Fiona Lee

Microeconomics ECO206_03
Assignment #1 – September 16th 2013

Chapter 3 (pg. 66 & 67)

1. Suppose there are three buyers of candy in a market: Tex, Dex, and Rex.

a. Fill in the table of the missing values

Individual Quantities Demanded

Price per candy Tex Dex Rex Total Quantity
Demanded

$8 3 1 0 4
7 8 2 2 12
6 12 3 4 19
5 17 4 6 27
4 23 5 8 36

b. Which buyer demands the least at a price of $5? The most at a price of
$7?
Dex demands the least price at $5 & Tex demands the most at $7

c. Which buyer’s quantity demanded increases the most when the price is
lowered from $7 to $6?
Tex demanded increased the most when the price is lowered from $7 to $6.

d. Which direction would the market demand curve shift if Tex withdrew
from the market? What if Dex doubled his purchases at each possible
price?
If Tex withdrew from the market, the market demand curve will shift to the
left because of the decrease in Total Quantity Demanded. The market demand
curve will shift to the right if Dex doubled his purchases at each possible price
because the Total Quantity Demanded increases.

e. Suppose that at a price of $6, the total quantity demanded increases from
19 to 38. Is this a “change in quantity demanded” or a “change in
demand”?
It will be a change in quantity demanded – therefore there will be a shift in the
demand curve.
2. The figure below shows the supply curve for tennis balls, S1, for Drop Volley
Tennis, a produce of tennis equipment. Use the figure and the table below to give
your answers to the following questions.

a. Use the figure to fill in the quantity supplied on supply curve S1 for each
price in the table below.

Price S1 S2 Change in
Quantity Quantity Quantity
Supplied Supplied Supplied

$3 15 4 11
2 10 2 8
1 5 0 5

b. If production costs were to increase, the quantities supplied at each price

would be shown by the third column of the table (“S2 Quantity Supplied”).
Use the data to draw supply curve S2 on the same graph as supply curve S1.
Green is the supply curve S2.
c. In the fourth column of the table, enter the amount by which the quantity
supplied at each price changes due to the increase in production costs.
d. Did the increase in production costs cause a “decrease in supply” or a
“decrease in quantity supplied”?
The increase in production costs causes a decrease in supply because there’s a
shift in the supply curve due to this factor.
3. Refer to the expanded table below from question 11.

Thousands of Price per Thousands of Surplus (+) or

Bushels Bushel Bushels Shortage (-)
Demanded Supplied

85 $3.40 72 (-)13
80 3.70 73 (-)7
75 4.00 75 0
70 4.30 77 (+)7
65 4.60 79 (+)14
60 4.90 81 (+)21

a. What is the equilibrium price? At what price is there neither a shortage nor
a surplus? Fill in the surplus-shortage column and use it to confirm your
answers.
The equilibrium price is $4.00, where there is neither a shortage nor a surplus.

b. Graph the demand for wheat and the supply of wheat. Be sure to label the
axes of your graph correctly. Label equilibrium price P and equilibrium
quantity Q.

c. How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or
shortage results if the price is 60 cents higher than the equilibrium price? 30
cents lower than the equilibrium price?
At $3.40, there is a shortage of 13 thousand bushels. At $4.90 there is a surplus of
21 thousand bushels. If the price is 60 cents higher than the equilibrium price,
there is a surplus of 14 thousand bushels. If the price is 30 cents lower than the
equilibrium price, there is a shortage of 7 thousand bushels.
 6. Assume that demand for a commodity is represented by the equation P=10-.2Qd
and supply by the equation P=2+.2Qs, where Qd and Qs are quantity demanded
and quantity supplied, respectively, and P is price. Using the equilibrium condition
Qs=Qd solve the equations to determine equilibrium price. Now determine
equilibrium quantity.
Because, 2+.2x = 10-.2x; Then, x = 20 Equilibrium Price = $6 Equilibrium
Quantity = 4

Chapter 4 (pg. 91)

1. Look at the demand curve in Figure 4.2a. Use the midpoint formula and points a
and b to calculate the elasticity of demand for that range of the demand curve. Do
the same for the demand curves in Figures 4.2b and 4.2c using, respectively, points c
and d for Figure 4.2b and points e and f for Figure 4.2c
a. 4.2a – a. (10,2) b. (40,1)
((40-10)/(50/2)) / ((1-2)/(3/2)) = 1.8
b. 4.2b- c. (10,4) d. (20,1)
((20-10)/(30/2)) / ((1-4)/(5/2)) = .56
c. 4.2c – e. (10,3) f. (30,1)
((30-10)/(40/2)) / ((1-3)/(4/2)) = 1

