Question

2. EXERCISE 8.4 SURPLUS AND DEADWEIGHT LOSs 1. Sketch a diagram to illustrate the competitive market for bread, showing the equilibrium where 5,000 loaves are sold at a price of 2.00. 2. Suppose that the bakeries get together to form a cartel. They agree to raise the price to 2.70, and jointly cut production to supply the number of loaves that consumers demand at that price. Shade the areas on your diagram to show the consumer surplus, producer surplus, and deadweight loss caused by the cartel. For what kinds of goods would you expect the supply curve to be highly elastic? Draw diagrams to illustrate how the share of the gains from trade obtained by producers depends on the elasticity of the supply curve. 3. 4.

Answer 1

Supply curve will be highly elastic for goods with following characteristics. Factors of production can be easily re-allocated Needed only a short time frame to get products to the market Suppliers with excess capacity to increase output produced The above graphs shows the impact of elasticity of supply by comparing two demand and supply graphs. Diagram on the right side is less elastic than that on the left. And in it, we can observe that more of gains from trade goes to the producer compared to the other case. That is, when supply is less elastic, more of gains from trade goes to producer and vice versa.