Question

please explain and label the answers

Q2: The following figure shows the demand and supply of television sets in a city. Since TVs are considered normal goods, demand increases from D to D2 in response to an increase in the income level. Quantity a. Use the figure to complete the table below:

Answer 1

Answer : a)

	Before income rose	After income rose	Change
Consumer surplus (C.S)	A + C	A + B	(A+B) - (A+C) = A + B - A - C = B - C
Producer surplus (P.S.)	F	C + D + F	(C+D+F) - F = C + D + F - F = C + D
Social surplus (C.S. + P.S.)	A + C + F	A + B + C + D + F	(A+B+C+D+F) - (A+C+F) = A + B + C + D + F - A - C - F = B + D

Based on given information and diagram after income rose the market demand increases and the demand curve becomes D2 from D1. As a result, the consumer surplus increases by the area B but decreases by the area C.

The producer surplus increases by the area C and D.

The social surplus increases by the area B and D.

b) i) Consumer surplus definitely rise.

Here due to increase in income than the increase in price level the consumer surplus increases by the area B and decreases by the area C. As area B is greater than the area C hence the consumer surplus definitely increase.

ii) Producer surplus definitely rise.

Here due to increase in market demand the price level rises. As a result, with new market demand D2 the producer surplus definitely increase.

iii) Social surplus definitely rise.

Here due to increase in market demand the producer surplus increases and due to increase in income than the increase in price level the consumer surplus also increases. As here the producer surplus and the consumer surplus increases hence the social surplus definitely increase.