Question

1 According to the Bureau of Transportation Statistics, due to an increase in demand, the average domestic airline fare increased from $367.17 in the fourth quarter of 2005 to $381.99 in the first quarter of 2006, an increase of $14.82. The number of passenger tickets sold in the fourth quarter of 2005 was 178.1 million. Over the same period, the airlines’ costs remained roughly the same: the price of jet fuel averaged around $1.85 per gallon in both quarters (Source: Energy Information Administration), and airline pilots’ salaries remained roughly the same (according to the Bureau of Labor Statistics, they averaged $135,040 per year in 2005). Can you determine if, and by how much producer surplus has increased as a result of the $14.82 increase in the average fare?

2 The accompanying table shows the supply and demand schedules for used copies of the first edition of a textbook. The supply schedule is derived from offers at amazon.com. The demand schedule is estimated.

Price of Book	Quantity of Books Demanded	Quantity of Books Supplied
$60	30	0
$65	27	3
$70	25	7
$75	20	7
$80	17	8
$85	15	15
$90	12	16
$95	9	17
$100	8	29
$105	2	31
$110	0	34

Calculate consumer and producer surplus at the equilibrium in this market

Now the second edition of this textbook becomes available. As a result, the willingness to pay of each potential buyer for a second-hand copy of the first edition falls by $20. In a table, show the new demand schedule and again calculate consumer and producer surplus at the new equilibrium.

Answer 1

Answer 1. The precise increase in producer surplus cannot be determined as we are not aware of the supply curve and the change in quantity supplied.

But if the quantity supplied doesn't change, rise in producer surplus will be equal to $14.82*178.1=$2639.4 million.

But generally, the supply curve is upward sloping and not horizontal. So the actual increase in producer surplus will be greater than $2639.4 million.

Note-According to HOMEWORKLIB RULES first question is answered