Question

5 marks Question 4 Use the following market equilibrium graph represents apartment market. i) Assume that the equilibrium rent Pe-6005. How much is the consumer surplus? How much will be the producer surplus? Also, calculate the economic surplus (2 marks) 11) Does the equilibrium rent promote economic efficiency? Explain using the marginal analysis principle. (1 mark)

Answer 1

i) If the economic rent is Pe = $600, consumer surplus is the area of triangle ABC. Producer surplus would be the area of triangle BCD. Economic surplus would be sum of consumer + producer surplus.

Drees A Pee b

ii) Yes, the price Pe promotes economic efficiency as Consumers are receiving maximum benefit from consuming good while producer are receiving maximum profit at this level. Assume the price are P1, where the consumer would not be willing to pay higher prices which reduce the consumer surplus and the new consumer surplus triangle is AEF while producer surplus after increase in price is DGFE. There is a dead weight loss of triangle FCG. Thus marginal analysis says that raising prices by a little would reduce the social surplus. Marginal benefit to society is smaller than marginal cost. As there is overall reduction in economic surplus of triangle FCG.