Microeconomics Canadian 1st Edition Karlan Solutions Manual 1

Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual
Solution Manual for Microeconomics Canadian 1st

Edition Karlan Morduch Alam Wong 0070265143
9780070265141
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CHAPTER 5
EFFICIENCY
Chapter Overview
In this chapter we introduce the concepts of willingness to pay and willingness to sell, which
help explain when individual buyers and sellers will choose to make a trade. We also discuss
what it means to measure consumer and producer surplus and show that the market
equilibrium is efficient because it maximizes total surplus.
As we’ll see in the next chapter, surplus and deadweight loss are powerful tools for
understanding the implications of business ideas and public policies. Who will benefit from the
policy? Who will be harmed by it? What effect will it have on the economy overall? The
language of surplus, efficiency, and distribution of benefits is particularly helpful for getting to
the bottom of controversial decisions. Later in the book, we will describe important cases
where the efficiency rule about market equilibrium does not always hold true, and we’ll see
how surplus can also help us understand these cases.
Karlan 1CE Instructor’s Manual: Chapter 5

Copyright © 2017 McGraw-Hill Education. All rights reserved.
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Macroeconomics 1CE
Learning Objectives
LO 5.1: Use willingness to pay and willingness to sell to determine supply and demand at a
given price.
LO 5.2: Calculate consumer surplus based on a graph or table.
LO 5.3: Calculate producer surplus based on a graph or table.
LO 5.4: Calculate total surplus based on a graph or table.
LO 5.5: Define efficiency in terms of surplus, and identify efficient and inefficient situations.
LO 5.6: Describe the distribution of benefits that results from a policy decision.
LO 5.7: Define and calculate deadweight loss.
LO 5.8: Explain why correcting a missing market can make everyone better off.
Chapter Outline
OPENING STORY: A BROKEN LASER POINTER STARTS AN INTERNET REVOLUTION

Willingness to Pay and Sell (LO 5.1)
Willingness to Pay and the Demand Curve
Willingness to Sell and the Supply Curve
BOX FEATURE: REAL LIFE – HAGGLING AND BLUFFING
Measuring Surplus
BOX FEATURE: FROM ANOTHER ANGLE – HOW MUCH WOULD YOU PAY TO KEEP THE
INTERNET FROM DISAPPEARING?
Consumer Surplus (LO 5.2)
Producer Surplus (LO 5.3)
Total Surplus (LO 5.4)
BOX FEATURE: REAL LIFE – AIRWAVES THAT COST $2.1 bILLION
Using Surplus to Compare Alternatives
Market Equilibrium and Efficiency (LO 5.5)
Changing the Distribution of Total Surplus (LO 5.6)
Deadweight Loss (LO 5.7)
Missing Markets (LO 5.8)
BOX FEATURE: WHAT DO YOU THINK – KIDNEYS FOR SALE
Beyond the Lecture
Class Activity: Consumer Surplus and Producer Surplus (LO 5.2, LO 5.3)
Class discussions that highlight differences in consumer surplus and producer surplus between
different individuals can help students to understand the concepts. It is important to try to get
students to consider the maximum that they would pay for something and the minimum that

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Macroeconomics 1CE
they would accept. There is often a difference between the market price and the price they
would pay or accept.
1. Have the class choose a concert for a popular singer or band. Find out who would pay
the most in the class to see a concert. Then compare this to the actual price of attending
the concert. You can then ask other students how much they would pay for the concert.
Some may not even be willing to attend for free. See the Pollstar average ticket prices
here.
2. Ask students how much they would need to be paid to perform a difficult and
potentially dangerous job. Consider Alaskan crab fishing (read an article about it here).
How much do students need to be paid relative to actual pay? What would their
producer surplus be?
Writing Assignment/Class Discussion: Market Equilibrium and Efficiency (LO 5.5)

Have students read Joel Waldfogel’s The Deadweight Loss of Christmas (1993 American
Economic Review 83:5, pp. 1328-1336). This may be a slightly difficult read for some students,
but most can understand the concept. Have students write a brief essay regarding the potential
for deadweight loss with gift-giving, and consider the following questions for class:
1. Why might there be a deadweight loss associated with gift-giving?
2. Who is most likely to give you a gift with a large deadweight loss? Who is most likely to
give you a gift that has little or no deadweight loss?
3. Why doesn’t everyone simply give cash as a gift?
Also, you may want to consider a brief clip from the movie Old School (show 12:40-13:30 and
48:20-49:00). In the movie, Will Ferrell tries to give a toaster that he received as a gift to others.
Class Discussion: Missing Markets (LO 5.8)

