HOMEWORK 3 (BASIC WELFARE ANALYSIS) ECO 41 FALL 2011 UDAYAN ROY
Each correct answer is worth 1 point. These 20 questions are based on chapter 7 of Principles of
Economics by N. Gregory Mankiw. Due on Wednesday, October 5.
1. You've just bought a shirt for $10.99. But you like the shirt enough to have paid as much as $15.00 if necessary.
Therefore, you realize that you got a net benefit of $4.01, in the sense that you paid $10.99 for something that's
worth $15.00 to you. In economics, what two-word term is used to refer to the net benefit that a buyer gets from
a purchase? Consumer Surplus
2. The accompanying table shows the willingness to pay for Good Z for five people. If the
price of Good Z is $4.80, what is John's consumer surplus? $0.50
Buyers Willingness to Pay ($)
Cassie
8.00
3. If the price of Good Z is $5.00, what is Jeremy's consumer surplus? $0.00
Jamie
7.50
4. If the price of Good Z is $4.45, what is the total consumer surplus of those who will
buy Good Z? $7.45
John
5.30
Jeremy
3.90
Sarah
2.50
5. The accompanying table shows the willingness to pay for Good Z for five people.
Suppose you had to choose only three of these five buyers to give Good Z to (for free). The total willingness to pay
would be highest if you choose which three?
a.
b.
c.
d.
e.
Cassie, Jamie, and John
Jamie, John, and Jeremy
John, Jeremy, and Sarah
Cassie, John, and Sarah
Jeremy, Sarah, and Cassie
6. The table above shows how high a price each of five people is willing to pay for
Good Z. If the price of Good Z is $4.90, of the five people listed, who will purchase the
good?
a.
b.
c.
d.
e.
Cassie, Jamie, and John
Cassie and Jamie
John, Jeremy, and Sarah
Cassie, John, and Sarah
Jeremy and Sarah
7. The accompanying diagram shows the demand curve for ice cream. When the
quantity demanded is 65, the height of the demand curve is $1.35. Apart from the fact
that $1.35 is the price of ice cream when the quantity demanded is 65, what else does
the height of the demand curve tell us?
The willingness to pay of the buyer of the 65th unit
8. The accompanying diagram shows the supply curve for ice cream. When the
quantity supplied is 65, the height of the demand curve is $1.05. Apart from the fact
that $1.05 is the price of ice cream when the quantity supplied is 65, what else does
the height of the supply curve tell us?
The additional cost of producing the 65th unit to its producer
Shaded as an
answer to
question 10
9. Given the information in the last two questions, if you were a (benevolent) dictator in full control of this
economy, would the amount of ice cream produced be 65, or less than 65, or more than 65? Explain briefly.
More than 65 units should be produced. The benefit from the 65th unit ($1.35) exceeds its cost ($1.05). Therefore,
the number of units of ice cream for which benefit exceeds cost is clearly greater than 65.
10. When the price of ice cream is $1.35, the quantity purchased, according to the demand diagram above, is 65.
Indicate, by shading in the appropriate region, the diagrammatic measure of the maximum dollar amount that the
consumers of all those 65 units of ice cream would have been willing to pay. See diagram
11. You are a plumber and you have just done a job for $200. However, as the cost to you of doing the job was $80,
you realize that your net gain for the job was $120. In economics, what two-word term is used to refer to the net
gain that the seller/producer in a transaction gets from a sale? Producer Surplus
12. If the price of the product is $1,100, what is Nathan's producer surplus? $0.00
13. The accompanying table shows the cost of doing a particular task -- say, painting a
standard house – for each of five possible producers/sellers. If the prevailing price of the
product is $1,100, what is the total producer surplus of all who will do the task? $1,050
14. If the price of the product is $1,100, what is Chelsea's producer surplus? $100
Producer Production Cost ($)
Kyle
1500
Nathan
1200
Chelsea
1000
Hillary
750
Landon
500
15. Refer to the graph shown. What area represents consumer surplus
when the price is P1?
a.
b.
c.
d.
e.
A
B
C
D
Other, specify _____
16. Refer to the graph shown. What area represents producer surplus
when the price is P1?
a.
b.
c.
d.
e.
A
B
C
D
Other, specify _____
17. Refer to the graph shown. What area represents the total production cost (or, more precisely, variable cost)
when the price is P1?
a.
b.
c.
d.
e.
A
B
C
D
Other, specify _____
18. Refer to the graph shown. What area represents the total sales revenue of the producers (which is also the
total amount paid by the consumers) when the price is P1?
2
a.
b.
c.
d.
e.
A
B
C
D
Other, specify CD
19. Refer to the graph shown. What area represents the total surplus in the market when the price is P1?
a.
b.
c.
d.
e.
A
B
C
D
Other, specify BC
20. Refer to the graph shown. What area represents the consumers’ total willingness to pay when the price is P1?
a.
b.
c.
d.
e.
A
B
C
D
Other, specify BCD
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ANSWER SHEET HOMEWORK 3 ECO 41 FALL 2011 UDAYAN ROY
NAME ____________________________
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