Midterm Review

Additional Problem #3: Consumer and Producer Surplus

Now consider the market for pizza. Suppose that the market demand for pizza is given by the equation P = 40 – 4QD, and the market supply for pizza is given by the equation P = 10 + 2QS, where QD = quantity demanded, QS = quantity supplied, P = price consumers pay (per pizza) and the price producers receive (per pizza).

Graph the supply and demand schedules for pizza and indicate the equilibrium price and quantity. (Your answer must contain your complete algebraic solution). Calculate the consumer surplus and producer surplus and identify these areas in the graph below.(Be sure to label the axes and functions, and number your intercepts.)

Equilibrium Price: Equilibrium Quantity:

(Show your complete algebraic solution for the equilibrium price and quantity in the space below.)

Consumer Surplus at Equilibrium: (Show all work.)

Producer Surplus at Equilibrium: (Show all work.)

Additional Problem #1: Consumer and Producer Surplus

The graph below shows the demand and supply of rental housing for Microtown.

$/month

S

800

600

200 D

Quantity

0 1 2 3 4 5 6 (thousands/month

a)What is the equilibrium rent/month? ______; the total rent/month at the equilibrium quantity of rental units? ______; the consumer surplus? ______; the producer surplus? ______.

b)What is the quantity of apartments that will be rented if a price ceiling is set at $800? ______. What is the quantity of apartments that will be rented if a price ceiling is set at $400? ______. What is the consumer surplus given this price ceiling? ______; the producer surplus? ______; the dead weight loss? ______; the search cost for rental? ______.

Additional Problem #2: Consumer and Producer Surplus

The graph below shows the market for anti-freeze. The government imposes a sales tax on sellers of T.

$/gallon

aS + T

S

40

30

10

D

Quantity

0 1 2 3 4 5 6 (thousands of gallons)

a)What is the equilibrium price/gallon without the tax? ______; the equilibrium quantity without the tax? ______.

b)What is the tax per gallon? ______. How much revenue will the sales tax raise? ______.

c)The tax decreases consumption by? ______.

d)What is the consumer surplus before the tax? ______; after the tax? ______. What is the producer surplus before the tax? ______; after the tax? ______. What is the dead weight loss associated with the tax? ______.

Additional Problem 3: Market Analysis

Consider the market for bus service. First draw a graph depicting market equilibrium for bus service. Then, for each of the events given below, analyze what effects each event will have on the market equilibrium for bus service, i.e. effect on equilibrium price, equilibrium quantity, demand or quantity demanded, supply or quantity supplied. You must draw separate graphs for each of the following events. Remember to label all axes, functions, and equilibrium points in your graph precisely.

(a)Bus drivers go on strike in order to pressure their employers for wage increases.

(b)The number of parking spaces decreases due to new land use planning requirements.

(c)Employers with 100 or more employees offer subsidized bus passes to their employees.

(d)Two thousand miles of Metrolink and commuter rail service are opened.

(e)Congestion on the freeways increases with no plans to fund construction of new freeway lanes.

Additional Problem 2: Elasticity

For each of the elasticity cases given below, verbally explain what the elasticity coefficient means, and offer an interpretation of the elasticity coefficient.

(a)The income elasticity of movies is 3.41.

(b)The price elasticity of tobacco is -0.61.

(c)The cross price elasticity of popcorn with respect to the price of soft drinks is 2.38.

(d)The price elasticity of rail service is 0.89.

(e)The income elasticity of dental services is 1.00.

Handout 2: Market Analysis

The table below gives the individual demands’ of Lisa and Chuck for movies:

Quantity of movies demanded / mo.
Price / movie / Lisa / Chuck
$7 / 1 / 0
6 / 2 / 0
5 / 3 / 0
4 / 4 / 1
3 / 5 / 2
2 / 6 / 3

a)Calculate the market demand for movies assuming that only Lisa and Chuck have individual demands for movies. Explain this market demand.

b)Graph the market demand for movies found in (a). Does this market demand follow the “law of demand.”? Explain and offer reasons for this law.

c)Calculate the price elasticity of demand for movies given your market demand in (a) for each price change. Is demand elastic, unit elastic, inelastic? Explain in detail. (Show all your work and give the complete elasticity formula).

d)Now, assume that 7 movies are offered per month. (1) Determine the market price for each movie. Explain your reasoning. (2) If Chuck’s demand for movies increases, as shown below, calculate the new market price for movies if 7 movies are offered per month.

Quantity of movies demanded/mo
Price / movie / Chuck
$7 / 0
6 / 0
5 / 1
4 / 3
3 / 4
2 / 6

What factor or factors could have increased Chuck’s demand for movies?

Handout 1: Production Possibilities

A certain economy only produces two goods, calculators (C) and tea (T). To manufacture these goods, it has three kinds of resources: (1) a fixed quantity of capital, useful only in producing calculators; (2) a fixed quantity of land, useful only in producing tea; and (3) a fixed quantity of labor of 100 men (M) capable of working in either occupation. The table below indicates the amounts of calculators and tea that can be produced when varying amounts of labor work with the specialized resources, calculators and tea.

Number of
men / Daily production
of calculators / Number of
men / Daily production
of tea
0 / 0 / 0 / 0
10 / 40 / 10 / 5
20 / 105 / 20 / 12
30 / 200 / 30 / 20
40 / 300 / 40 / 28
50 / 390 / 50 / 36
60 / 450 / 60 / 43
70 / 500 / 70 / 49
80 / 550 / 80 / 54
90 / 580 / 90 / 58
100 / 600 / 100 / 60
  1. Draw this economy’s production-possibility curve. (Be careful to label axes. Use of graph paper will enable your graph to be more accurate.)
  1. According to the table above, diminishing returns first appear in the production of calculators when the total number of men employed rises to :

Explain what causes this diminishing returns phenomenon briefly.

  1. What is the opportunity cost of producing 200 calculators instead of 40?

Explain the concept of opportunity cost briefly.

  1. Assume that the production possibility curve above exists in 1985. Assume further that the following (separate) events took place between 1985 and 2000. Other things being equal, explain carefully how the production possibility curve would be altered.

a) The use of robotics technology is introduced into computer industry.

b) A strain of virus destroys a large percentage of tea plants worldwide.

c) Improved harvesting methods are employed in the tea industry.

d) Population growth continues at current positive rates over this period.