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Consumer Surplus (CS) equation
- CS= Benefit - Cost
- = Reservation Price Buyers - Actual Price
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Suppose rational decision-maker Gena purchased a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $100 and Gena's reservation price for the ticket was $150. Gena's consumer surplus from this purchase was ____
1. -$50
2. $0
3. $50
4. $100
5. $150
6. $250
3.
- Reservation price: 150
- Actual price: 100
CS= R - A = 150 - 100 = 50
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Suppose rational decision-maker Gena was considering purchasing a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $100 and Gena's reservation price for the ticket was $150. Instead of buying the Springsteen ticket, however, Gena chose to go to a free Beth Patterson concert. Everything else held constant, it can be concluded with certainty that Gena's consumer surplus from seeing Beth Patterson was
1. greater than $150
2. greater than $100
3. greater than or equal to $100
4. greater than $50
5. greater than or equal to $50
6. equal to $50
7. less than or equal to $50
5.
- Bruce: CS= R - A = 150 - 100= 50
- Beth: CS= R - A = X - 0 = X, X≥50
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Producer Surplus (PS) equation
- PS= Benefit - Cost
- = Actual Price - Reservation Price Sellers
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Suppose Andrea, a rational artist, recently sold her painting, City #1, for $325. Suppose further that her reservation price for selling the painting was $250. Andrea’s producer surplus from this sale was
1. -$75
2. $0
3. $75
4. $250
5. $325
6. $575
3. $75
- 1. Identify the actual price (325)
- 2. Identify the reserv. price (250)
- 3. Calculate the PS (325-250= 75)
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Econ Surplus (ES) equation
- PS + CS= Econ Surplus (ES)
- = Reserv. Price Buyers - Reserv. Price Sellers
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| Scenario | Change in CS | Change in PS | Change in ES | | Change in p* | | | | | Change in Q* transacted | | | | Total | | | |
| Scenario | Change in CS | Change in PS | Change in ES | | Change in p* | Bad+ + | Good= | None + | | Change in Q* transacted | Good+ | Good= = | Good = | | Total | Ambiguous+ | Good= | Good |
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Suppose limes and coconuts are complements in consumption. Suppose further that the supply of limes increases. Everything else held constant…
1) How will consumer surplus change in the coconut market?
2) Producer surplus?
3) Economic surplus?
| Scenario | Change in CS | Change in PS | Change in ES | | Change in p* (up) | Bad | Good | 0 | | Change in Q* transacted (up) | Good | Good | Good | | Total | Ambiguous | Good | Good |
- Step 1: Scenario: Supply of limes increases
- Step 2: eqm price (up) & eqm Q (up) for coconut
- Step 3: CS, PS, ES
S(Lime) inc > P(Lime) > D(Lime) > D(Coconut) Incr > P(Coconut) Incr
1. Consumer Surplus change in the coconut market will be ambiguous
- 2. Producer Surplus: Increase
- 3. Economic Surplus: Decrease
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Suppose that the wages paid to apple harvesters increase. Everything else held constant…
1) How will consumer surplus change in the apple market?
2) Producer surplus?
3) Economic surplus?
| Scenario | Change in CS | Change in PS | Change in Economic ES | | Change in P* (up) | Bad | Good | 0 | | Change in Q* Transacted (down) | Bad | Bad | Bad | | Total | Bad | Ambiguous | Bad |
1. Decrease
- 2. Producer Surplus: Ambiguous
- 3. Economic Surplus: Decrease
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