Question

1. Demonstrate graphically and explain verbally the concept of consumer surplus. 2. Demonstrate graphically and explain verbally the concept of producer surplus. 3. Demonstrate graphically and explain verbally why the equilibrium values of price and quantity in a supply and demand model lead to the maximum combination of consumer and producer surplus. 6. Demonstrate graphically and explain verbally the cost to consumers of a tax of t per carton imposed on the sellers of cigarettes. Where does the lost producer surplus go? 9. Suppose the price elasticity of demand is 1.5 and the price elasticity of supply is 0.5, what is the percentage of a tax borne by the consumer, and what is the percentage of the same tax borne by the producer?

Answer 1

Answer to Q. no. 1:

Consumer surplus is the benefit of getting a good deal. For example, let's say that you bought mangoes @ $1000 per dozen , but you were expecting and willing to pay $3000 per dozen. This $2000 represents your consumer surplus. So consumer surplus is an economic measurement of consumer benefits. It happens when the price that consumers pay for a product or service is less than the price they're willing to pay. It's a measure of the additional benefit that consumers receive because they're paying less for something than what they were willing to pay.

A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.

The demand curve is a graphic representation used to calculate consumer surplus. It shows the relationship between the price of a product and the quantity of the product demanded at that price, with price drawn on the y-axis of the graph and quantity demanded, drawn on the x-axis. Because of the law of diminishing marginal utility, the demand curve is downward sloping.

Consumer surplus is measured as the area below the downward-sloping demand curve.