Answers b3c15 e

NSS Exploring Economics 3 (3rd Edition)
Answers to Exercises
Chapter 15 Consumer surplus, producer surplus and total social surplus
Questions
p.5
Test yourself 15.1
The following table shows a consumer’s benefit from the consumption of a good:
Q (units) TB ($) MB ($)
1 10
2 9
3 8
4 34
5 6
a. Complete the above table.
b. Based on the above table, explain why TB is increasing even if MB decreases with
consumption.
*c. Is it possible for TB to fall when consumption exceeds a certain level? If so, what would
happen to MB?
p.11
Test yourself 15.2
Refer to the following table.
Q (units) MB ($)
1 13
2 11
3 9
4 7
5 5
6 3
a. Draw the corresponding demand schedule.
b. How many units would the consumer buy when the price is equal to the following? What
are the corresponding consumer surpluses? (Hint: TB = ∑MB)
i. $9
ii. $5
NSS Exploring Economics 3 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 15)
Test yourself 15.3
The following diagram shows the individual demand curve of a consumer who consumes at
Q1 when the market price is P1.
Indicate how the following will change in the diagram when the market price falls.
a. Quantity demanded
b. Total expenditure
c. Total benefit
d. Marginal benefit of the last unit consumed
e. Consumer surplus
p.24
Test yourself 15.4
The following table shows the total cost schedule of a price taker.
Q (units) 0 1 2 3 4
Total cost ($) 10 30 60 100 150
a. Draw the corresponding supply schedule.
b. Find the profit-maximising outputs, producer surpluses and profits if the market price is
i. $40;
ii. $50.
Test yourself 15.5
The following diagram shows the individual supply curve of a price taker who produces at Q1
when the market price is P1.
Indicate how the following will change when the market price increases.
a. Quantity supplied
b. Total revenue
c. Total variable cost
d. Marginal cost of producing the last unit
e. Producer surplus
p.25
Misconceptions 15.1
The following diagram shows the MC curve of a price-taking garment producer. The
producer is currently producing at Q1 and the market price is P1.
How would (i) the MC curve, (ii) the profit-maximising output, and (iii) the producer surplus
change under each of the following situations? Indicate the changes in the diagram if
applicable. (Hint: a price taker cannot affect the market price.)
a. There is a decrease in the marginal cost.
b. There is a decrease in the fixed cost.
p.27
Misconceptions 15.2
Determine whether the following statements are true or false.
a. When consumer surplus equals producer surplus, total social surplus is maximised.
b. Total social surplus is NOT maximised only when MC is higher than MB because a loss
is incurred.
p.31
Test yourself 15.6
Electric cars have become more popular in recent years. Other factors being constant, how
would the increase in popularity of electric cars affect the following in the gasoline market?
Explain with the aid of a diagram. Assume the gasoline market is perfectly competitive.
a. Consumers’ total expenditure
b. Consumer surplus
c. Producer surplus
d. Total social surplus
Exercises
pp.36-38
Multiple Choice Questions
Choose the best answer.
1.
A consumer’s marginal benefit curve of a good shows
A. his quantities demanded for the good at different prices.
B. the maximum prices he is willing to pay for different units of the good.
C. the total amount he is willing to pay for a given quantity of the good.
D. None of the above
2.
A person’s maximum willingness to pay for a good
A. will increase when the price of the good increases.
B. will decrease when the price of the good increases.
C. is always equal to the market price.
3.
When a consumer’s total benefit increases as a result of an increase in his consumption,
A. the marginal benefit will increase.
B. the marginal benefit will decrease.
C. the market price will increase.
D. the market price will decrease.
4.
Suppose the retail price of cosmetic products decreases and the market demand remains the
same. Which of the following statements are correct?
(1) Consumers’ total benefit from cosmetic products will increase.
(2) Consumers’ total expenditure on cosmetic products will increase.
(3) The marginal benefit of the last unit of cosmetic products consumed will also decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
5.
A used car is priced at $25,000 but John is willing to pay no more than $20,000. After
negotiating with the seller, John buys the car for $19,000. His consumer surplus from the
used car is _______.
A. $1,000
B. $5,000
C. $6,000
D. $19,000
6.
The following table shows the marginal benefit schedule of a consumer for honey melons:
Quantity Marginal Benefit
(units) ($)
1 100
2 90
3 80
4 70
5 60
When the price of honey melons increases from $70 to $80, the consumer surplus will
________.
A. increase by $30
B. increase by $50
C. decrease by $30
D. decrease by $50
7.
Which of the following items about a good should be used to calculate the producer surplus?
(1) The total variable cost of the good
(2) The market price of the good
(3) The quantity transacted of the good
(4) The fixed cost of the good
A. (1), (2) and (3) only
B. (1), (2) and (4) only
C. (2), (3) and (4) only
D. (1), (2), (3) and (4)
8.
The following table shows an individual producer’s cost schedule of producing Good X in a
perfectly competitive market.
Output (units) Total fixed cost ($) Total cost ($)
2 20 40
3 20 80
4 20 130
5 20 190
If the market price of Good X is $60, the producer will produce _______ units and his
producer surplus is _______.
A. 4 … $110
B. 4 … $130
C. 5 … $110
D. 5 … $130
9.
Suppose the price of apples is $5. To maximise profit, a producer produces 20 apples. If the
total variable cost is $60, the marginal cost of the 20th apple is _______ and the producer
surplus is _______.
A. $3 … $40
B. $3 … $60
C. $5 … $40
D. $5 … $60
10.
In a perfectly competitive market, when a firm produces a quantity that maximises its
producer surplus, which of the following statements are correct?
(1) Its marginal cost equals the market price.
(2) Its profit is also maximised.
(3) A decrease in the fixed cost will not affect its output level.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
11.
Study the following diagram.
Which of the following statements about the above diagram is true?

