Question

Please show all steps clearly

(a)

| 0 4 8 12 16 20 24 28 32 36 40 44 48

Suppose there is a price increase to $16. How much is total consumer surplus in this market at the new price?

(b)

(c)

Suppose there is a price increase to $25. How much is total producer surplus in this market at the new price?

(d)

Suppose there is a price decrease to $20. What would be the amount of the dead weight loss in this market at the new price?

(e)

Suppose that demand shifts from the original equilibrium such that consumers wish to purchase 12 fewer units at every price. How much is total consumer surplus in this market at the new equilibrium price?

Answer 1

a) The equilibrium price is $14 where the equilibrium quantity (Qd=Qs) is 20. The consumer surplus is the area below the demand curve and above the price line. It is the total value difference between the price that the consumers willing to pay and the actual price they paid to obtain the good. The consumer is willing to pay $24. but he gets the good at a price of $14. Thus at the equilibrium the consumer surplus is $100(the area of the triangle is base xheight/2. Base is 20. height is $10($24-$14). When price increase to $16 the demand decrease to 16. The new consumer surplus is $64($8x16/2). At new price the total consumer surplus is $64. b) The equilibrium price in this market is $14 and equilibrium quantity is 20. The consumer is willing to pay $24 for the good. But he gets the commodity at a price of $14. Then the difference between the price the consumer is willing and the actual price he paid is $10. The quantity demanded is 20. Then consumer surplus is $100($10x20/2). c) The producer's surplus is the differences between the surplus earned by the producers which arise out of the difference between the price at which the producers are willing to sell and the price actually received by them in the market by selling a given quantity. The area above the supply curve and below the price line is the area of producer's surplus. At a price of $25, the producers are willing to supply the commodity at a price of $10. But they receive a price of $25. The quantity demanded decrease to 10 due to high price above the equilibrium. Then the total producer's surplus out of the sale of 10 is $125. The new area of producer's surplus represented in the form of a trapezium (15+10x10/2). d) Deadweight loss is the loss of surplus to the consumers and producers which arise out of fall in production and consumption. When the price decrease to $20, the quantity supplied decrease from the equilibrium quantity of 44 to 32. The value of deadweight loss is $72($12x12/2).

DWL ---- --- 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 e). If the demand decrease by 12 units, the new consumer surplus is $81($9x18/2).

18 New CS 6 12 18 24 30 36 42 48 54 60 66 72 When the consumer wish to purchase 12 units less at the prevailing price, the demand curve shift to down. The new cquilibrium quantity is 18 and equilibrium price is $15. Then the value of new consumer surplus is $81(59x18/2).