In order to highlight how change and technology can impact missing markets, have students
consider the impact of the internet on consumer and producer surplus. Many students likely do
not remember the pre-internet age, so this can be a nice small group discussion in class or in an
online environment. You can use this article from The Economist to start a discussion. Have
students consider the following:
1. What is the impact of the internet on producer and consumer surplus? What is the
impact of overall surplus?
2. What was the impact of the internet on transactions costs associated with trades?
Solutions to End-of-Chapter Questions and Problems
Review Questions

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Macroeconomics 1CE
1. Bill is a professional photographer. His camera is broken, and he needs a new one within
the next hour, or he will miss an important deadline. Lisa is a high-school student who
doesn’t have a camera but wants to get one to take pictures at her prom next month. Who
do you think would have a higher willingness to pay for a particular camera today? Why?
[LO 5.1]
Answer: Bill will have the higher willingness to pay. He needs a camera for his job and he
has no time to spare looking. Meeting his important deadline depends on him finding a
camera within the next hour. Bill’s options are limited and his willingness to pay will reflect
that. While Lisa would like to have a camera for her prom night, Lisa has time to look for the
best deal. And if she never found a camera priced at or below her reservation price, Lisa
could rely on friends and Facebook for prom photos. The fact that Lisa has more time and
other options for photos will make her willingness to pay less than Bill’s.
2. You are in the market for a new couch and have found two advertisements for the kind of
couch you want to buy. One seller notes in her ad that she is selling because she is moving
to a smaller apartment, and the couch won’t fit in the new space. The other seller says he is
selling because the couch doesn’t match his other furniture. Which seller do you expect to
buy from? Why? (Hint: Think who would be the more motivated seller.) [LO 5.1]
Answer: You would expect to buy from the seller whose couch won’t fit in the new space.
This seller will probably be willing to sell at a lower price because she does not have the
option of keeping the couch if she can’t get a higher price. She needs to sell the couch and
has revealed as much to you in her advertisement. The other seller may not like the fact
that his couch doesn’t match his other furniture, but he does have the option of keeping the
couch if he can’t find a buyer to pay what he thinks it’s worth. You will probably get a
better deal from the first seller.
3. Suppose you are at a flea market and are considering buying a box of vintage records. You
are trying to bargain down the price, but the seller overhears you telling a friend that you
are willing to pay up to $50. Why is your consumer surplus now likely to be lower than it
would have been if the seller hadn’t overheard you? [LO 5.2]
Answer: Now that the seller knows your highest willingness to pay (how much the records
are worth to you), she knows she doesn’t have to accept your lower offers. She will charge
you $50, knowing that you are going to purchase at that price. If you pay exactly what
something is worth to you, you will have no consumer surplus. Your surplus would be
greater if you were able to buy the box for less than $50, but you have unknowingly
revealed your willingness to pay more.

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Macroeconomics 1CE
4. Consider a market in equilibrium. Suppose supply in this market increases. How will this
affect consumer surplus? Explain. [LO 5.2]
Answer: If supply increases, equilibrium price will decrease. This is a movement along the
demand curve. The lower equilibrium price will mean more consumer surplus.
5. You currently have a television that you want to sell. You can either pick a price and try to
sell it at a yard sale or auction it off on eBay. Which method do you think will yield a higher
producer surplus? Why? [LO 5.3]
Answer: Auctioning the television on eBay should yield a higher price. eBay will give you
access to many more consumers than those who might stop by your yard sale. And
auctioning the television will force consumers to compete with each other for your
television and reveal their willingness to pay.
6. Consider a market in equilibrium. Suppose demand in this market decreases. How will this
affect producer surplus? Explain. [LO 5.3]
Answer: If demand decreases, equilibrium price will decrease. This is a movement along the
supply curve. The lower equilibrium price will mean less producer surplus.
7. Consider the market for plane tickets to the Caribbean. A bad winter in Eastern and Central
Canada increases demand for tropical Caribbean vacations, shifting the demand curve to the
right. The supply curve stays constant. Does total surplus increase or decrease? (Hint: Sketch
out a generic supply and demand curve and look at what happens to the size of the triangle
that represents total surplus when the demand curve shifts right.) [LO 5.4]
Answer: Willingness to buy is represented by the demand curve. When demand increases
and supply (willingness to sell) stays the same, total surplus increases. You can see this by
sketching a graph like the one below and looking at what happens to total surplus when the
market demand shifts. When demand = D1, total surplus = Area A. When demand = D2,
total surplus = Area A + Area B.

