Question

5. The Ministry of Tourism in the Republic of Palau estimates that the demand for its scuba diving tours is given by Q 6,000-20P, where Q is the number of divers served each month and P is the price of a two-tank dive. The supply of scuba diving tours is given by30P-2.000 a. Solve for the equilibrium price and quantity b. Find the value of the consumer surplus received by divers visiting Palau. (Hin: I may help to draw a graph.) c. Find the value of producer surplus received by dive shops. (Hint: It may help to draw a graph.) d. Suppose that the demand for scuba diving services increases, and that the new demand is given by @-7.000- 20P. Calculate the impact of this change in demand on the values you calculated in parts (a) through (c). e. Are consumers better off or worse off as a result of the demand increase? How about producers?

Answer 1

Given Q^D = 6000-20 P Q^S = 30 P - 2000 At Equilibrium Quantity Demand equal Quantity Supply. 6000 - 20 P = 30 P - 2000 50 P = 8000 P = 8000/50 = 160 Quantity Q = 6000 - 20 P = 6000 - 20 times 160 = 6000 - 3200 Q = 2800 So At Equilibrium Quantity = 2800, Price = 160 \r\n Consumer Surplus rightarrow It is the Area above the equilibrium price and below the supply curve. = 1/2 times (300 - 160) times (2800 - 0) = 1/2 times 140 times 2800 = 196,000 So the consumer surplus received by drivers visiting palm is = 196,000 Producer surplus = It is the Area below the Equilibrium price and above the supply curve. = 1/2 times (160 - 66.66) times (2800 - 0) = 1/2 times 93.34 times 1400 = 130 676 So the producer surplus received by dive shops is 130 676. New demand curve = Q^D = 7000 - 20 P At equilibrium 7000 - 20 P = 30 P - 2000