Project #46706 - MicroEconomic 203 Home Work

Week 3 Homework

  

1a) When is a market equilibrium considered to be “efficient”? Explain. 

 

1b) Define consumer surplus and producer surplus. 

 

1c) Using end-of chapter question 2.8 (page 459), identify the areas on the figure that represent: 

               

*Consumer surplus in the market equilibrium  

*Producer surplus in the market equilibrium  

*Total surplus in the market equilibrium  

  

*Consumer surplus under a maximum price of $10 

*Producer surplus under a maximum price of $10 

*Total surplus under a maximum price of $10 

  

*Consumer surplus under a maximum quantity of 70 

*Producer surplus under a maximum quantity of 70 

*Total surplus under a maximum quantity of 70. 

  

 

 

2a) Consider a market where a maximum price (or price ceiling which is below the equilibrium price) has been mandated.    

      As the price elasticity of supply increases, is the resulting deadweight loss larger or smaller? Explain. 

 

 

2b) Based on the data in question 1.9 (page 459), find the willingness to pay and the consumer surplus for the average

      consumer. 

 

 

2c) Use the scenario in end-of-chapter Question 5.8 (page 462) to answer this question. 

 

*The initial equilibrium price and quantity in the market for cleaning services are $10 and 1,000 hours,     respectively.  Assume the city imposes a tax of $3 per hour on cleaning services, one-third of the  

tax is shifted forward to consumer, and the price elasticity of demand is - 0.833.  Find the new  

equilibrium price and quantity in the market for cleaning services.  

 

 

 

3a) Assume that a consumer with a fixed income must select the combination of widgets (W) and movies (M) that makes

      her happy.  Briefly discuss the process this consumer uses to make this decision. 

 

 

 

 

3b) Using the scenario from end-of-chapter question 1.13 (page 489), you are a consumer consultant who has been hired

      to determine whether a consumer is maximizing his utility.  

 

 *You can ask your client only two questions. What are your questions? 

 

 

 *If your client’s answers indicate that he is indeed maximizing utility, what are his answers? Explain. 

 

 

 

 

3c) Using the scenario from end-of-chapter question 1.12 (from Chapter 22, page 489): 

 

*complete the table below, and use it to identify the utility-maximizing combination of rides and          

  games.   (Provide a rationale for the combination you choose.) 

 

                               Quantity           Marginal Utility         Marginal Utility per Dollar (MU/P) 

 
 

Rides 

 
 

Games 

 
 

Rides 

 
 

Games 

    Rides (P = $2) 

Games (P = $1) 

1

   

    28 

50

10

 
 

 
 

2

26

42

14

 
 

 
 

3

 

24

36

18

 
 

 
 

4

22

26

26

 
 

 
 

 

 
3d) Briefly describe the substitution and income effects.  How do these combined effects help determine the  

      negative slope of a demand curve? Elucidate. 

  

 

4a) Briefly discuss an indifference curve. What is the relevance of the marginal rate of substitution (or MRS)?  

      Explain.  

 

4b) How is the indifference curve useful in helping us find the utility-maximizing combination of products?  

      Elucidate.

 

 

5a) How does accounting profit differ from economic profit?  Assuming implicit costs are not zero, when economic profit

      is zero, is accounting profit positive?  Explain. 

 

5b) How does the shape of the average cost curve change in the long run?  Elucidate. 

 

 

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