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Macroeconomics 1CE
8. You need to paint your fence but you really hate this task. You decide to hire the kid next
door to do it for you. You would be willing to pay him up to $100, but you start by offering
$50, expecting to negotiate. To your great surprise, he accepts your $50 offer. When you
tell your friend about the great deal you got, she is shocked that you would take advantage
of someone. What can you tell your friend to assure her that you did not cheat the kid next
door? [LO 5.4]
Answer: You can tell your friend that as long as the kid next door was not afraid of you and
didn’t feel that he had no choice but to accept your offer, the trade was voluntary. You
certainly received surplus from the exchange since you would have been willing to pay
more. But just because you hate painting and were willing to pay more does not mean that
it was a zero-sum game. The kid next door might like to paint and be outdoors and may
have been willing to do the job for even less than $50. By accepting your offer, the kid
signaled that $50 was at least equal to his reservation price. If he would have accepted less
than $50 to do the job, then he had surplus from the exchange as well.
9. Ontario has rent control for any rental unit built before 1991. Rent control —in essence, is a
price ceiling on rent. Is the market for apartments built before 1991 likely to be efficient or
inefficient? What does this imply for the size of total surplus? [LO 5.5]
Answer: The market for apartments built before 1991 under the maximum price policy is
inefficient. Efficiency means maximizing total surplus. If the maximum price policy moves
the price away from its equilibrium price (which it does), surplus will not be maximized. Any
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Macroeconomics 1CE
price other than the equilibrium price will not maximize surplus. It should be noted that the
goal of placing a maximum price on apartments is not to make the market efficient. It is an
attempt to make the market more equitable. We will address the tradeoff between
efficiency and equity more as we move forward.
10. Total surplus is maximized at the equilibrium price and quantity. When demand increases,
price increases. Explain how total surplus is still maximized if price increases due to an
increase in demand. [LO 5.5]
Answer: When demand increases, the market moves to a new equilibrium. The price will be
higher but surplus will still be maximized because the market is still functioning at its (new)
equilibrium price.
11. Atlantic Provinces of Canada have a price ceiling on gasoline to keep it affordable. How does
this policy affect producer and consumer surplus? How does this policy affect total surplus?
[LO 5.6]
Answer: A price ceiling (maximum price) below the equilibrium price would reduce
producer surplus. There would be fewer trades and the trades that did occur would happen
at a lower price. For consumers, the story is a bit more complicated. Some consumers
would gain and some would lose surplus. Consumers who were able to trade would do so at
a lower price. They would gain surplus. However, because there would be fewer trades,
some consumers would no longer be able to trade and would lose surplus. In the end, the
losers (producers and some consumers) would lose more than the winners (consumers able
to find trades) would gain, and total surplus would decrease.
12. Consider a policy to help struggling farmers by setting a minimum trade price for wheat.
Will this be an effective way to increase their surplus? Explain. [LO 5.6]
Answer: Minimum prices are also inefficient and cause fewer trades to occur than would
occur at the equilibrium price. In the case of a minimum price for wheat, some farmers
would gain because they will receive a higher price than the equilibrium price. However,
fewer trades will occur and some farmers will be unable to trade. Remember that at a price
above equilibrium, quantity supplied exceeds quantity demanded and there is excess
supply.
13. If rent control creates deadweight loss for both consumers and suppliers of housing, why
are consumers often in favor of this policy? [LO 5.7]
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Macroeconomics 1CE
Answer: Even though rent control causes fewer trades and deadweight loss, some
consumers will benefit by the lower prices. Consumers support the policy if they believe
they will be among those who are able to find housing at lower prices.
14. Suppose price is 5 percent above equilibrium in two markets: a market for a necessity and a
market for a luxury good. All else equal (including supply conditions), in which market do
you expect deadweight loss to be greater? Explain. [LO 5.7]
Answer: Deadweight loss would be greater in the market for the luxury good. This is
because demand will be more elastic. Consumers will react more (in terms of buying less of
a good) to a higher price when demand is elastic.
15. Your grandmother likes old-fashioned yard sales and doesn’t understand why everyone is so
excited about eBay. Explain to her why the creation of a market that enables people who
don’t live in the same town to buy and sell used goods increases total surplus over the yard-
sale market. [LO 5.8]
Answer: Yard sales are nice because you get to meet people and chat with them face to
face, but eBay helps people connect across great distances. If you are looking to buy
something in particular and are limited to looking at yard sales in your town, you may not
find what you’re looking for. If you do a search on eBay, though, your chances are much
greater that you will find somebody selling that item. And if you want to sell something,
you will have access to many more buyers on eBay than those that might wander by your
yard sale. It’s also possible that more than one person will be interested in what you are
selling and their competition for your item will get you a much better price.
16. At Zooey’s elementary school, children are not allowed to trade lunches or components of
their lunches with other students. Lunchroom monitors watch closely and strictly enforce
this policy. Help Zooey make an argument about the inefficiency of this policy to her
principal. [LO 5.8]
Answer: The school policy is preventing a market that would generate mutually beneficial
trades. A student who likes bologna sandwiches better than tuna sandwiches might trade
her tuna sandwich to another student who thinks the bologna sandwich in her lunch pail is
gross. Both students are happier after this trade. The ban on lunch trading prevents the
surplus that would be generated by allowing lunch items to be allocated according to
voluntary trades from being realized. (Of course, the principal might care less about the
preferences of the students than those of their parents!)
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Macroeconomics 1CE
Problems and Applications
1. Answer the following questions based on Tables 5P-1 and 5P-2. [LO 5.1]
a. What is the quantity demanded at $10? What is the quantity supplied at $10?
b. What is the quantity demanded at $25? What is the quantity supplied at $25?
Answer:
a. Quantity demanded is 8 units. Consumers B, C, D, E, F, G, H, and I (all but A) are all
willing to pay at least $10. Quantity supplied is 2. Only suppliers B and H are willing to
sell at a price of $10?
b. Quantity demanded is 3 units. Only consumers B, E, and F are willing to pay $25.
Quantity supplied is 7. Suppliers A, B, D, E, F, H, and I (all but C and G) are willing to sell
at a price of $25.
2. Use the information below to construct a step-graph of the six consumers’ willingness to
pay. [LO 5.1]
Answer:

