Lesson 8 Assignment<\/p>\n
Answer question 5 in \u201cProblems and Applications\u201d from the end of chapter 7 (p. 156). You will want to answer questions 3 and 4 first, but you are not being asked here to submit detailed answers to those questions.<\/p>\n
Question 5. Consider a market in which Bert from problem 3 is the buyer and Ernie from problem 4 is the seller.<\/p>\n
a.Use Ernie\u2019s supply schedule and Bert\u2019s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these prices brings supply and demand into equilibrium?<\/p>\n
b.What are consumer surplus, producer surplus, and total surplus in this equilibrium?<\/p>\n
c.If Ernie produced and Bert consumed one less bottle of water, what would happen to total surplus?<\/p>\n
d. If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?<\/p>\n
For part (a), please fill in the chart below with appropriate numbers.<\/p>\n
Price Quantity<\/p>\n
Demanded Quantity <\/p>\n
Supplied<\/p>\n
$2 $4 $6 For parts (b)\u2013(d), please show your calculations.<\/p>\n
3. It is a hot day, and Bert is very thirsty. Here is the value<\/p>\n
he places on a bottle of water:<\/p>\n
Value of first bottle $7<\/p>\n
Value of second bottle 5<\/p>\n
Value of third bottle 3<\/p>\n
Value of fourth bottle 1<\/p>\n
a. From this information, derive Bert\u2019s demand<\/p>\n
schedule. Graph his demand curve for bottled<\/p>\n
water.<\/p>\n
b. If the price of a bottle of water is $4, how many<\/p>\n
bottles does Bert buy? How much consumer<\/p>\n
surplus does Bert get from his purchases? Show<\/p>\n
Bert\u2019s consumer surplus in your graph.<\/p>\n
c. If the price falls to $2, how does quantity demanded<\/p>\n
change? How does Bert\u2019s consumer surplus<\/p>\n
change? Show these changes in your graph.<\/p>\n
Answer:<\/p>\n
a)<\/p>\n
b) At the price of $4, Bert buys two bottles of water. The value of first bottle is $7 but pays only $4 for it, therefore consumer surplus = $7 – $4 = $3. Area A in the graph is consumer surplus. The value of second bottle is $5 but pays only $4 for it with a consumer surplus = $5 – $4 = $1. Hence, Bert\u2019s total consumer surplus = $3 + $1 = $4, which is the area of A in the figure.<\/p>\n
c) When the price of bottle falls from $4 to $2, Bert buys three bottles. The consumer surplus includes both area A and area B. Hence, the consumer surplus rises by $7 – $2 = $5.<\/p>\n
4. Ernie owns a water pump. Because pumping large<\/p>\n
amounts of water is harder than pumping small<\/p>\n
amounts, the cost of producing a bottle of water rises as<\/p>\n
he pumps more. Here is the cost he incurs to produce<\/p>\n
each bottle of water:<\/p>\n
Cost of first bottle $1<\/p>\n
Cost of second bottle 3<\/p>\n
Cost of third bottle 5<\/p>\n
Cost of fourth bottle 7<\/p>\n
a. From this information, derive Ernie\u2019s supply<\/p>\n
schedule. Graph his supply curve for bottled water.<\/p>\n
b. If the price of a bottle of water is $4, how many<\/p>\n
bottles does Ernie produce and sell? How much<\/p>\n
producer surplus does Ernie get from these sales?<\/p>\n
Show Ernie\u2019s producer surplus in your graph.<\/p>\n
c. If the price rises to $6, how does quantity supplied<\/p>\n
change? How does Ernie\u2019s producer surplus<\/p>\n
change? Show these changes in your graph.<\/p>\n
Answer:<\/p>\n
When the price of bottle is $4, Ernie sells two bottles of water. The producer surplus is area A in the figure. He received $4 for the first bottle but the cost is only $1. Hence Ernie has producer surplus of $4 – $1 = $3. He receives $4 for the second bottle which costs $3 and hence the producer surplus = $4 – $3 = $2. Therefore, the total producer surplus = $3 + $1 = $4. <\/p>\n
When the price of bottle increases from $4 to $6, Ernie sells three bottles of water. The producer surplus consists of area A and area B. <\/p>\n
Producer surplus from 1st bottle = $6 – $1 = $5<\/p>\n
Producer surplus from 2nd bottle = $6 – $3 = $3<\/p>\n
Producer surplus from 3rd bottle = $6 – $5 = $1<\/p>\n
Total producer surplus = $5 + $3 + $1 = $9<\/p>\n
Hence, the producer surplus increases by $5. <\/p>\n
5. Consider a market in which Bert from Problem 3 is the<\/p>\n
buyer and Ernie from Problem 4 is the seller.<\/p>\n
a. Use Ernie\u2019s supply schedule and Bert\u2019s demand<\/p>\n
schedule to find the quantity supplied and quantity<\/p>\n
demanded at prices of $2, $4, and $6. Which of<\/p>\n
these prices brings supply and demand into<\/p>\n
equilibrium?<\/p>\n
b. What are consumer surplus, producer surplus, and<\/p>\n
total surplus in this equilibrium?<\/p>\n
c. If Ernie produced and Bert consumed one less<\/p>\n
bottle of water, what would happen to total<\/p>\n
surplus?<\/p>\n
d. If Ernie produced and Bert consumed one<\/p>\n
additional bottle of water, what would happen to<\/p>\n
total surplus?<\/p>\n
Answer:<\/p>\n
a)<\/p>\n
Price Quantity supplied Quantity demanded<\/p>\n
$2 1 3<\/p>\n
$4 2 2<\/p>\n
$6 3 1<\/p>\n
b) At price $4, consumer surplus = $4 and producer surplus = $4. Hence, total surplus = $4 + $4 = $8.<\/p>\n
c) If Ernie produces one less bottle, the producer surplus would fall to $3 (from problem 4). If Bert produces one less bottle, the consumer surplus would fall to $ (from problem 3). Hence total surplus would fall to $3 + $3 = $6. <\/p>\n
d) If Ernie produces one additional bottle, the producer surplus would fall by $5 – $4 = $1. If Bert produces one additional bottle, the consumer surplus would fall to $4 – $3 = $1. Hence, total surplus would fall to $1 + $1 = $2. <\/p>\n","protected":false},"excerpt":{"rendered":"
Lesson 8 Assignment Answer question 5 in \u201cProblems and Applications\u201d from the end of chapter 7 (p. 156). You will<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-46087","post","type-post","status-publish","format-standard","hentry"],"yoast_head":"\n