A. Area A must be equal to Area B.
B. Area B must be equal to Area C.
C. Area (A + B) represents the total social surplus.
D. All of the above
12.
Suppose at the current output of Good X, the marginal cost of production is lower than the
marginal benefit. This implies that
A. total social surplus can increase by increasing the output.
B. total social surplus can increase by decreasing the output.
C. the producers should stop producing Good X.
13.
The following diagram shows the market demand and market supply curves of a good in a
price-taking market.
The shift in the market supply curve from S1 to S2 will lead to
A. a decrease in the cost of producing the last unit of the good.
B. a decrease in the market demand for the good.
C. an uncertain change in the producer surplus.
D. a decrease in the consumer surplus.
14.
In a free market, when supply increases,
A. total social surplus may increase or decrease, depending on the percentage changes in
price and quantity transacted.
B. producer surplus increases while consumer surplus remains unchanged.
C. consumer surplus increases while producer surplus remains unchanged.
D. both consumer and producer surpluses increase.
15.
Which of the following statements about market exchange is correct?
A. Producers gain at the loss of consumers.
B. Consumers gain at the loss of producers.
C. Both the consumer and the producer can gain if the transacted price is higher than the
producer’s marginal cost but lower than the consumer’s marginal benefit.
pp.39-40
Short Questions
1.
The following diagram shows a consumer’s demand curve for coffee. At P1, the quantity
demanded is Q1.
Suppose the consumer’s demand increases and at the same time the market price of coffee
decreases. Will the quantity demanded necessarily increase? Will the consumer surplus
necessarily increase? Illustrate your answers in the above diagram. (5 marks)
2.
The following table shows the total cost schedule of a firm operating in a perfectly
competitive market.
Output (units) 0 1 2 3 4 5
Total cost ($) 15 25 40 60 85 115
a. Explain why the total cost may NOT be zero when a firm’s output level is 0. (2 marks)
b. Suppose the market price is $20. Calculate the firm’s profit and producer surplus at the
profit-maximising output level. (5 marks)
3.
The following table shows the production costs of a price-taking firm.
Total fixed cost ($) 2 2 2 2 2 2
Average variable cost ($) ─ 2 3 4 5 6
a. Suppose that the market price of the product is $8. Find the profit-maximising output
level and the profit of the firm. (3 marks)
b. Calculate the firm’s producer surplus at the profit-maximising output level. (2 marks)
4.
The following table shows the cost schedule of a price-taking producer producing jeans in the
short run. The firm aims to maximise its profit.
Total variable cost ($) 70 90 120 160 210 270
Suppose the market price of jeans is $40.
a. Find the firm’s output and its producer surplus. Show your work. (3 marks)
*b. Under what situation will the firm earn zero profit? Show your work. (3 marks)
5.
A firm operates in a perfectly competitive market. Suppose there is an increase in the market
price and the fixed cost of production. WITHOUT using a diagram, explain the effects on
the following:
a. Profit-maximising output
b. Producer surplus
c. Profit (8 marks)
6.
Refer to the following diagram for the umbrella market, which is assumed to be perfectly
competitive.
a. Label the consumer surplus and producer surplus in the above diagram. (2 marks)
b. If the number of rainy days increases, how would the consumer surplus and total social
surplus be affected in the above market? Explain with the aid of the above diagram.
(5 marks)
pp.40-41
Structured Questions
1.
There has been a significant advancement in the production technology of smartphones,
which greatly lowers the production cost of smartphones.
Suppose the market for smartphones is perfectly competitive.
a. With the aid of two separate diagrams, explain the effects of the technological
advancement on consumer surpluses in the markets for
i. smartphones; (5 marks)
ii. digital camera. (5 marks)
b. In Hong Kong, some speculators buy new smartphones from the producers and resell
them in the second-hand market for a ‘profit’.
Keung just bought two new smartphones for $6,000 each. He could resell them in the
second-hand market for $7,500 each. At the end, he chose to sell one in the second-hand
market and kept one for his own use.
i. What is the opportunity cost of keeping the smartphone he has just bought? (1 mark)
ii. Calculate Keung’s producer surplus from reselling the smartphone. For the one he
kept for his own use, determine whether the marginal benefit is higher or lower than
$7,500. (2 marks)
Answers
p.5
Test yourself 15.1
a.
Q (units) TB ($) MB ($)
1 10 10 (= 10 – 0)
2 19 (= 10 + 9) 9
3 27 (= 19 + 8) 8
4 34 7 (= 34 – 27)
5 40 (= 34 + 6) 6
b. Even if MB is decreasing, as long as it is positive, it is added to TB when consumption

