principles microeconomics questions
1. Table 1 shows four consumers’ willingness to pay for a shirt, and in what quantities. For example,
Ginger wants to buy two shirts, and is willing to pay at most $25 per shirt.
Consumer Willingness to Pay (WTP) Quantity
Jack $15 1
Jill $40 3
Ginger $25 2
Fred $20 1
Table 1: Willingness to Pay for shirts
(a) Construct the market demand schedule for the shirt market, assuming that Jack, Jill, Ginger, and
Fred are the only consumers in the market.
(b) If the market price for shirts is $22 per shirt, how many shirts will each consumer buy and what
is market demand? Calculate total consumer surplus.
(c) On a graph, draw the market demand curve for shirts and show total consumer surplus when the
market price is $22.
(d) Suppose the market price for shirts increases to $30 per shirt. How many shirts will each consumer
buy and what is market demand? How does total consumer surplus change in comparison to the
original price of $22 per shirt?
2. Determine the amount of producer surplus generated in each of the following situations.
(a) Dustin tries to sell his old cathode-ray TV on eBay. If he fails to sell it on eBay, he knows that
his friend Raymond, who likes to tinker with electronics, will give him $10 for it. Dustin manages
to sell it on eBay for $25.
(b) Al advertises his car for sale in the used-car section of Craigslist for $3,000 or best oﬀer, but he
is willing to selling the car for any price above $1,600.
i. The best oﬀer he receives is $1,475, which he declines.
ii. The best oﬀer he receives is $1,750, which he accepts.
3. The demand and supply functions for the world truﬄe market are given by
QD = 48, 000 − 40P
QS = −3000 + 10P,
where P is the per-pound price of truﬄes in dollars.
(a) Find the equilibrium price and quantity of truﬄes.
(b) Graph the market for truﬄes. Clearly mark the following: (1) market equilibrium price and
quantity, (2) the area of consumer surplus, and (3) the area of producer surplus.
(c) Calculate total consumer and producer surplus in market equilibrium.
(d) Suppose that a disease strikes wild boars, which are used to ﬁnd and harvest truﬄes. This reduces
the supply of truﬄes at every price by 500 pounds. Demand for truﬄes is unchanged.
i. Explain and graph the eﬀect of this disease on the market for truﬄes. How are the equilibrium
price and quantity aﬀected? Be sure to mark the new equilibrium price and quantity, and
mark the areas of the new total consumer and producer surpluses.
ii. Find the new equilibrium price and quantity after the disease has struck.
iii. Calculate the new level of total consumer and producer surplus after the disease has struck.
4. Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will
receive 10% of the revenue from every video rental of a movie they authored. That is, retailers who
rent out videos must pay 10% of their revenues from video rentals to screenwriters. They have no such
agreement for movies shown in pay-per-view television.
(a) Explain, both verbally and graphically, how the new writers’ agreement aﬀects the market for
video rentals. How will consumer surplus in the market for video rentals change? Illustrate with
a diagram. Do you think the writers’ agreement will be popular with consumers who rent videos?
(b) Consumers consider video rentals and pay-per-view movies substitutable to some extent. Explain,
both verbally and graphically, how the new writers’ agreement aﬀects the market for pay-per-view
movies. How will producer surplus in the market for pay-per-view movies change? Illustrate with
a diagram. Do you think the writers’ agreement will be popular with cable television companies
that show pay-per-view movies?