1. How consumer surplus relates to values and costs
The following graph shows the market for high heels. The downward-sloping (blue) line represents demand, and the upward-sloping (orange) line represents supply. The market is perfectly competitive and currently in equilibrium at a price of $50 per pair.
On the graph, use the green triangle (triangle symbols) to shade in the area representing consumer surplus. Tool Tip: You can mouse over the shaded region on the graph to find its area.
At a price of $50, all consumers who choose to buy a pair of high heels value them at . Given this information, consumer surplus in this market is . (Hint: Note the units on the X-axis.)
It must be the case that for each firm that produces high heels, the of the last pair of high heels produced is
True or False: When the price of a pair of high heels is $55, there is no deadweight loss in this market.
2. Elasticity and total revenue
The following graph shows the demand curve for kumquats. You can use the red rectangle labeled Total Revenue (cross symbols) to compute total revenue at various prices along the demand curve. To see the area of the Total Revenue rectangle, scroll over the shaded area with your mouse. You will not be graded on where you place the rectangle.
The price elasticity of demand between points C and D is approximately
Suppose the price of kumquats is currently $3 per bushel. Because the price elasticity of demand between points A and B is , a $1-per-bushel fall in price will lead to in total revenue per month.
In order for a price increase to cause an increase in total revenue, demand must be
3. Producer surplus for an individual and a market
Suppose the market for apple pie is a perfectly competitive market. Jared owns a restaurant where he sells apple pie. The orange line on the following graph shows Jared's supply curve. The price of apple pie is $5.00 per slice, as shown by the horizontal grey line.
From the graph, you can tell that Jared's marginal cost of supplying his second slice of apple pie each week is
. Since he receives $5.00 per slice, the producer surplus he gains from supplying the second slice of apple pie is
Suppose the price of apple pie were to rise to $7.00 per slice. At this higher price, Jared would receive a producer surplus of from his second slice of apple pie. At the higher price, the quantity of apple pie supplied by Jared would
The orange line on the following graph shows the market supply of apple pie in a small economy. Using the purple triangle (diamond symbols), shade the area representing producer surplus if the price of apple pie is $5.00 per slice. Then, using the green quadrilatera (triangle symbols), shade the area representing additional producer surplus if the price rises to $7.00 per slice.
4. Consumer surplus for an individual and a market
The blue line on the following graph shows Ralph's demand for cheesecake. The price of cheesecake is $8.00 per slice, as shown by the horizontal grey line.
From the graph, you can tell that Ralph's marginal benefit from his 15th slice of cheesecake each month is
. Since he only has to pay $8.00 per slice, the consumer surplus he gains from the 15th slice of cheesecake is
Suppose the price of cheesecake were to fall to $6.00 per slice. At this lower price, Ralph would receive a consumer surplus of from his 15th slice of cheesecake. At the lower price, Ralph would also the amount of cheesecake he buys.
The blue line on the following graph shows the market demand for cheesecake in a small economy. Using the purple triangle (diamond symbols), shade the area representing consumer surplus if the price of cheesecake is $8.00 per slice. Then, using the green quadrilateral (triangle symbols), shade the area representing additional consumer surplus if the price falls to $6.00 per slice.