Micro Economics

  

The accompanying diagram shows supply and demand curves illustrating the market for Gondwanaland gosum berries. Utilizing this information, answer the following questions.

1. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How much consumer surplus is created when there is no price floor? Show your calculations. (4 points)

Consumer surplus is the area below the demand curve and above the equilibrium price. The area can be calculated using the formula:

0.5*equilibrium quantity*the difference between maximum price and market price

0.5*500*(100-50) = 12500

The consumer surplus is 12500

2. How much producer surplus is created when there is no price floor? Show your calculations. (4 points)

Producer surplus is the area above the supply curve and below the equilibrium price. It can be calculated using the formula:

0.5*equilibrium quantity*equilibrium price

0.5*500*50 = 12500

The producer surplus is 12500

3. What is the total surplus when there is no price floor? Show your calculations. (4 points)

Total surplus is the summation of consumer surplus and producer surplus

Total surplus = consumer surplus + producer surplus

Total surplus = 12500 + 12500 = 25000

4. After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How much consumer surplus is created with the price floor? Show your calculations. (8 points)

Consumer surplus will be the area above the price floor and below the demand curve. The area is given by:

0.5*quantity purchased*difference between maximum payable price and price floor

0.5*300*(100-70)

0.5*300*30 = 4500

The consumer surplus with price floor is 4500

5. After the price floor is instituted, the Chairman of Productions Office buys up any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much producer surplus is created with the price floor? Show your calculations. (10 points)

The producer surplus is the area enclosed by the price floor, the supply curve and quantity purchased. The area can be calculated as:

0.5*price level*quantity purchased

0.5*70*700 = 24500

The producer surplus with price floor is 24500

6. The Chairman of Production’s Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much money does the Chairman of Production’s Office spend on buying up surplus gosum berries? Show your calculations. (10 points)

The amount of money spent by the chairman of production is the product of the extra quantity produced and the price at which the quantity is purchased.

Extra quantity produced = 700 – 300 = 400

Amount of money spent by chairman of production = 400*70 = $28000

7. The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production’s Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production’s Office spent on buying surplus gosum berries. Using your answers for problems 4, 5, and 6 above, what is the total surplus when there is a price floor? Show your calculations. (12 points)

Total surplus = consumer surplus + producer surplus – taxes

Total surplus = 4500 + 24500 – 28000

Total surplus = 1000

8. How does this compare to the total surplus without a price floor from problem 3 above? Is it more, or less, and by how much? (12 points)

The total surplus reduces with the price floor, from 25000 without price floor to 1000 with price floor, which represents a 24000 decrease in total surplus. 

Reference: 

Unit 6, BU224-04 Assignment Template

Krugman, P., & Wells, R. (2018). Microeconomics. Chapter 13, Monopoly, Macmillan Publishers.