1.Consider the following demand schedule for umbrellas at a local store:
|Price||Quantity demanded per day|
a.Draw the demand curve for umbrellas. Be sure to label the axes.
b.Suppose the price of umbrellas is $14. Indicate the area of market consumer surplus in your graph. Also indicate the area that represents the total amount that consumers spend on umbrellas.
c.Next, assume that Rebecca is willing to pay a maximum of $18 for an umbrella. What is Rebecca’s consumer surplus if she purchases an umbrella? Show her consumer surplus on your graph.
d.Another consumer, Andy, is willing to pay a maximum of $10 for an umbrella. What is his consumer surplus in this market?
e.If the demand schedule above represents demand on a normal summer day, what would you expect to happen to market consumer surplus if the forecast is for a heavy rainfall? Assume that the store does not raise its price. Draw a graph to support your answer.
3.Consider the following supply schedule for apartments in a local market.
|Rent (per month)||Quantity of apartments supplied|
a.Draw the supply curve for apartments. Be sure to label the axes.
b.Suppose the going rental price for apartments is $550 per month. How many apartments will be supplied? (Assume the supply curve is a straight line between the points in the table above.)
c.Indicate the area of market producer surplus in your graph. Also indicate the area that represents the total cost of supplying apartments.
d.Next, assume that a particular landlord is willing to supply an apartment only if the rental price is at least $450 per month. What is her producer surplus in this market? Use a graph to support your answer.
e.Suppose that the price for condominiums in the area increases. This creates an incentive for apartment owners to sell their apartments as condominiums, thus removing them from the rental market. What would you expect to happen to producer surplus in the apartment market as a result of this change? Draw a graph to support your answer.
6.Consider the market for electricity. Suppose that the price of producing energy decreases due to lower fuel costs.
a.How does the decrease in electricity production costs affect total net social welfare? Use a graph to support your answer and indicate the area that represents the change in social welfare.
b.Can we clearly say what happens to consumer surplus as a result of the decrease in energy production costs? Use a graph to support your answer.
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