Question

Fill in the blanks. Indicate areas by listing the vertexes of the area as one moves around the area in a clockwise direction-e.g. see the labeling of areas on pages 40 - 43 of the Module 3B Lecture Notes. 1. In the graph below, a) If the market price is P, and the market quantity is Q3, then consumer surplus is shown by the area b) If the market price is P, and the market quantity is Q3, then producer surplus is shown by the area c) The efficient quantity is d) A price increase from P. to P2 will (increase, decrease) consumer surplus by the area e) A price decrease from Pz to Pz will (increase, decrease) producer surplus by the area S = MC D. = MB 2. In the graph above, a) total benefit at Q, is shown by the area b) total cost at Q. is shown by the area c) An increase in quantity from Q, to Qs will (increase, decrease) total benefit by the area d) An increase in quantity from Q, to Q will (increase, decrease) total cost by the area e) The deadweight loss ("welfare cost" or "loss in efficiency") at Qa is given by the area

Answer 1

1. Note that consumer surplus is the excess benefit that a consumer receives from a good over the price it pays. this means that the difference between the price one is ready to pay (reservation price) and the price one actually pays is called consumer surplus. hence it is the area between the price line and the demand curve.

Producer surplus, on the other hand, is the excess benefit that a producer receives from a good over the price it receives. this means that the difference between the price one is ready to sell its good and the price one actually receives is called producer surplus. hence it is the area between the price line and the supply curve.

a. The consumer surplus is shaded (slant lines) in the following figure (a).

b. The producer surplus is shaded (vertical lines) in the above figure (b).

c. The efficient quantity is where the demand and supply are equal. hence the efficient quantity here is Q2.

d. When the price increases form price P1 to P2, then the consumer surplus will decline by the shaded area as given in the following figure (triangles) (d).

e. When the price decreases form price P3 to P2, then the producer surplus will decline by the shaded area in the following figure (triangles-circles) (e).