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Macroeconomics 1CE
3. Use the information below to construct a step-graph of the six sellers’ willingness to sell.
[LO 5.1]
Answer:

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Macroeconomics 1CE
4. Based on Table 5P-1, calculate consumer surplus for each consumer when the price is $17.
What is the total consumer surplus at this price? [LO 5.2]
Answer:
Consumer A: $0 (WTP < $17).
Consumer B: $10 ($27 - $17 = $10).
Consumer C: $0 (WTP < $17).
Consumer D: $4 ($21 - $17 = $4).
Consumer E: $16 ($33 - $17 = $16).
Consumer F: $18 ($35 - $17 = $18).
Consumer G: $0 (WTP < $17).
Consumer H: $0 (WTP < $17).
Consumer I: $5 ($22 - $17 = $5).
Total consumer surplus: 0 + 10 + 0 + 4 + 16 + 18 + 0 + 0 + 5 = $53.
5. Use the market represented in Figure 5P-1 to draw the consumer surplus when the market
is in equilibrium. What is the value of consumer surplus at the equilibrium price? [LO 5.2]

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Macroeconomics 1CE
Answer: The consumer surplus is the area under the demand curve and above $7. The value
of consumer surplus at this price is 0.5 base × height = 0.5(40)(4) = $80.
6. Use the market represented in Figure 5P-1 to draw the consumer surplus when the market
price is $8. What is the value of consumer surplus at this price? [LO 5.2]
Answer: The consumer surplus is the area under the demand curve and above $8. The value
of consumer surplus at this price is 0.5 base × height = 0.5(30)(3) = $45.

