1) Refer to Figure 9.3. If the market is in equilibrium, the consumer surplus ea
ID: 1195258 • Letter: 1
Question
1) Refer to Figure 9.3. If the market is in equilibrium, the consumer surplus earned by the buyer of the 100th unit is
A) $0.50.
B) $0.75.
C) $1.50.
D) $2.00.
E) $2.75.
Answer: B
2) Refer to Figure 9.3. If the market is in equilibrium, the producer surplus earned by the seller of the 100th unit is
A) $0.50.
B) $0.75.
C) $1.50.
D) $2.00.
E) $2.75.
Answer: C
3) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, consumer surplus will
A) fall by $50.
B) fall by $150.
C) remain the same.
D) rise by $50.
E) rise by $150.
Answer: E
4) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, producer surplus will
A) fall by $150.
B) fall by $300.
C) remain the same.
D) rise by $150.
E) rise by $300.
Answer: B
5) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, the resulting deadweight loss will be
A) $1.50.
B) $200.
C) $150.
D) $300.
E) $600.
Answer: C
Explanation / Answer
It is a problem on market equilibrium. Two curves are there. They are market demand curve and market supply curve. Both demand and supply depends upon price. Demand has inverse relation ad supply has positive relation. Thus equilibrium is foud where demand curve is intersecting supply curve.
Consider the diagram below. All explanations are based on this diagram.
Answer of (1)
Consumer’s surplus is the excess of money consumers ready to pay over the equilibrium price. In this problem, firm has equilibrium at $2 price where demand and supply curve intersected. Now consider demand curve. It indicates different prices that consumers are willing to pay for getting a required quantity. Here consumers are ready to buy 100 units at $2.75. But they are paying equilibrium price of $2.00. So they are enjoying a benefit of $2.75-$2.00 =$0.75 per unit. It is consumer’s surplus.
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Answer (2)
Producer’s surplus is the difference between equilibrium price and the price at which suppliers are ready to sale. Here equilibrium price per unit is $2. Supply curve shows that firm is ready to sale 100 units at $0.5. So producers surplus per unit is $2-$0.50=$1.50.
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Answer (3):
When government has introduced a price ceiling of $1.00, No firm can charge more than this price. At this price producers will supply only 200 units. Now look at the demand curve. For getting 200 units consumer’s as per demand curve is ready to pay $2.50. But they will get it at $1.00. So consumer’s surplus is $2.50-$1.00=$1.50. Thus consumers are now getting 200-100 =100 extra units. For each unit consumers surplus is $1.50. So total consumers surplus will increase by $1.50 x 100 units = $150 units
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Answer (4):
Consider the total producers surplus now. First consider equilibrium position. If price was $2 then 400 units can be sold. So total revenue to producer could be 400 x $2=$800. But note that only for marginal unit producer was ready to supply at $2. For previous units price supplier was ready to pay was much less than $2. So there is producer’s surplus. Total producers surplus at equilibrium was area feo. It is half the area of a rectangle. In that rectangle two sides are $2 and 400 units. Thus rectangle area is $2 x 400=$800. Half of it is $400. It is the area of producer’s surplus at equilibrium.
Now consider present situation. Only 200 units are supplied at price $1. So total area ia $1x 200=$200. Half of this square area is producer’s surplus . Area is ‘ogh’. It is half of $200 i.e. $100.
Thus producers surplus is falling from $400 to $100. So net decrease is $300.
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Answer (e):
Dead weight loss is that portion of surplus which neither producer nor consumers has enjoyed.f At equilibrium price and quantity it will not occur. But it is found when price ceiling has been imposed. In the diagram, area ceh is dead weight loss. For 200 th units now producer is ready to pay $1 and consumer is willing to pay $2.50. Thus $1.50 is difference . Multiply it by quantity difference of 400-200. So total value is $1.50 x 200=$300. Half of it is the area of dead weight loss. It is $150.
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