increases.
c. Yes, TB may decrease when consumption exceeds a certain level. In this case, MB is
negative.
p.11
Test yourself 15.2
a.
P ($) Qd (units)
3 6
5 5
7 4
9 3
11 2
13 1
b. i. 3 units;
CS = ($13 + $11 + $9) – ($9 × 3) = $6
ii. 5 units;
CS = ($13 + $11 + $9 + $7 + $5) – ($5 × 5) = $20
Test yourself 15.3
a. Quantity demanded increases from Q1 to Q2.

b. Total expenditure changes from Area P1BQ10 to Area P2CQ20. Whether TE increases or
decreases is uncertain.
c. Total benefit increases from Area ABQ10 to Area ACQ20.
d. Marginal benefit of the last unit consumed decreases from P1 to P2.
e. Consumer surplus increases from Area ABP1 to Area ACP2 (or increases by Area P1BCP2).
p.24
Test yourself 15.4
a.
Price ($) 20 30 40 50
Qs (units) 1 2 3 4
b. i. Profit-maximising output
= 3 units;
Producer surplus
= $40 × 3 – ($100 – $10)
= $30
Profit = $30 – $10 = $20
ii. Profit-maximising output
= 4 units;
Producer surplus
= $50 × 4 – ($150 – $10)
= $60
Profit = $60 – $10 = $50
Test yourself 15.5
a. Increases from Q1 to Q2
b. Increases from Area P1BQ10 to Area P2CQ20
c. Increases from Area ABQ10 to Area ACQ20
d. Increases from P1 to P2
e. Increases from Area P1BA to Area P2CA (or: Increases by Area P2CBP1)
p.25
Misconceptions 15.1
a.
i. The MC curve will shift downwards.

