HOMEWORK ASSIGNMENT #5
NAME: GREG PRETESEILLE
KEY CONCEPTS AND SUMMARY FOR MODULE #6
 Consumer surplus is the gap between the price that consumers are
willing to pay, based on their preferences, and the market equilibrium
price.
 Producer surplus is the gap between the price for which producers are
willing to sell a product, based on their costs, and the market
equilibrium price.
 Social surplus is the sum of consumer surplus and producer surplus.
Total surplus is larger at the equilibrium quantity and price than it will
be at any other quantity and price.
 Deadweight loss is loss in total surplus that occurs when the economy
produces at an inefficient quantity.
 Graph demonstrating Consumer, Producer, and Total Surplus
 Graph demonstrating Consumer, Producer, and Total Surplus
with a Price Ceiling. Please notice, Producer Surplus shrinks,
Consumer Surplus increases, and a dead weight loss is introduced. A
dead weight loss can be applied to any deficiency caused by an inefficient
allocation of resources. Price ceilings, such as price controls and rent
controls; price floors, such as minimum wage and living wage laws; and
taxation can all potentially create deadweight losses.
 Graph demonstrating Consumer, Producer, and Total
Surplus with a Price Floor. Please notice, Producer Surplus
increases, Consumer Surplus shrinks, and a dead weight loss is
introduced. A dead weight loss can be applied to any deficiency
caused by an inefficient allocation of resources. Price ceilings, such as
price controls and rent controls; price floors, such as minimum wage
and living wage laws; and taxation can all potentially create
deadweight
losses.
Consumer Surplus Questions – Be sure to watch the videos in D2L content
1. Erika is walking around a big department store when she finds a shirt that she really
loves. The price tag is torn off, so she can’t find the price. She decides that as long as the
shirt is less than $40, she will buy it. When she goes to the register, she discovers that
the shirt originally cost $40, but it’s on sale for $32. Which of the following is true about
Erika’s consumer surplus.
a. If Erika buys the shirt, she will have a consumer surplus of $32.
b. Erika should not buy the shirt because her consumer surplus would be -$10.
c. If Erika buys the shirt, she will have a consumer surplus of $18.
d. If Erika buys the shirt, she will have a consumer surplus of $10.
e. If Erika buys the shirt, she will have a consumer surplus of $8.
Customer
Ice Cream
Arya
$8
Bran
$5
Cersei
$4
Daenerys
$2
The table above shows reservation prices for ice cream cones for individual consumers. Each
consumer is only interested in buying one ice cream cone. The price of an ice cream cone is $3.
Use this information to answer the questions 2- 4.
2. How many people will buy ice cream?
3 PEOPLE
3. What is Bran’s consumer surplus?
$2
4. If these people make up the entire market, what is consumer surplus in the market for
ice cream? (HINT: Add up Arya’s, Bran’s, and Cersei” consumer surplus)
$8
5. What is consumer surplus in this market if the price is $60?
To do this, please compute the area of the triangle below the demand curve and above
the $60 price i.e. the blue triangle. Please use the formula for triangles: ½ Base times
height
.5*(150-60)*30= $2,400
6. What is consumer surplus in this market if the price is $30? To do this, please compute
the area of the triangle below the demand curve and above the $30 price i.e. the blue
triangle below. Please use the formula for triangles: ½ base times height
.5*(150-30)*40= $1,800
Producer Surplus - Be sure to watch the videos in D2L content
7. Karen decides that as long as someone is willing to pay more than $100, she’ll sell her
couch on Craigslist. She lists her couch for $300, and the next day someone calls her up
and offers her $250.
a.
b.
c.
d.
e.
If Karen sells her couch, she will have a producer surplus of $250.
Karen should not sell her couch because she will make a loss of $50.
If Karen sells her couch, she will have a consumer surplus of $250.
If Karen sells her couch, she will have a consumer surplus of $150.
If Karen sells her couch, she will have a producer surplus of $150.
Seller
Seller’s Reservation Price
Alex
$12
Piper
$16
Daya
$22
Red
$30
8. See chart above. Four different students have one textbook each that they are
considering selling back to the bookstore after the semester ends. The table above
shows each student’s reservation price, or the lowest price at which they would be
willing to sell the book. The bookstore is buying textbooks at a price of $25. Use this
information to answer the following questions.
a. How many of the students will agree to sell their textbooks?
Answer: 3 people
b. What is Alex’s producer surplus?
Answer: $13
c. If these students make up the entire market, what is producer surplus in the
market for textbooks? Answer: $25 Note: 13+9+3=25
9. Use the graph above to calculate producer surplus at a price of $20. To do this, please
compute the area of the triangle above the supply curve and underneath the $20 price
i.e. the blue triangle above. Please use the formula for triangles: ½ base times height
. .5*(20)*(20)= 200
10. Use the graph above to calculate producer surplus at a price of $30. To do this, please
compute the area of the triangle above the supply curve and underneath the $20 price
i.e. the blue triangle above. Please use the formula for triangles: ½ base times height
Please be sure to look at the Y-intercept.
.5*(20)*(20)= 200
Please use the graph below to answer question 11 - 13:
11. Which of the following area(s) represent producer surplus when the price is equal to P2?
A) D, E, and F
B) B and C
C) D and E
D) A, B, and C
12. Which of the following area(s) represent consumer surplus when the price is equal to
P2?
a.
b.
c.
d.
D, E, and F
B and C
D and E
A, B, and C
13. Which of the following area(s) represent consumer surplus when the price is equal to
P3?
a.
b.
c.
d.
F
A, B and C
C and E
A, B, and D
14. Which of the following area(s) represent deadweight loss if the price is set to P1?
a.
b.
c.
d.
A
A, B and C
C and E
B, D and F
15. Refer to Figure 7-24. If the government imposes a price floor at $18, then consumer surplus is
a.
ABF.
b.
AGH.
c.
HGCD.
d.
HGBF.