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Solution
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
WTP
Anthony $250
Chad
175
Flea
300
John
125
Example:
4 buyers WTP
for an iPod
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
WTP
Anthony $250
Chad
175
Flea
300
John
125
Hence, Qd = 2
when P = $200.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
WTP
Anthony $250
Chad
175
Flea
300
John
125
P (price
of iPod)
$301 &
up
251
300
176
250
126
175
who buys
Qd
nobody
Flea
Anthony, Flea
Chad, Anthony,
Flea
John, Chad,
0 125
Anthony, Flea
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
5
Q
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Qd
$301 & up
251 300
176 250
126 175
0 125
Q
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Fleas
WTP
Anthonys
WTP
Chads WTP
Johns
WTP
At any Q,
the height of
the D curve is
the WTP of the
marginal buyer,
the buyer who
would leave the
market if P were
any higher.
Q
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CS = WTP P
name
WTP
Anthony $250
Chad
175
Flea
300
John
125
Suppose P = $260.
Fleas CS = $300 260 =
$40.
The others get no CS
because they do not buy an
iPod at this price.
Total CS = $40.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
P = $260
Fleas
WTP
Fleas CS =
$300 260 =
$40
Total CS = $40
Q
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
Instead, suppose
Fleas
WTP
Anthonys
WTP
P = $220
Fleas CS =
$300 220 =
$80
Anthonys CS =
$250 220 =
$30
Total CS = $110
Q
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11
The lesson:
Total CS equals
the area under
the demand
curve above the
price, from 0 to
Q.
Q
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
At Q = 5(thousand),
Price
the marginal buyer
per pair
is willing to pay $50 $
for pair of shoes.
Suppose P = $30.
Then his consumer
surplus = $20.
1000s of
pairs of
shoes
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
13
P
$
Height =
$60 30 = $30.
So,
CS = x 15 x $30
= $225.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
14
2. Fall in CS due
to remaining
buyers
paying higher
P
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1. Fall in CS
due to
buyers
leaving
market
Q
15
Consumer surplus
A. Find CS for
P = $30.
demand curve
16
Answers
A. CS = x 10 x $10
= $50
demand curve
P falls to $20.
B. CS for the
additional buyers
= x 10 x $10 = $50
C. Increase in CS
on initial 10 units
= 10 x $10 = $100
2013
Cengage
2013 Cengage
Learning.
Learning.
All Rights
AllReserved.
Rights Reserved.
May notMay
be copied,
not be copied,
scanned,scanned,
or duplicated,
or duplicated,
in wholeinorwhole
in part,
or in
except
part,for
except
use as
for use as
permitted
permitted
in a license
in a distributed
license distributed
with a certain
with a certain
productproduct
or service
or service
or otherwise
or otherwise
on a password-protected
on a password-protected
website website
for classroom
for classroom
use.
use.
17
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
PROBLEM
Melissa buys an iPod for $100 and gets consumer surplus of $80.
a. What is her willingness to pay?
b. If she had bought the iPod on sale for $70, what would her
consumer surplus have been?
c. If the price of an iPod were $200, what would her consumer
surplus have been?
Solution
a. Consumer surplus is willingness to pay minus the price paid. Therefore,
willingness to pay is the sum of consumer surplus and the price paid, or
$100 + $80 = $180.
b. Her surplus is willingness to pay minus the price paid or $180 - $70 =
$110.
c. Because $200 exceeds her willingness to pay, she does not purchase an
iPod and she receives no consumer surplus
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19
35
willingness to sell.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20
name
cost
Jack
$10
Janet
20
Chrissy
35
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Qs
$0 9
10 19
20 34
35 & up
21
Qs
$0 9
10 19
20 34
35 & up
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
At each Q,
the height of
the S curve
is the cost of the
marginal seller,
the seller who
would leave
the market if
the price were
any lower.
23
Producer Surplus
P
PS = P cost
Producer surplus (PS):
the amount a seller
is paid for a good
minus the sellers cost
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24
PS = P cost
Chrissys
cost
Janets
cost
Jacks PS = $15
Janets PS = $5
Chrissys PS = $0
Total PS = $20
Jacks cost
Suppose P = $25.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Suppose P = $40.
Price
per pair
At Q = 15(thousand),
the marginal sellers
cost is $30,
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
26
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
27
1. Fall in PS
due to sellers
leaving market
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
28
Producer surplus
A. Find total PS for
P = $20.
supply curve
29
Answers
A. PS = x 10 x $20
= $100
supply curve
P rises to $30.
B. PS on
additional units
= x 5 x $10 = $25
C. Increase in PS
on initial 10 units
= 10 x $10 = $100
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30
PROBLEM
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34
Efficiency
Total = (value to buyers) (cost to sellers)
surplus
An allocation of resources is efficient if it maximizes
total surplus. Efficiency means:
The goods are consumed by the buyers who
value them most highly.
The goods are produced by the producers with the
lowest costs.
Raising or lowering the quantity of a good
would not increase total surplus.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35
P
S
CS
PS
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
36
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Q
37
PROBLEM
There are four consumers willing to pay the following amounts for haircuts:
Jerry: $7 Oprah: $2 Ellen: $8 Phil: $5
There are four haircutting businesses with the following costs:
Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2
Each firm has the capacity to produce only one haircut. For efficiency, how
many haircuts should be given?
Which businesses should cut hair and which consumers should have their
hair cut?
How large is the maximum possible total surplus?
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
38
Solution
Supply equals demand at a quantity of three haircuts and a price between
$4 and $5. Firms A, C, and D should cut the hair of Ellen, Jerry, and Phil.
Oprahs willingness to pay is too low and firm Bs costs are too high, so
they do not participate. The maximum total surplus is the area between the
demand and supply curves, which totals $11 ($8 value minus $2 cost for
the first haircut, plus $7 value minus $3 cost for the second, plus $5 value
minus $4 cost for the third).
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
39