Tutorial 4 for week 5

Solution

Questions on efficiency

Question 1 (From Mctaggart 7th edition)

Figure 5.4 illustrates the competitive market for mobile phones.

a. What are the equilibrium price and equilibrium quantity of mobile phones?
The equilibrium price is $30 per mobile phone and the equilibrium quantity is 100 mobile phones per
month.
b. Shade in and label the consumer surplus at the competitive equilibrium.
In Figure 5.5 the consumer surplus is the shaded area A.
 c. Shade in and label the producer surplus at the competitive equilibrium.
In Figure 5.5 the producer surplus is the shaded area B.
d. Calculate total surplus at the competitive equilibrium.
The total surplus is equal to the sum of the consumer surplus plus the producer surplus, or the
triangle with area A + area B. The amount of the total surplus equals ½ × ($60 per mobile phone − $15
per mobile phone) × 100 mobile phones, which is $2,250.
e. Is the market for mobile phones efficient?
The equilibrium quantity of mobile phones is 100 mobile phones per month because this is the quantity
at which the demand and supply curves intersect. The demand curve is the marginal social benefit curve
and the supply curve is the marginal social cost curve. Therefore the efficient quantity of mobile phones
is 100 mobile phones per month because this is the quantity at which these two curves intersect. This
competitive market is efficient if it is at the equilibrium quantity. This is where marginal social
benefit equals marginal social cost and that means efficient quantity.

Question 2

The table gives the demand and supply schedules for sunscreen.
Sunscreen factories are required to limit production to 100 bottles a day.

Quantity demanded Quantity

Price supplied
(dollars per bottle) (bottles per day)
0 400 0
5 300 100
10 200 200
15 100 300
20 0 400

a. What is the maximum price that consumers are willing to pay for the 100th bottle?
Consumers are willing to pay a maximum price of $15 for the 100th bottle of sunscreen. The demand
schedule shows the maximum price that consumers will pay for each bottle of sunscreen. The maximum
price that consumers will pay for the 100th bottle is $15.
b. What is the minimum price that producers are willing to accept for the 100th bottle?
Producers are willing to accept a minimum price of $5 for the 100th bottle of sunscreen. The supply
schedule shows the minimum price that producers will accept for each bottle of sunscreen. The
minimum price that producers will accept for the 100th bottle is $5.
c. Describe the situation in this market.
There is less than the efficient quantity being produced. The efficient quantity is the equilibrium quantity,
200 bottles.
Indicate whether the statement is true or false.

1. When the market price of a good falls, consumer surplus increases because (1) the consumer surplus
received by existing buyers becomes larger and (2) more buyers enter the market at the lower price.
  a. True
  b. False

2. The highest price a buyer is prepared to spend on a good, is that buyer’s willingness to pay.
  a. True
  b. False

3. Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced
and distributed.
  a. True
  b. False

4. If a consumer is not willing to purchase a product, her willingness to pay must be below the market
price.
  a. True
  b. False

5. An allocation of resources that maximises total surplus is said to be equitable.

  a. True
  b. False

6. Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum
amount of output was produced from a given number of inputs.
  a. True
  b. False

Multiple choice
7. Refer to Graph above. When the price falls from P2 to P1, which of the following is NOT true?
  a. the sellers who still sell the good are worse off because they now receive less
  b. some sellers leave the market because they are not willing to sell the good at the lower
price
  c. the total cost of what is now sold by sellers is actually higher
  d. all of the above are correct

8. In Graph above, at the market-clearing equilibrium, total producer surplus is represented by the area:
  a. F
  b. F + G
  c. D + E + F
  d. D + E + F + G + H

Graph

9. Refer to Graph above. What area represents producer surplus when the price is P 1?
  a. A
  b. B
  c.  C
  d. D

10. Amy buys a new dog for $1500. She receives consumer surplus of $300 on her purchase. Her
willingness to pay is:
  a. $150
0
  b. $300
  c. $120
0
  d. $180
0

11. Suppose that the demand for coffee rises. This means that the producer surplus for coffee will:
  a. increase
  b. decrease
  c. increase or decrease because the effect is ambiguous
  d. neither increase nor decrease because the price hasn’t
changed

12. Lee is willing and able to pay $250 for an iPhone, but is able to buy it for $199. Lee’s consumer
surplus is:
  a. $0
  b. $51
  c.  $19
9
  d. $25
0

13. Pollution is a classic example of:

  a. cost minimisation by firms
  b. corporate greed
  c.  market failure
  d. an efficient market
outcome

14. Sharon is bidding on a new camera on an internet auction. She values the camera at $700 and wins the
auction with a bid of $650, therefore:
  a. Sharon’s willingness to pay is $700 and her consumer surplus is 0
  b. Sharon’s willingness to pay is $700 and her consumer surplus is $50
  c. Sharon’s willingness to pay is $650 and her consumer surplus is $50
  d. Sharon’s willingness to pay is $650 and her consumer surplus is $0

15. A contest is a good way to allocate scarce resources when

A. the decision being made affects a large number of people.
 B. there is no effective way to distinguish among potential users.
C. the efforts of the players are hard to monitor directly.
D. the lines of responsibility are clear.

16. Allocating resources by the order of someone in authority is a allocation method.

a. majority rule B) market price
C) command D) first—come, first-served

17. If a person will rent an apartment only to married couples over 30—years old, that person is
allocating resources using a allocation method.
a. first-come, first-served B) personal characteristics
C) command D) market price