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1、Problems and Applications1.If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left, as shown in Figure 7-5. The result is a rise in the price of lemons and a decline in consumer surplus from A + B + C to just A. So consumer surplus declines by the amount
2、 B + C.Figure 7-5In the market for lemonade, the higher cost of lemons reduces the supply of lemonade, as shown in Figure 7-6. The result is a rise in the price of lemonade and a decline in consumer surplus from D + E + F to just D, a loss of E + F. Note that an event that affects consumer surplus i
3、n one market often has effects on consumer surplus in other markets.Figure 7-62.A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread, as shown in Figure 7-7. The shift of the demand curve leads to an increased price, which increases producer s
4、urplus from area A to area A + B + C.Figure 7-7The increased quantity of French bread being sold increases the demand for flour, as shown in Figure 7-8. As a result, the price of flour rises, increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in on
5、e market leads to effects on producer surplus in related markets. Figure 7-83.a.Berts demand schedule is: PriceQuantity DemandedMore than $70$5 to $71$3 to $52$1 to $33$1 or less4Berts demand curve is shown in Figure 7-9.Figure 7-9b.When the price of a bottle of water is $4, Bert buys two bottles of
6、 water. His consumer surplus is shown as area A in the figure. He values his first bottle of water at $7, but pays only $4 for it, so has consumer surplus of $3. He values his second bottle of water at $5, but pays only $4 for it, so has consumer surplus of $1. Thus Berts total consumer surplus is $
7、3 + $1 = $4, which is the area of A in the figure.c.When the price of a bottle of water falls from $4 to $2, Bert buys three bottles of water, an increase of one. His consumer surplus consists of both areas A and B in the figure, an increase in the amount of area B. He gets consumer surplus of $5 fr
8、om the first bottle ($7 value minus $2 price), $3 from the second bottle ($5 value minus $2 price), and $1 from the third bottle ($3 value minus $2 price), for a total consumer surplus of $9. Thus consumer surplus rises by $5 (which is the size of area B) when the price of a bottle of water falls fr
9、om $4 to $2.4.a.Ernies supply schedule for water is:PriceQuantity SuppliedMore than $74$5 to $73$3 to $52$1 to $31Less than $10Ernies supply curve is shown in Figure 7-10.Figure 7-10b.When the price of a bottle of water is $4, Ernie sells two bottles of water. His producer surplus is shown as area A
10、 in the figure. He receives $4 for his first bottle of water, but it costs only $1 to produce, so Ernie has producer surplus of $3. He also receives $4 for his second bottle of water, which costs $3 to produce, so he has producer surplus of $1. Thus Ernies total producer surplus is $3 + $1 = $4, whi
11、ch is the area of A in the figure.c.When the price of a bottle of water rises from $4 to $6, Ernie sells three bottles of water, an increase of one. His producer surplus consists of both areas A and B in the figure, an increase by the amount of area B. He gets producer surplus of $5 from the first b
12、ottle ($6 price minus $1 cost), $3 from the second bottle ($6 price minus $3 cost), and $1 from the third bottle ($6 price minus $5 price), for a total producer surplus of $9. Thus producer surplus rises by $5 (which is the size of area B) when the price of a bottle of water rises from $4 to $6.5.a.
13、From Ernies supply schedule and Berts demand schedule, the quantity demanded and supplied are:PriceQuantity SuppliedQuantity Demanded $ 213422631Only a price of $4 brings supply and demand into equilibrium, with an equilibrium quantity of 2.b.At a price of $4, consumer surplus is $4 and producer sur
14、plus is $4, as shown in problems 3 and 4. Total surplus is $4 + $4 = $8.c.If Ernie produced one fewer bottle, his producer surplus would decline to $3, as shown in problem 4. If Bert consumed one fewer bottle, his consumer surplus would decline to $3, as shown in problem 3. So total surplus would de
15、cline to $3 + $3 = $6.d.If Ernie produced one additional bottle of water, his cost would be $5, but the price is only $4, so his producer surplus would decline by $1. If Bert consumed one additional bottle of water, his value would be $3, but the price is $4, so his consumer surplus would decline by
16、 $1. So total surplus declines by $1 + $1 = $2.6.a.The effect of falling production costs in the market for stereos results in a shift to the right in the supply curve, as shown in Figure 7-11. As a result, the equilibrium price of stereos declines and the equilibrium quantity increases.b.The declin
17、e in the price of stereos increases consumer surplus from area A to A + B + C + D, an increase in the amount B + C + D. Prior to the shift in supply, producer surplus was areas B + E (the area above the supply curve and below the price). After the shift in supply, producer surplus is areas E + F + G
18、. So producer surplus changes by the amount F + G - B, which may be positive or negative. The increase in quantity increases producer surplus, while the decline in the price reduces producer surplus. Since consumer surplus rises by B + C + D and producer surplus rises by F + G - B, total surplus ris
19、es by C + D + F + G.c.If the supply of stereos is very elastic, then the shift of the supply curve benefits consumers most. To take the most dramatic case, suppose the supply curve were horizontal, as shown in Figure 7-12. Then there is no producer surplus at all. Consumers capture all the benefits