ii. The profit-maximising output will increase from Q1 to Q2.
iii. The producer surplus will increase from Area P1CA to Area P1EB.
b. i. A change in fixed cost will not affect the MC curve.
ii. The profit-maximising output remains unchanged.
iii. The producer surplus remains unchanged.
p.27
Misconceptions 15.2
a. False.
TSS is maximised if MB = MC at the quantity transacted. At this quantity, CS may not be
equal to PS.
b. False.
TSS is not maximised whenever MB is not equal to MC. When MB > MC, TSS will
increase if quantity transacted increases. Thus, TSS is not maximised.
p.31
Test yourself 15.6
When electric cars become more popular, the demand for gasoline will decrease.
a. Consumers’ total expenditure decreases from Area P1FQ10 to Area P2EQ20.

b. Consumer surplus decreases from Area AFP1 to Area BEP2.
c. Producer surplus decreases from Area P1FC to Area P2EC.
d. Total social surplus decreases from Area AFC to Area BEC.
Exercises
pp.36-38
Multiple Choice Questions
1. B
2. D
Options A and B are incorrect. A person’s maximum willingness to pay for a good is
independent of its price.
Option C is incorrect. Without government intervention, only the marginal benefit
(maximum willingness to pay for an extra unit) of the last unit consumed is equal to its
price when the consumer surplus is maximised.
3. B
4. B
Option (1) is correct. Consumers’ total benefit increases because more quantity is
consumed.
Option (2) is incorrect. The change in total expenditure depends on the price elasticity of
demand for cosmetic products.
Option (3) is correct. A consumer will consume up to a level where MB = P. Therefore,
when the price decreases, the consumer will increase his quantity demanded so that his
MB will fall to a level equal to the price.
5. A
Consumer surplus = $20,000 – $19,000 = $1,000
6. C
When P = $70, Qd = 4,
CS = $(100 + 90 + 80 + 70) – $70 × 4 = $60
When P = $80, Qd = 3,
CS = $(100 + 90 + 80) – $80 × 3 = $30
Change in CS = $30 – $60 = –$30
7. A
PS = TR – TVC = P × Q – ∑MC
Fixed cost is irrelevant to the calculation of PS.
8. D
The profit-maximising output is 5 units because when Q = 5, MC = $190 – $130 = $60,
which is equal to the market price.
When Q = 5,
PS = TR – TVC = TR – (TC – FC)
= $60 × 5 – ($190 – $20)
= $130
9. C
To maximise profit, the producer will produce up to a level where MC = P. Therefore,
MC = P = $5 when Q = 20.
PS = TR – TVC = $5 × 20 – $60 = $40
10. D
Option (3) is correct. A change in TFC will not affect the MC schedule. Given that the
market price remains unchanged, producer surplus maximising output is not affected.
11. C
Area A = CS
Area B = PS
Area C = TVC
Area (A + B) = CS + PS = TSS
At market equilibrium, CS, PS and TVC may not be equal.
12. A
At Q1, MC < MB, TSS will increase if Q increases.

