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POLC 6313 – Policy Analysis I: Microeconomics

Problem Set #2 (Due Date: 10/5)
1. If the demand for a good does NOT change, how will an increase in the price of that
good affect the consumer surplus from it?
As defined in our notes, Consumer surplus is the difference between market
price and what consumers (as individuals or the market) would be willing to pay.
If demand for a good does NOT change, an increase in the price of that good will
decrease the consumer surplus. As shown below in my graph, the pink shaded
area decreases to the smaller red area.

2. What is producer surplus?

Producer surplus is the difference between market price and the price at which
firms are willing to supply the product. See below.

3. What is the significance of the concepts "consumer surplus" and "producer surplus"?
To understand the significance of these concepts we must be understand that
consumer surplus is the difference between market price and what consumers
(as individuals or the market) would be willing to pay, while producer surplus is
the difference between market price and the price at which firms are willing to
supply the product. Consumer surplus and producer surplus together represent
total surplus, in other words it is the sum of the producer and consumer surplus.
As economists we want society to achieve allocative efficiency because it
provides the greatest possible level of well-being for society given a limited set
of resources. Thus, when examining concepts of consumer surplus and producer
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surplus we take into account things such as deadweight loss, wasted resources,
etc., essentially anything that causes inefficiency.

4. The figure below shows the market demand curve for pizza.
a) What is the marginal social benefit of the 20th pizza?
The marginal social benefit of the 20th pizza, which is measured by the
amount people are willing to pay for the additional unit of a good or
service, is 10 dollars per pizza.
b) What is the maximum price a consumer is willing to pay for the 20th pizza?
According to this figure, the maximum price a consumer is willing to pay
for the 20th pizza is 10 dollars.
c) If the price of a pizza is $6, what is the consumer surplus of the 20th pizza?
If the price of a pizza is $6, the consumer surplus of the 20 th pizza is $4.
Price at (Q) 20 – Price at (Q) 40 = $10-$6= $4
See below.
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d) If the price of a pizza is $10, what is the consumer surplus?

If a price of a pizza is $10, the consumer surplus of the 20 th pizza is 40.
See below.

e) If the price of a pizza is $6, what is the consumer surplus?

If the price of a pizza is $6, then the consumer surplus is $160.
See below.

5. The diagram below depicts the market demand for, and market price of, buckets of raw oysters
in Orlando.
a) What is the consumer surplus of the person who buys the 100th bucket of oysters?
The consumer surplus of the person who buys the 100th bucket of oysters is $6.
Price at (Q) 100th – Market Price = $12-$6= $6.
See Below.
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b) What is the consumer surplus of the person who buys the 200th bucket of oysters?
The consumer surplus of the person who buys the 200th bucket of oysters is $3.
Price at (Q) 200th – Market Price = $9-$6= $3.
See Below.

c) What is the consumer surplus of the person who buys the 300th bucket of oysters?
The consumer surplus of the person who buys the 300th bucket of oysters is 0.
Price at (Q) 300th – Market Price = $6-$6= $0.
See Below.

d) What is the consumer surplus in the market?

The consumer surplus in the market is $1350. See below.
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6. The figure below shows the market supply curve for pizzas
a) What is the marginal social cost of the 20th pizza?
It is $6.

b) What is the minimum supply price of the 20th pizza?

It is $6.

c) If the price is $6 per pizza, what is the producer surplus for the 20th pizza?
If the price is $6 per pizza the producer surplus for 20th pizza is 0.

d) If the price is $6 per pizza, what is the total producer surplus?

If the price is $6 per pizza, the total surplus is 20. See below.
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e) If the price is $8 per pizza, what is the total producer surplus?

If the price is $8 per pizza, the total surplus is 80. See below.

f) If the price is $10 per pizza, what is the total producer surplus?
If the price is $10 per pizza, the total surplus is 180. See below.

7. The table below gives the demand and supply schedules for bread. Assume that the only
people who benefit from bread are the people who consume it and the only people who
bear the cost of bread are the people who produce it
a) What is the maximum price that consumers are willing to pay for the 80th loaf of
bread?
The max price consumers are willing to pay for the 80th loaf of bread is
$1.40.
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b) What is the minimum price that producers are willing to accept to produce 200
loaves of bread?
The minimum price consumers are willing to accept to produce 200
loaves of bread is $1.10. See below.

c) What is the efficient quantity of bread?

The efficient quantity of bread is 160. See below.

d) If the market is efficient, what is the consumer surplus?

If market is efficient, consumer surplus is $64. See below.
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e) If the market is efficient, what is the producer surplus?

If market is efficient, producer surplus is $32. See below.

f) If one firm owns all the bread outlets and sells 120 loaves per day, what is the
deadweight loss (if any)?
If one firm owns all the bread outlets and sells 120 loaves per day, the deadweight
loss is 6. See below.

8. The figure below shows the market for hot dogs.

a) What is the maximum price consumers are willing to pay for the 25th hot dog?
The max price they are willing to pay for the 25th hot dog is $4. See below.
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b) What is the efficient quantity?

The efficient quantity is 75. See below.

c) Suppose that the production was limited to 25 hot dogs. In the figure, indicate
the amount of the deadweight loss.

9. In a supply and demand diagram, illustrate a price floor that affects the market’s price
and quantity and a price floor that has no effect on the price and quantity.
Price floor: a minimum price buyers are required to pay for a good or service
(usually set ABOVE equilibrium).
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10. The figure below illustrates the market for antifreeze. Suppose the government decides
to implement an $8 sales tax on the sellers for every gallon of antifreeze sold.
a) In the figure, illustrate the effect the tax has on the market for antifreeze.

b) What is the equilibrium price of a gallon of antifreeze before the tax? What is the
price paid by buyers after the tax?
The equilibrium price of a gallon of antifreeze before the tax $4.00. After
the tax, the price paid by buyers is $10.
Original (without tax):
(P1) = $4.00
(Q1)= 8
After Tax:
P2=$10.00
Q2= 4
c) What is the equilibrium quantity of antifreeze before the tax? What is the
equilibrium quantity after the tax?
The equilibrium quantity of antifreeze before the tax is 8. The equilibrium
quantity after tax is 4.
Original (without tax):
(P1) = $4.00
(Q1)= 8
After Tax:
P2=$10.00
Q2= 4
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d) What is the revenue collected by the government from this tax?

The revenue collected by the government from this tax is $32,000.
See Below.

e) Do buyers or sellers bear the largest incidence of the tax?

Buyers/Consumer bear the largest incidence of tax. See below.

11. Illustrate the deadweight loss created by the tax.