BUSINESS ECONOMIC

Name : Akbar Prasandhika

NIM : 29319011

Question Number 1
1. There are six potential consumers of computer games, each willing to buy only one game.
consumer 1 is willing to pay $40 for a computer game, consumer 2 is willing to pay $35,
consumer 3 is willing to pay $30, consumer 4 is willing to pay $25, consumer 5 is willing
to pay $20, and consumer 6 is willing to pay $15.
a. Suppose the market price $29.What is total consumer surplus?
b. The market price decreases to $19. What is the total consumer surplus at now?
c. When the price fell from $29 to $19. How many did each consumer’s individual
consumer surplus change?

Answer for Number 1

a.
- Consumer 1 buys a game, since her/his willingness to pay greater than the market
price. He/She gain: $40- $29 = $11
- Consumer 2 buys a game, since her/his willingness to pay greater than the market
price. He/She gain: $35- $29 = $6
- Consumer 3 buys a game, since her/his willingness to pay greater than the market
price. He/She gain: $30- $29 = $1
The total consumer surplus is $11 + $6 + $1 =$18
b.
- Consumer 1 buys a game, since her/his willingness to pay greater than the market
price. She/He gain: $40- $19 = $21
- Consumer 2 buys a game, since her/his willingness to pay greater than the market
price. She/He gain: $35- $19 = $16
- Consumer 3 buys a game, since her/his willingness to pay greater than the market
price. She/He gain: $30- $19 = $11
- Consumer 4 buys a game, since her/his willingness to pay greater than the market
price. She/He gain: $25- $19 = $6
 - Consumer 5 buys a game, since her/his willingness to pay greater than the market
price. She/ He gain: $20- $19 = $1
The total consumer surplus is $21 + $16 + $11+ $6+ $1 = $55
c. Total consumer surplus has increased by $55 - $18 = $37 as a result of the price
decrease. The individual consumer surplus increased by $10 each for Consumer 1, 2
and 3 when the amount of the price is reduce. This account $30 of increase in consumer
surplus. But consumer 4 and 5 now also get consumer surplus since the lower price
leads them to buy computer game. Consumer 4 gets $6 of consumer surplus and
consumer 5 gets $1.

Question Number 2
2. When demand is estimated to be p = 50 - 0,5x, calculate the loss in consumer surplus when
a tax drivers price from $1 to $5.

Answer for Number 2

- To determine the loss, first you need to plot the demand curve and then calculate the
required consumer surplus change. The demand curve is linear, so its position is
determined by its intercepts with p and x axes.
- (See equation p = 50-0,5x) When x = 0 then p = 50, that determining the vertical
intercept. When p = 0 then x = 100, that determining the horizontal intercept.
- The demand curve is a straight line that must pass through these points. When p = 1,
x = 98 and when p = 5, x = 90.

Figure 1. Demand Curve

In the Figure 1, the loss in consumer surplus equals to the area trapezoidal abcd.
Labcd = ½ (ac + bd) x t
 Labcd = ½ (90 + 98) x (5-1)
Labcd = $376
Therefore, the loss in consumer surplus is $376

Question Number 3
3. Suppose we’re given the demand function p = -50q + 2000 and we had the supply function
p = 10q + 500.
a. Calculate the price and quantity at equilibrium point
b. Calculate the consumer surplus, producers surplus and total surplus?

Answer for Number 3

a. To find the equilibrium point, set demand equal to supply. The price and quantity at
equilibrium point:
Demand = Supply
– 50q + 2000 = 10q + 500
1500 = 60q
q = 1500/60
q = 25
if q = 25, so p :
p = 2000 - 50q
p = 2000 – (50 x 25)
p = 2000 – 1250
p = 750 Figure 2. Supply & Demand Curve

At equilibrium point, the price is $750 and the quantity is 25

b.

Figure 3. Supply & demand curve for Consumer Surplus

- The Consumer surplus is the triangle below the demand curve but above the
equilibrium price (See Figure 3) or we can say area of triangle ABE. Thus,
CS = 1/2 x AB x BE
CS = (1/2)*1250*25 = $15.625
- To find producer surplus, we can follow a similar method to find the area of the
triangle below equilibrium price but above the supply curve (See Figure 4 below).

Figure 4. Supply & Demand curve for Producer Surplus

The producer surplus is similar to area of triangle BCE.
PS = ½ x BC x BE
PS = ½ x 250 x 25 = $3.125
- Total surplus is merely the sum of the two so =
TS = CS + PS = $15.625 + $3.125 = $18.750
 Question Number 4
4. Assume that the demand and supply of hamburgers can be represented in the following
diagrammatic model.

Figure 5. Hamburger Supply and Demand

a. What is the equilibrium price and quantity?
b. Calculate consumer surplus, producer surplus and social surplus.?
c. Suppose the quantity supplied is restricted by government regulation to 200 units per
month. Calculate the new price, the consumer surplus, producer surplus and social
surplus?

Answer for Number 4

a. From Figure 5, we can see that the intersect between supply and demand curve is in
point C. So, the Equilibrium price is $2 and equilibrium quantity is 300.
b. (1) Consumer surplus is area of triangle ACG, thus:
CS = ½ x AG x CG
CS = ½ x 1,5 x 300
CS = $225
(2) Producer surplus is area of triangle CEG, thus:
PS = ½ x GE x CG
PS = ½ x 1,5 x 300
PS = $225
(3) Social surplus = $450
c. Restricted supply is 200 per month means that the market price now is $2,5 (point B),
so
 (1) The consumer surplus is area ABH :
CS = ½ x AH x BH
CS = ½ x 1 x 200
CS = $100
(2) The Producer surplus is area EDBH :
PS = ½ x (BD + HE) x BH
PS = ½ x (1 + 2,5) x 200
PS = $300
(3) Total Surplus is :
TS = CS + PS
TS = $400
Note: The competitive market equilibrium (the initial equilibrium) gives the price and
quantity at which total surplus is maximised.

Question Number 5
5. Suppose that the campus bookstore makes used textbooks available at a price of $30. Anne,
Brad, Carolyn, Darren and Erica plan to buy books and they have their own willingness.
Do they gain from purchases and if so, how much?
Table 1. Consumer Surplus When the Price of a Used Textbook Is $30
Individual
consumer
Williness to pay surplus =
Potential Buyer Price paid ($)
($) willingness to
pay - price paid
($)
Ann 59 30 29
Brad 45 30 15
Carolyn 35 30 5
Darren 25 - -
Erica 10 - -
Total Consumer surplus 49

At a price of $30, Anne, Brad, and Carolyn buy a book but Darren and Erica do not.
Anne, Brad, and Carolyn get individual consumer surpluses equal to the difference between
their willingness to pay and the price. Both Darren and Erica have a willingness to pay less
than $30, so are unwilling to buy a book in this market; they receive zero consumer surplus.
The total consumer surplus is the sum of the individual consumer surpluses of Anne, Brad, and
Carolyn equal to $29 + $15 + $5 = $49.