Economics 172 Name:

Spring 2006 Quiz 8

1) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith’s consumer surplus is

(a) $5,000.

(b) $15,000.

(c) $20,000.

(d) not able to be calculated from the information given.

The consumer surplus is the amount below the maximum demand and above the actual price paid. You know the purchase price but now what the maximum Smith would have paid. So (d)

2) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Jones’ producer surplus is

(a) $5,000.

(b) $15,000.

(c) $20,000.

(d) not able to be calculated from the information given.

The producer surplus is the amount less than the price but above the minimum amount the producer would need to get in order to produce anything. In this case, the lastter is $200,000. The house sold for $205,000 so Jones’ surplus is $5,000.

3) Suppose consumers of cigarettes can be classified into two groups: heavy users and light users. Heavy users purchase more cigarettes and are less sensitive to price changes relative to light users. To determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of cigarettes increases, one would need to know

(a) each group’s average income.

(b) the actual quantities purchased by each.

(c) each individual’s price elasticity of demand.

(d) no additional information.

When the price of cigarettes rises, the heavy user has a lower price elasticity of demand so he buys almost the same amount as he did before. They start out at the same price so the heavy user loses more consumer consumer surplus. So (d).

4) Sarah and David both have linear demand curves for lemonade. Sarah’s demand curve for lemonade intersects David’s demand curve at a price of 50 cents per glass. Sarah’s demand curve is more inelastic than David’s. A change in the price of lemonade from 50 cents to 25 cents per glass will

(a) decrease Sarah’s consumer surplus more than David’s.

(b) decrease David’s consumer surplus more than Sarah’s.

(c) increase Sarah’s consumer surplus more than David’s.

(d) increase David’s consumer surplus more than Sarah’s.

The more elastic demand curve will receive the higher consumer surplus from a price decline, so (d).

5) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals

(a) 50.

(b) 25.

(c) 12.50.

(d) 10.

If p=10, Q = 5. When Q=0, p = 5. So the producer surplus is the area above the supply curve and below the price. The horizontal Q is 5. The vertical distance on the y axis between p=5 and p=10 is 5. The area is ½ pq = ½ 25 = 12.5.