20、of falling production costs, with consumer surplus rising from area A to area A + B.Figure 7-11Figure 7-127.Figure 7-13 shows supply and demand curves for haircuts. 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 Sally Jess
21、y, Jerry, and Montel. 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 secon
22、d, plus $5 value minus $4 cost for the third).Figure 7-138.a.The effect of falling production costs in the market for computers results in a shift to the right in the supply curve, as shown in Figure 7-14. As a result, the equilibrium price of computers declines and the equilibrium quantity increase
23、s. The decline in the price of computers increases consumer surplus from area A to A + B + C + D, an increase in the amount B + C + D.Figure 7-14Prior to the shift in supply, producer surplus was areas B + E (the area above the supply curve and below the price). After the shift in supply, producer s
24、urplus is areas E + F + G. So producer surplus changes by the amount F + G - B, which may be positive or negative. The increase in quantity increases producer surplus, while the decline in the price reduces producer surplus. Since consumer surplus rises by B + C + D and producer surplus rises by F +
25、 G - B, total surplus rises by C + D + F + G.Figure 7-15b.Since adding machines are substitutes for computers, the decline in the price of computers means that people substitute computers for adding machines, shifting the demand for adding machines to the left, as shown in Figure 7-15. The result is
26、 a decline in both the equilibrium price and equilibrium quantity of adding machines. Consumer surplus in the adding-machine market changes from area A + B to A + C, a net gain of C - B. Producer surplus changes from area C + D + E to area E, a net loss of C + D. Adding machine producers are sad abo
27、ut technological advance in computers because their producer surplus declines.c.Since software and computers are complements, the decline in the price and increase in the quantity of computers means that peoples demand for software increases, shifting the demand for software to the right, as shown i
28、n Figure 7-16. The result is an increase in both the price and quantity of software. Consumer surplus in the software market changes from B + C to A + B, a net increase of A - C. Producer surplus changes from E to C + D + E, an increase of C + D, so software producers should be happy about the techn
29、ological progress in computers.d.Yes, this analysis helps explain why Bill Gates is one the worlds richest men, since his company produces a lot of software thats a complement with computers and there has been tremendous technological advance in computers.Figure 7-169.a.Figure 7-17 illustrates the d
30、emand for medical care. If each procedure has a price of $100, quantity demanded will be Q1 procedures.Figure 7-17b.If consumers pay only $20 per procedure, the quantity demanded will be Q2 procedures. Since the cost to society is $100, the number of procedures performed is too large to maximize tot
31、al surplus. The quantity that maximizes total surplus is Q1 procedures, which is less than Q2. c.The use of medical care is excessive in the sense that consumers get procedures whose value is less than the cost of producing them. As a result, the economys total surplus is reduced.d.To prevent this e
32、xcessive use, the consumer must bear the marginal cost of the procedure. But this would require eliminating insurance. Another possibility would be that the insurance company, which pays most of the marginal cost of the procedure ($80, in this case) could decide whether the procedure should be perfo
33、rmed. But the insurance company doesnt get the benefits of the procedure, so its decisions may not reflect the value to the consumer.10.a.Figure 7-18 illustrates the effect of the drought. The supply curve shifts to the left, leading to a rise in the equilibrium price from P1 to P2 and a decline in
34、the equilibrium quantity from Q1 to Q2.Figure 7-18b.If the price of water is not allowed to change, there will be an excess demand for water, with the shortage shown on the figure as the difference between Q1 and Q3.c.The system for allocating water is inefficient because it no longer allocates wate
35、r to those who value it most highly. Some people who value water at more than its cost of production will be unable to obtain it, so societys total surplus isnt maximized.The allocation system seems unfair as well. Water is allocated simply on past usage, rewarding past wastefulness. If a familys de
36、mand for water increases, say because of an increase in family size, the policy doesnt allow them to obtain more water. Poor families, who probably used water mostly for necessary uses like drinking, would suffer more than wealthier families who would have to cut back only on luxury uses of water li
37、ke operating backyard fountains and pools. However, the policy also keeps the price of water lower, which benefits poor families, since otherwise more of their family budget would have to go for water.d.If the city allowed the price of water to rise to its equilibrium price P2, the allocation would
38、be more efficient. Quantity supplied would equal quantity demanded and there would be no shortage. Total surplus would be maximized.Whether the market allocation would be more or less fair than the proportionate reduction in water under the old policy is difficult to say, but it is likely to be more
39、 fair. Notice that the quantity supplied would be higher (Q2) in this case than under the water restrictions (Q3), so theres less reduction in water usage. To make the market solution even more fair, the government could provide increased tax relief or welfare payments for poor families who suffer from paying the higher water prices.