BU224-02

Microeconomics

Problem - 1

A)

In the absence of any price floor, consumer surplus is the area below the demand curve but above the equilibrium price.

Equilibrium price = $0.13

Equilibrium quantity = 211.5 billion pound.

So, consumer surplus = ½ * (0.2-0.13)*211.5 = $7.403 billion

B)

Producer surplus is the area above the supply curve but below the equilibrium price.

Producer surplus = ½ *(0.13-0.06)*211.5 = $7.403 billion

C)

Total surplus = consumer surplus + producer surplus = $7.403 billion + $7.403 billion

= $14.806 billion

D)

With the price floor at $0.17 per pound, consumer surplus is the area below the demand curve but above the price.

Consumer surplus = ½ * (0.20-0.17)*211 = $3.165 billion

E)

With the price floor at $0.17 per pound, producer surplus is the area above the supply curve but below the price.

Producer surplus = ½* (0.17-0.06)*212.5 = $11.688 billion

F)

USDA buys 1.5 billion pounds of cheese at a price $0.17 per pound.

So, USDA spends $0.17*1.5 billion = $0.255 billion

G)

Total surplus when there is price floor = consumer surplus + producer surplus - money spent by the USDA

= $3.165+$11.688-$0.255 = $14.598 billion

H)

This is less than the total surplus without price floor.

Problem - 2

A)

Using midpoint method,

PED. = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]

When the price of an ice cream cone rises from $1 to $2 then

P1 = $1, P2 = $2

Q1 = 3000, Q2 = 2400

PED = -0.22222/0.66667 = -0.333

B) As |PED|1, price elasticity of demand is relatively elastic.

E) Price elasticity of demand varies at every point along a straight line demand curve because of its percentage nature. Price elasticity demand is not the same as the slope, because at a high price, PED is