is the one:

a. whose willingness to pay is higher than all other buyers and potential buyers.

b. whose willingness to pay is lower than all other buyers and potential buyers.

c. who is willing to buy exactly one unit of the good.

d. who would be the first to leave the market if the price were any higher.

_____ 14. If a consumer is willing and able to pay $20 for a particular good and if she actually pays $16 for the good, then her consumer surplus is:

a. $4.

b. $16.

c. $20.

d. $36.

_____ 15. Suppose there is an early freeze in California that reduces the size of the orange crop. What happens to consumer surplus in the market for oranges?

a. Consumer surplus increases.

b. Consumer surplus decreases.

c. Consumer surplus is not affected by this change.

d. We would have to know whether the demand for oranges is elastic or inelastic.

_____ 16. Producer surplus is the area on a supply/demand graph:

a. under the supply curve.

b. between the supply and demand curves.

c. below the price line and above the supply curve.

d. under the demand curve and above the price line.

_____ 17. Economists typically measure economic efficiency using:

a. total producer and consumer surplus.

b. profits to firms.

c. the quantity supplied by sellers.

d. the price paid by buyers.

_____ 18. Which of the following statements is correct?

a. Efficiency and equality are both maximized when total surplus is maximized.

b. Efficiency deals with the size of the economic pie; equality with how fairly the pie is sliced.

c. Efficiency is more difficult to evaluate than equality.

d. Equality is judged on positive grounds; efficiency requires normative judgments.

_____ 19. The price elasticity of demand measures how much:

a. quantity demanded a response to changes in price.

b. quantity demanded a response to changes in income.

c. price responds to a change in demand.

d. Both a and c are correct

_____ 20. Goods with many close substitutes tend to have:

a. less elastic demands.

b. more elastic demands.

c. price elasticities of demand that are unit elastic.

d. income elasticities that are negative.

Short Answer Questions:

All of the following questions are based on the data shown here for coffee demand and supply at a fictional Columbus coffee shop called Go-bucks.

Price Quantity Quantity

per Cup Demanded Supplied

$1.60 1,700 1,220

$1.80 1,555 1,300

$2.00 1,400 1,400

$2.20 1,235 1,520

$2.40 1,060 1,660

$2.60 875 1,820

_____ 21. (6 points) Using the mid-point formula, calculate the price elasticity of demand as the price increases from $1.60 to $1.80.

_____ 22. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $1.80 to $2.00.

_____ 23. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $2.40 to $2.60.

24. (4 points) Over which price range is demand inelastic? Over which price range is demand elastic? Does this follow the trend noted in class?

_____________________________________________________________________________

_____ 25. (6 points) Turning to the supply side, calculate the price elasticity of supply as the price increases from $2.20 to $2.40.

26. (2 points) How would you describe the price elasticity of supply over this range?

_____________________________________________________________________________

graychimpanzee865

Suppose that US Airways aggregate demand curve for seats in this quarter is
Q = 20000-20*P for P < 1000
where P is its price in dollars. Its marginal cost is $100 per passenger.
(i) What is US Airways prot-maximizing price?
(ii) When US Airways sets the prot-maximzing price, what is the value of consumer surplus and
deadweight loss? What is the rms prot?

(b) Lets suppose we write demand in a different way. Marginal cost is still $100. Suppose that there are 20,000 potential passengers on the National-Charlotte market. The willingness to pay of an individual potential passenger is uniformally distributed between $0 and $1000, and a passenger will travel if and only if the price set by US Airways, which has to be the same for all passengers, is less than their willingness to pay.

(i) What will be the quantity of seats sold (i.e., number of travellers) if US Airways sets a price of $100? $550 dollars?

(ii) What is the rms aggregate demand curve (i.e., given an expression like the one above)?

(iii) What would be its aggregate demand curve if valuations (i.e., willingness to pay) were uniformally distributed between $0 and $800? In this case what would be the prot-maximizing price, the consumer surplus, deadweight loss and prot?

(c) It takes about 7.5 hours to drive from DC to Charlotte. For business travellers driving is not an option. Suppose that there are 10,000 potential business travellers with willingness to pay uniformally distributed between $0 and $1000. There are 10,000 potential leisure travellers with willingness to pay to go to Charlotte also uniformally distributed between $0 and $1000, but they will drive if US Airways charges a price of more than $200 (i.e., you can think of the e

ECN 104 Chapter Notes - Chapter 7: Economic Surplus, Demand Curve, Marginal Utility

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