13. D
Option B is incorrect. A decrease in the market supply of the good will reduce the market
quantity demanded, but not the market demand for the good.
14. D
15. C
Options A and B are incorrect. Both consumers and producers gain from market
exchange.
pp.39-40
Short Questions
1.
The quantity demanded will necessarily increase. (1 mark)
The consumer surplus will necessarily increase. (1 mark)
Indicate on the diagram:
● Rightward shift of demand curve (1 mark)
● Decrease in price and increase in Qd (1 mark)
● Increase in consumer surplus (form Area BCP1 to Area AEP2) (1 mark)
2.
a. In the short run, a firm has to bear the fixed cost even if its output level is zero. (2 marks)
b.
Total cost ($) 15 25 40 60 85 115
Marginal cost ($) — 10 15 20 25 30
The profit-maximising output level is 3 units (at which MC = P = $20). (1 mark)
Profit = TR – TC
= P × Q – TC
= $20 × 3 – $60
= $0 (2 marks)
Producer surplus = Profit + TFC
= $0 + $15
= $15 (2 marks)
OR
Producer surplus = TR – TVC
= P × Q – (TC – TFC)
= $20 × 3 – ($60 – $15)
= $15 (2 marks)
3.
Total fixed cost ($) 2 2 2 2 2 2
Average variable cost ($) — 2 3 4 5 6
Marginal cost ($) — 2 4 6 8 10
a. The profit-maximising output level is 4 units (at which MC = P = $8). (1 mark)
Profit = TR – TC
= P × Q – (TFC + TVC)
= $8 × 4 – ($2 + $20)
= $10 (2 marks)
b. Producer surplus = Profit + TFC
= $10 + $2
= $12 (2 marks)
OR
Producer surplus = TR – TVC = P × Q – TVC
= $8 × 4 – $20
= $12 (2 marks)
4.
a.
Marginal cost ($) — 20 30 40 50 60
When P = $40, profit-maximising output = 5 units because at this output level,
MC = P = $40. (2 marks)
Producer surplus = $40 × 5 – $160 = $40 (1 mark)
b. As the producer is producing in the short run, there is a fixed cost. (1 mark)
Profit = PS – TFC. Profit becomes 0 when TFC is equal to $40. (2 marks)
5.
a. An increase in the fixed cost of production does not affect the MC curve. (1 mark)
As the MC curve is upward sloping, an increase in the market price will lead to an
increase in the profit-maximising output. (2 marks)
b. At a higher price and a higher output level, producer surplus will increase. (2 marks)
c. The change in profit is uncertain. (1 mark)
Profit = PS – TFC. Profit will increase (decrease) if the increase in PS is larger (smaller)
than that of the TFC. (2 marks)
6.
a. Consumer surplus = Area ACP1 (1 mark)
Producer surplus = Area P1CB (1 mark)
b. If the number of rainy days increases, the demand for umbrellas will increase. (1 mark)
As a result, both the consumer surplus and the total social surplus will increase. (1 mark)
● Rightward shift of demand curve (1 mark)
● Increase in consumer surplus (from Area ACP1 to Area EFP2) (1 mark)
● Increase in total social surplus (from Area ACB to Area EFB) (1 mark)
(Note: Assume parallel shift of demand curve.)
pp.40-41
Structured Questions
1.
a. i. Technological advancement in smartphone production will lead to an increase in
supply or a decrease in MC. As a result, the market price will decrease and the
quantity transacted will increase. (2 marks)
Consumer surplus will increase. (1 mark)
● Rightward shift of supply curve / Downward shift of MC curve (1 mark)
● Increase in CS (from Area AE1P1 to Area AE2P2) (1 mark)
ii. Smartphones can be a substitute for digital cameras. When the price of smartphones
decreases, the demand for digital cameras will decrease, leading to a decrease in both
the equilibrium price and quantity. (2 marks)
As a result, the consumer surplus will decrease. (1 mark)
● Leftward shift of demand curve (1 mark)
● Decrease in CS (from Area AE1P1 to Area BE2P2) (1 mark)
b. i. The cost of keeping the smartphone is its resale value, i.e., $7,500. (1 mark)
ii. Producer surplus from reselling the smartphone = $7,500 – $6,000 = $1,500 (1 mark)
The marginal benefit of the smartphone he kept is higher than $7,500. (1 mark)

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NSS Exploring Economics 3 (3rd Edition)

Chapter 15 Consumer surplus, producer surplus and total social surplus

Choose the best answer.

Which of the following statements about the above diagram is true?

b. Even if MB is decreasing, as long as it is positive, it is added to TB when consumption

a. Quantity demanded increases from Q1 to Q2.

i. The MC curve will shift downwards.

a. Consumers’ total expenditure decreases from Area P1FQ10 to Area P2EQ20.

At Q1, MC < MB, TSS will increase if Q increases.

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