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5 views

Set 1 - Questions

Uploaded by

i21sudeekshas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Market Mechanism and Consumer Surplus

1. Melissa buys an iPhone for $120 and gets consumer surplus of $80.
a. What is her willingness to pay?
b. If she had bought the iPhone on sale for $90, what would her consumer surplus have been?
c. If the price of an iPhone were $250, what would her consumer surplus have been?
2. One of the largest changes in the economy over the past several decades is that technological
advances have reduced the cost of making computers.
a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus,
and producer surplus in the market for computers.
b. Forty years ago, students used typewriters to prepare papers for their classes; today they use
computers. Does that make computers and typewriters complements or substitutes? Use a supply-and
demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in
the market for typewriters. Should typewriter producers have been happy or sad about the technological
advance in computers?
c. Are computers and software complements or substitutes? Draw a supply-and-demand diagram to
show what happened to price, quantity, consumer surplus, and producer surplus in the market for
software. Should software producers have been happy or sad about the technological advance in
computers?
d. Does this analysis help explain why software producer Bill Gates is one of the world’s richest men?
Question: A friend of yours is considering two cell phone service providers. Provider A charges
$120 per month for the service regardless of the number of phone calls made. Provider B does not
have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand
for minutes of calling is given by the equation QD = 150 – 50P, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone?
b. How much consumer surplus would she obtain with each provider? (Hint: Graph the demand
curve and recall the formula for the area of a triangle.) Remember that Price of a minute with Provider
A = 0 and Price of a minute with Provider B = 1.
c. Which provider would you recommend that your friend choose? Why?
Question: The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider
some implications of this fact.
a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and
quantity of flat-screen TVs sold.
b. In your diagram, show what happens to consumer surplus and producer surplus.
Question: The estimated monthly demand function for tomatoes in Spain is Q = 200 - 20p + 10pr,
where p is the price of tomatoes and pr is the price of red peppers, a substitute for tomatoes. The
estimated supply function for tomatoes is Q = 160 + 16p - 20pf, where the price of fertilizer, pf, is
€1.00, so the supply function can be written as Q = 140 + 16p. The initial price of red peppers is
€3.00 per kilogram. Using algebra, determine the initial equilibrium price and quantity of
tomatoes, and then determine how price and quantity change if the price of red peppers falls to
€2.00.
Question: The demand function for a truckload of firewood for college students in a small town
is Qc = 400 - p. It is sometimes convenient to rewrite a demand function with price on the left
side. We refer to such a relationship as the inverse demand function. Therefore, the inverse
demand function for college students is p = 400 - Qc. The demand function for other town residents
is Qr = 400 - 2p.
a. What is the inverse demand function for other town residents?
b. At a price of $300, will college students buy any firewood? What about other town residents? At what
price is the quantity demanded by other town residents zero?
c. Draw the total demand curve, which sums the demand curves for college students and other residents.

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