2. Investigate how demand elasticities are affected by increases in demand. Shift each
of the demand curves in Figures 4.2a, 4.2b, and 4.2c to the right by 10 units. For
example, point a in Figure 4.2a would shift rightward from location (10 units, $2) to
(20 units, $2), while point b would shift rightward from location (40 units, $1) to (50
units, $1). After making these shifts, apply the midpoint formula to calculate the
demand elasticities for the shifted points. Are they larger or smaller than the
elasticities you calculated in Problem 1 for the original points? In terms of the
midpoint formula, what explains the change in elasticities?
a. 4.2a – a. (20,2) b. (50,1)
((50-20)/(70/2)) / ((1-2)/(3/2)) = 1.29
b. 4.2b- c. (20,4) d. (30,1)
((30-20)/(50/2)) / ((1-4)/(5/2)) = .34
c. 4.2c – e. (20,3) f. (40,1)
((40-20)/(60/2)) / ((1-3)/(4/2)) = .67
They are smaller elasticities than Problem 1’s original points. With the increase
and a shift of the demand curve to 10 addition units: figure a has become less
elastic than originally, figure b because more inelastic than originally and figure c
is not unit-elastic anymore and has become inelastic.

3. Suppose that the total revenue received by a company selling basketballs is $600
when the price is set at $30 per basketball and $600 when the price is set at $20 per
basketball. Without using the midpoint formula, can you tell whether demand is
elastic, inelastic, or unit-elastic over this price range?
Because total revenue does not change when price changes, demand is unit-elastic.
 4. Danny “Dimes” Donahue is a neighborhood’s 9-year old entrepreneur. His most
recent venture is selling homemade brownies that he bakes himself. At a price of
$1.50 each, he sells 100. At a price of $1.00 each, he sells 300. Is demand elastic or
inelastic over this price range? If demand had the same elasticity for a price decline
from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the
price from $1.00 to $0.50 increase or decrease Danny’s total revenue?
Total Revenue = P x Q
$1.50 x 100 = $150 $1.00 x 300 =$300 - Because total revenue changes in the opposite
direction from price, demand is elastic (as price stop, Total Revenue increases) If demand had
the same elasticity from $1.00 to $.50 as it does for the decline from $1.50 to $1.00, cutting the
price from $1.00 to $.50 would increase the total revenue.

Chapter 5 (pg. 113)

1. Refer to Table 5.1. If the six people listed in the tale are the only consumers in the
market and the equilibrium price is $11 (not the $8 shown), how much consumer
surplus will the market generate?

Person Maximum Price Actual Price Consumer

Willing to Pay (Equilibrium Surplus
Price)

Bob $13 $11 $2

Barb 12 11 1
Bill 11 11 0
Bart 10 11 0
Brent 9 11 0
Betty 8 11 0

The market will generate $3 worth of consumer surplus if market equilibrium price is $11.
2. Refer to Table 5.2. If the six people listed in the table are the only producers in the
market and the equilibrium price is $6 (not the $8 shown), how much producer
surplus will the market generate?

Person Maximum Price Actual Price Producer

Willing to Pay (Equilibrium Surplus
Price)

Carlos $3 $6 $3
Courtney 4 6 2
Chuck 5 6 1
Cindy 6 6 0
Craig 7 6 0
Chad 8 6 0

The market will generate $4 worth of producer surplus if market equilibrium price is $6

3. Look at Tables 5.1 and 5.2 together. What is the total surplus if Bob buys a unit
from Carlos? If Barb buys a unit from Courtney? If Bob buys a unit from Chad? If
you match up pairs of buyers and sellers so as to maximize the total surplus of all
transactions, what is the largest total surplus that can be achieved?

The largest total surplus that can be achieved is if Bob buys a unit from Carlos, having a
surplus of $10.

4. Assume the following values for Figures 5.4a and 5.4b. Q1 = 20 bags. Q2 = 15 bags.
Q3 = 27 bags. The market equilibrium price is $45 per bag. The price at a is $85 per
bag. The price at c is $5 per bag. The price at f is $59 per bag. The price at g is $41
per bag. Apply the formula for the area of a triangle (Area = ½ X Base X Height) to
answer the following questions.
a. What is the dollar value of the total surplus (producer surplus plus consumer
surplus) when allocatively efficient output level is being produced? How
large is the dollar value of the consumer surplus at that output level?
Consumer surplus = ½(20-0)(85-45) = 400 Producer Surplus = ½(20-0)(45-5) =
400 Total surplus = 400 + 400 = $800
b. What is the dollar value of the deadweight loss when output level Q2 is being
produced? What is the total surplus when output level Q2 is being produced?
Deadweight loss = ½(20-15)(59-31)=$70
Consumer Surplus = ½(45-5)(20-15)=$100
Producer Surplus= ½(85-45)(20-15)=$175
Total Surplus =$100+$175 = $275
c. What is the dollar value of the deadweight loss when output level Q3 is
produced? What is the dollar value of the total surplus when output level Q3
is produced?
Deadweight loss = ½(27-20)(59-31)=$98
Producer Surplus= ½(85-45)(27-20)=$140
Consumer Surplus = ½(45-5)(27-20)=$140
Total Surplus = 140+140 = $280