surplus

HM3.pdf

a. If you are willing to pay 10 usd to eat one ice cream, but you are paying 1.5 usd, what is

your surplus as a consumer?

b. What is your surplus if you buy 2 ice creams?

c. Define consumer surplus

d. Now, you are a producer of ice creams. You are willing to receive 0.5usd for each ice

cream you sell because that is the marginal cost. What is your surplus if you sell one ice

cream for 1.5 usd?

e. What is your surplus if you sell two ice creams?

f. Define producer surplus

g. What is the economic surplus if you use the information from 1a and 1d?

h. Define economic surplus

i. Let’s assume a market with just one consumer and one producer. Let’s assume the

consumer is willing to pay 10 usd for each ice cream. Let’s also assume the producer is

willing to receive 0.5 usd for each ice cream he sells. If there is no intervention from the

government, there will be an equilibrium price of 1.5 uds, and at this price the consumer

will buy two ice creams to the producer.

The government has decided to set a price floor of 5 usd for each ice cream. At this price,

the consumer will only buy 1 ice cream to the producer. What is the new consumer

surplus? What is the new producer surplus? What is the new economic surplus? Is this

economic surplus lower or higher than the one you get when there is no intervention

from the government. (show the procedure)

2. Assume you have the following demand (red curve) and supply (green curve) curves for the

market of pencils

a. Compute the consumer surplus (show the procedure)

b. Compute the producer surplus (show the procedure)

c. Compute the economic surplus (show the procedure)

price

quantities

1.5

3. Now, lets assume that the government has set a price ceiling of 2.5 usd. You can see the next

picture.

a. Compute the new consumer surplus (show the procedure)

b. Compute the new producer surplus (show the procedure)

c. Compute the new economic surplus (show the procedure)

d. Compute the dead weight loss (show the procedure)

price

quantities

1.5

2.5