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Chapter 7: Consumers, Producers, and the Efficiency of Markets Problems and Applications
Book Title: Principles of Microeconomics
Printed By: MANUEL ASITIMBAY ([email protected])
© 2021 Cengage Learning, Cengage Learning

Chapter Review
Problems and Applications

1. Kyra buys an iPhone for and gets consumer surplus of .

a. What is her willingness to pay?

b. If she had bought the iPhone on sale for , what would her
consumer surplus have been?

c. If the price of an iPhone were , what would her consumer surplus

have been?

2. An early freeze in California sours the lemon crop. Explain what happens to
consumer surplus in the market for lemons. Explain what happens to
consumer surplus in the market for lemonade. Illustrate your answers with
diagrams.

3. Suppose the demand for French bread rises. Explain what happens to
producer surplus in the market for French bread. Explain what happens to
producer surplus in the market for flour. Illustrate your answers with diagrams.

4. It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of
water:

Value of first bottle $7

Value of second bottle $5

Value of third bottle $3

Value of fourth bottle $1

a. From this information, derive Bert’s demand schedule. Graph his

demand curve for bottled water.

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b. If the price of a bottle of water is , how many bottles does Bert buy?
How much consumer surplus does Bert get from his purchases? Show
Bert’s consumer surplus in your graph.

c. If the price falls to , how does quantity demanded change? How does
Bert’s consumer surplus change? Show these changes in your graph.

5. Ernie owns a water pump. Because pumping large amounts of water is harder
than pumping small amounts, the cost of producing a bottle of water rises as
he pumps more. Here is the cost he incurs to produce each bottle of water:

Cost of first bottle $1

Cost of second bottle $3

Cost of third bottle $5

Cost of fourth bottle $7

a. From this information, derive Ernie’s supply schedule. Graph his supply
curve for bottled water.

b. If the price of a bottle of water is , how many bottles does Ernie

produce and sell? How much producer surplus does Ernie get from
these sales? Show Ernie’s producer surplus in your graph.

c. If the price rises to , how does quantity supplied change? How does
Ernie’s producer surplus change? Show these changes in your graph.

6. Consider a market in which Bert from problem 4 is the buyer and Ernie from
problem 5 is the seller.

a. Use Ernie’s supply schedule and Bert’s demand schedule to find the
quantity supplied and quantity demanded at prices of , , and .
Which of these prices brings supply and demand into equilibrium?

b. What are consumer surplus, producer surplus, and total surplus in this
equilibrium?

c. If Ernie produced and Bert consumed one fewer bottle of water, what
would happen to total surplus?

d. If Ernie produced and Bert consumed one additional bottle of water,

what would happen to total surplus?

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7. 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.

c. Suppose the supply of flat-screen TVs is very elastic. Who benefits most
from falling production costs—consumers or producers of these TVs?

8. There are four consumers willing to pay the following amounts for haircuts:

Gloria: $35 Jay: $10 Claire: $40 Phil: $25

There are four haircutting businesses with the following costs:

Firm A: $15 Firm B: $30 Firm C: $20 Firm D: $10

Each firm can give at most one haircut. To achieve efficiency, how many
haircuts should be given? Which businesses should cut hair and which
consumers should have their hair cut? How large is the maximum possible
total surplus?

9. 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?

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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 people?

10. A friend of yours is considering two cell phone service providers. Provider A
charges 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
per minute for calls. Your friend’s monthly demand for minutes of calling is
given by the equation , where is the price per minute.

a. With each provider, what is the cost to your friend of an extra minute on
the phone?

b. In light of your answer to (a), how many minutes with each provider
would your friend talk on the phone?

c. How much would she end up paying each provider every month?

d. 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.)

e. Which provider would you recommend that your friend choose? Why?

11. Consider how health insurance affects the quantity of healthcare services
performed. Suppose that the typical medical procedure has a cost of , yet
a person with health insurance pays only out of pocket. Her insurance
company pays the remaining . (The insurance company recoups the
through premiums, but the premium a person pays does not depend on how
many procedures that person chooses to undertake.)

a. Draw the demand curve in the market for medical care. (In your
diagram, the horizontal axis should represent the number of medical
procedures.) Show the quantity of procedures demanded if each
procedure has a price of .

b. On your diagram, show the quantity of procedures demanded if

consumers pay only per procedure. If the cost of each procedure to
society is truly , and if individuals have health insurance as

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described above, will the number of procedures performed maximize

total surplus? Explain.

c. Economists often blame the health insurance system for excessive use
of medical care. Given your analysis, why might the use of care be
viewed as “excessive”?

d. What sort of policies might prevent this excessive use?

Chapter 7: Consumers, Producers, and the Efficiency of Markets Problems and Applications
Book Title: Principles of Microeconomics
Printed By: MANUEL ASITIMBAY ([email protected])
© 2021 Cengage Learning, Cengage Learning

© 2023 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means -
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