ELUR 221-1280 PS2 Fall 2018 5) Consumer Surplus (2 points) A market has four ind
ID: 1141162 • Letter: E
Question
ELUR 221-1280 PS2 Fall 2018 5) Consumer Surplus (2 points) A market has four individuals, each considering buying a grill for his backyard. Assume that grills come in so he is willing to pay $400 for a grill. Butch is a meat-lover, honing his grilling skil to pay $350 for a grill. Collin just met the girl of his dreams, and she loves a good grilled steak, so his effort to impress her he is willing to pay $320 for a grill Daniel loves grilled shrimp and thinks it might be cheaper in the long run if he buys a grill instead of eating out every time he wants grilled shrimp, so he is willing to pay $200 for a grill. only one size and model. Abe considers himself a grill-master, and finds a grill a necessity, in If the market price of grills is $320 a. b. c. What is Abe's Consumer Surplus? (0.5 point) How many grills will be sold? (0.5 point) What is the total Consumer Surplus for this small market? (1 point) 6) Producer Surplus (3 points) Assume there are three hardware stores willing to sell one standard model hammer. House Depot can offer their hammer for a minimum of $7. Lace Hardware can offer the hammer for a mini of $10. Bob 's Hardware store can offer the hammer at a minimum price of $13. a. If the market price of hammers was $17, how many hammers would be supplied? (1 point) b. What would be the Producer Surplus in this scenario? (1 point) c. If the price of hammers decreases to $12, what happens to the market? What happens to producer surplus? (1 point) 7) Welfare Analysis (7 points) The market to the right is in equilibrium. Which areas represent Consumer Surplus? (use the letters as marked) Producer Surplus? Total Surplus? (2 points) a. $10Explanation / Answer
Consumer surplus is the difference between the maximum amount a consumer is willing to pay and the market price.
5 a) Market price is $320 per grill. Abe is willing to pay $400 for a grill, so his consumer surplus is $400-$320=$80.
b) Three grills would be sold. Abe would buy since he is willing to pay $400, Butch would buy since he is willing to pay $350 and Collin would buy since he is willing to pay $320. Daniel will not buy as his willingness to pay is only $200 which is below the market price of $320.
c) Total consumer surplus is
Abe's consumer surplus is $400-$320=$80, Butch's consumer surplus=$400-$350=$50. Total consumer surplus is $80 +$50=$130. Collin has no consumer surplus.
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