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Macroeconomics 1CE
7. Based on Figure 5P-1, consumer surplus is $0 when price is greater than or equal to what
price? [LO 5.2]
Answer: Consumer surplus is $0 when price is ≥ $11.
8. Based on Table 5P-2, calculate producer surplus for each producer when the price is $12.
What is total producer surplus at this price? [LO 5.3]
Answer:
Seller A: $0 (WTS > $12).
Seller B: $8 ($12 — 4 = $8).
Seller C: $0 (WTS > $12).
Seller D: $0 (WTS > $12).
Seller E: $0 (WTS = $12).
Seller F: $0 (WTS > $12).
Seller G: $0 (WTS > $12).
Seller H: $3 ($12 — $9 = $3).
Seller I: $0 (WTS > $12).
Total producer surplus = 0 + 8 + 0 + 0 + 0 + 0 + 0 + 3 + 0 = $11.

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Macroeconomics 1CE
9. Use the market represented in Figure 5P-1 to draw the producer surplus when the market is
in equilibrium. What is the value of producer surplus at the equilibrium price? [LO 5.3]
Answer: The producer surplus is the area above the supply curve and below $7. The value
of producer surplus at this price is 0.5 base × height = 0.5(40)(4) = $80.
10. Use the market represented in Figure 5P-1 to draw the producer surplus when the market
price is $5. What is the value of producer surplus at this price? [LO 5.3]
Answer: The producer surplus is the area above the supply curve and below $5. The value
of producer surplus at this price is 0.5 base × height = 0.5(20)(2) = $20.

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Macroeconomics 1CE
11. Based on Figure 5P-1, producer surplus is $0 when price is less than or equal to what price?
[LO 5.3]
Answer: Producer surplus is $0 when price is ≤ $3.
12. What is the value of the existence of the market represented in Figure 5P-2? [LO 5.4]
Answer: The value of the existence of a market is given by the total surplus possible in that
market. In Figure 5P-2, the total surplus that is possible is 0.5(70)(44 — 2) = $1,470.
13. Consider the market represented in Figure 5P-3. [LO 5.4]

a. Calculate total surplus when demand is D1.
b. Calculate total surplus when demand decreases to D2.
Answer: Total surplus when demand is D1: 0.5(100)(22 — 6) = $800. Total surplus when
demand decreases to D2: 0.5(50)(16 — 6) = $250.

a. Calculate total surplus when supply is S1.
b. Calculate total surplus when supply increases to S2.
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Macroeconomics 1CE
Answer: Total surplus when supply is S1: 0.5(50)(50 — 20) = $750. Total surplus when
supply increases to S2: 0.5(75)(50 — 10) = $1,500.

a. Draw the consumer surplus and producer surplus if the market is functioning at the
equilibrium price and quantity. Compute the total surplus if the market is functioning at
the equilibrium price and quantity.
b. Compute the consumer surplus and producer surplus if the price is $30.
c. Compute the consumer surplus and producer surplus if the price is $10.
Answer:
a. Total surplus = 0.50(40)(4) = $80.
a. Consumer surplus = 0.50(40 - 30)(2) = $10. Producer surplus = (30 - 10)(2) + 0.50(10)(2) =
$50. Total surplus = $60.
b. Consumer surplus = 0.50(40 - 30)(2) + (30 - 10)(2) = $50. Producer surplus = 0.50(10)(2) =
$10. Total surplus = $60.

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Macroeconomics 1CE
16. Assume the market for wine is functioning at its equilibrium. For each of the following
situations, say whether the new market outcome will be efficient or inefficient. [LO 5.5]
a. A new report shows that wine is good for heart health.
b. The government sets a minimum price for wine, which increases the current price.
c. An unexpected late frost ruins large crops of grapes.
d. Grape pickers demand higher wages, increasing the price of wine.
Answer:
a. Efficient. Demand increases and the market functions at its new equilibrium.
b. Inefficient. Setting a minimum price will move the market away from its equilibrium.
c. Efficient. Supply decreases and the market functions at its new equilibrium.
d. Efficient. Supply decreases and the market functions at its new equilibrium.
17. Based on Figure 5P-6, choose all of the following options that are true. [LO 5.5, 5.6]
a. The market is efficient.
b. Total surplus is higher than it would be at market equilibrium.
c. Total surplus is lower than it would be at market equilibrium.
d. Producer surplus is lower than it would be at market equilibrium.
e. Consumer surplus is lower than it would be at market equilibrium.
Answer: C and E. Total surplus is lower than it would be at market equilibrium. Consumer
surplus is lower than it would be at market equilibrium.
18. In which of the following situations can you say, without further information, that consumer surplus
decreases relative to the market equilibrium level? [LO 5.6]
a. Your province passes a law that pushes the interest rate (i.e., the price) for payday loans below
the equilibrium rate.
b. The federal government enforces a law that raises the price of dairy goods above the
equilibrium.
c. Your city passes a local property tax, under which buyers of new houses have to pay an
additional 5 percent on top of the purchase price.
d. The US government lowers the effective price of food purchases through a food-stamp program.
Answer: B and C. The federal government enforces a law that raises the price of dairy
goods above the equilibrium. Your city passes a local property tax, under which buyers of
new houses have to pay an additional 5 percent on top of the purchase price.
19. Use the areas labeled in the market represented in Figure 5P-7 to answer the following questions.
[LO 5.6]
a. What area(s) are consumer surplus at the market equilibrium price?
b. What area(s) are producer surplus at the market equilibrium price?
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Macroeconomics 1CE
c. Compared to the equilibrium, what area(s) do consumers lose if price is P2?

