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?