Economics 160
STUDY QUESTIONS ON CONSUMER AND PRODUCER SURPLUS
1. What does consumer surplus measure? How is it calculated?
2. If Bob is willing to pay up to $100 for a ticket to a concert, but actually pays $60, then what is his consumer surplus?
3. Assume the following total value schedule for some consumer. Fill in the MV column in the table below.
Q Total Value (TV) Marginal Value (MV)
1 $10 ----
2 $19
3 $27
4$34
5$40
6$45
7$49
8$52
9$54
a. Derive this consumer’s demand curve (that is, graph it).
Assume the price of this good is $6. To maximize consumer surplus, a consumer would purchase how many units? What is consumer surplus at this quantity? Show consumer surplus on your graph.
4. See Figure 1. If the price is $10, then what is consumer surplus? What is consumer surplus at a price of $8?
Price
FIGURE 1.
$30
$10
$8
100 120 Quantity
5. What does producer surplus measure? How is it calculated?
6. Firm A faces the following total cost schedule. Fill in the MC column.
Q Total Cost (TC) Marginal Cost (MC)
0 0 ----
1$1
2$3
3$6
4$10
5$15
6$21
7$28
8$36
9$45
a. Using the information from the table, derive the supply curve.
b. If the price of the good was $4, how units would be produced? What would producer surplus be at this quantity? Show producer surplus on your graph.
7. See Figure 2. What is producer surplus at P = $10? What is producer surplus at P = $18?
FIGURE 2.
Price Supply
$18
$10
$2
10 20 Quantity
8. See Figure 3. Find consumer surplus, producer surplus, and total surplus.
Figure 3.
Price
A Supply
P1
B
Demand
C
Q1 Quantity
9. Using the information in Figure 4, fill in the table below.
Price
Figure 4.
A Supply
B
C
P1
D E
F
G H
Demand
Q0 Q1 Quantity
At Quantity of Q1 At Quantity of Q0 (at same price of P1) Change
CS
PS
Total Surplus
What happens to total surplus?
10. See Figure 5. Before taxes, the price is P1. After tax, the price paid by consumers and received by sellers is listed below. Fill in the table below.
Price Figure 5.
A Supply
Price paid by
Consumers B
C
P1
D E
Price received
by Sellers F
G H
Demand
Q0 Q1 Quantity
At Quantity of Q1 At Quantity of Q0 Change
CS .
PS .
Government tax revenue .
Total Surplus
Is there a deadweight loss?
11. Initially, Country A neither exports nor imports any sugar. The initial price and quantity in Country A are P1 and Q1, respectively. Country A now decides to allow exports or imports of sugar. The world price of sugar is P* which is below P1.
a. Draw the relevant supply and demand graph corresponding to the information given above.
b. Using a table, show the impact that trade has on CS, PS, and total surplus.
c. Suppose the government decides to impose a tariff on imported sugar. Draw a new supply and demand graph that illustrates this new situation. Use a table to show the impact on CS, PS, government tariff revenue, and total surplus.
ANSWERS
1. CS measures the net gains from trade to consumers. It is measured by taking the difference between
what a consumer is willing to pay for a certain number of units and what the consumer actually pays for those units. More formally, CS = TV – PQ.
2. CS = $100-$60 = $40.
3. Q Total Value (TV) Marginal Value (MV)
1 $10 $10
2 $19 $9
3 $27 $8
10$34 $7
11$40 $6
12$45 $5
13$49 $4
14$52 $3
15$54 $2
Price
CS = shaded areas = $4+$3+$2 + $1 = $10
$10
$9
$8
$7
Price=$6
$5
$4
$3
$2
Demand Curve (=marginal value curve)
$1
1 2 3 4 5 6 7 8 9 10 Quantity
4. CS = ½( 30-10)(100)= $1000 at a price of $10. CS= ½(30-8)(120)=$1320.
5. PS is a measure of net gains from trade to sellers. PS = PQ –TC.
6.
Q Total Cost (TC) Marginal Cost (MC)
0 0 ----
1 $1 $1
2 $3 $2
3 $6 $3
4 $10 $4
5 $15 $5
6 $21 $6
7 $28 $7
8 $36 $8
9 $45 $9
Price
Supply Curve
PS= shaded areas = $3+$2+$1=$6.
$9
$8
$7
$6
$5
Price=$4
$3
$2
$1
1 2 3 4 5 6 7 8 9 Quantity
7. PS = ½(10-2)(10)= $40 at a price of $10. PS = ½(18-2)(20)= $160 at a price of $18.
8. CS = area A, PS = area B, and total surplus is A+B.
9. At Quantity of Q1 At Quantity of Q0 Change
CS A+B+C A+B -C
PS D+E+F D+F -E
Total Surplus A+B+C+D+E+F A+B+D+F -(C+E)
What happens to total surplus? Total surplus falls by C+E.
10. At Quantity of Q1 At Quantity of Q0 Change
CS A+B+C A -(B+C) .
PS D+E+F F -(D+E) .
Government tax revenue 0 B+D +(B+D) .
Total Surplus A+B+C+D+E+F A+B+D+F -(C+E)
Deadweight loss = C+E.
11. Before Trade After Trade Change
CS A A+B+C+D +(B+C+D)
PS B+E E -B .
Total Surplus A+B+E A+B+C+D+E +(C+D)
Price
Sdomestic
A
P1
B C D
Pworld
E
Ddomestic
Qs Q1 Qd Quantity
11c. Before Program After Program Change = After minus Before
CS A+B+C+D+E+F A+B -(C+D+E+F)
.
PS (domestic) G C+G +C
.
Rev. to 0 E +E
Government .
Total Surplus -DF
P
Sdomestic
A
P1+T B Pworld'
C D E F
P1 Pworld
G
Ddomestic
imports
after T
sQ1dom sQ2dom dQ2dom dQ1domestic
imports before tariff