d. Compared to the equilibrium, what area(s) do producers lose if the price is P 2?
e. Compared to the equilibrium, what area(s) do producers gain if the price is P2?
f. Compared to the equilibrium, total surplus decreases by what area(s) if the price is P 2?
Answer:
a. A, B, C.
b. D, E.
c. B, C.
d. E.
e. B.
f. C, E.
20. Figure 5P-8 shows a market for cotton, with the price held at $0.80 per pound. Calculate the
dead-weight loss caused by this policy. [LO 5.7]
Answer: Deadweight loss = 0.5($.30)(20m) = $3 million

a. Suppose the government sets a minimum price of $25 in the market. Calculate the
deadweight loss.
b. Suppose the government sets a maximum price of $25 in the market. Calculate the
deadweight loss.
Answer:
a. Deadweight loss = 0.5(10)(12) = $60.
b. Deadweight loss = $0. If the maximum price is $25, the market will function at its
equilibrium price, which is $20. Since the price ceiling is above the equilibrium it is not
binding.
22. We can consider the market for traveling to Mars to be missing, because no technology
exists that allows this service to be bought and sold. Suppose that someone has invented
space-travel technology that will enable this service to be provided. Figure 5P-10 shows the
estimated market for trips to Mars. Calculate the surplus that could be generated by filling
in this missing market. [LO 5.8]
Answer: Since the market does not currently exist, the surplus gained would be the area of
total surplus: 0.5(40)(310,000 – 150,000) = $3,200 thousand.

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Macroeconomics 1CE
23. Consider the market for travelling to Mars represented in Figure 5P-10. Assuming
consumers knew they would each eventually pay $190,000 for the trip itself, how much
would they collectively be willing to invest to support the space program that would make
this trip possible? [LO 5.8]
Answer: Consumers would be willing to spend up to the amount of their consumer surplus.
Consumer surplus is the difference between how much consumers are willing to pay (the
value they place on purchasing a good) and the actual price they pay. The consumer surplus
in this market represents the value that consumers place on taking a trip to Mars. They
would be willing to invest up to this amount to make the trip possible. The value of
consumer surplus is: 0.5(40)(310,000 – 190,000) = $2,400 thousand.

5-19

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Download full test bank at:

Karlan 1CE Instructor’s Manual: Chapter 5

OPENING STORY: A BROKEN LASER POINTER STARTS AN INTERNET REVOLUTION

Beyond the Lecture

Karlan 1CE Instructor’s Manual: Chapter 5

Writing Assignment/Class Discussion: Market Equilibrium and Efficiency (LO 5.5)

Class Discussion: Missing Markets (LO 5.8)

Solutions to End-of-Chapter Questions and Problems

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Problems and Applications

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Answer: Consumer surplus is $0 when price is ≥ $11.

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

Answer: Producer surplus is $0 when price is ≤ $3.

13. Consider the market represented in Figure 5P-3. [LO 5.4]

14. Consider the market represented in Figure 5P-4. [LO 5.4]

15. Consider the market represented in Figure 5P-5. [LO 5.5]

Karlan 1CE Instructor’s Manual: Chapter 5

c. Compared to the equilibrium, what area(s) do consumers lose if price is P2?

Answer: Deadweight loss = 0.5($.30)(20m) = $3 million

21. Consider the market represented in Figure 5P-9. [LO 5.7]

Karlan 1CE Instructor’s Manual: Chapter 5

Karlan 1CE Instructor’s Manual: Chapter 5

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