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dr Adrian Solek, Department of Microeconomics, Cracow University of Economics

1. Jimmy and Will are travelling by plane. Jimmy has a seat at 4. Max likes to eat sushi at a Japanese restaurant. Here are his
the aisle and Will at the window. Jimmy would prefer to sit at the reservation prices:
window and Will is indifferent about it. Is this situation Pareto
100
efficient or inefficient? Can you think of any Pareto benefit that 90
could be achieved? 90
75

buyer's reservation price

80
2. The production possibilities frontier of a certain economy is 70
60
shown below. 60
50 45
goods for women

A
B 40
30
30
C 20
F 10
0
E 0
1 2 3 4 5 6
D
quantity of sushi

a) If the price of one portion of sushi is 40 zł, how much will

goods for men
Max buy?
a) Say which of the following changes are Pareto benefits b) How much will he spend?
and why. Assume the more goods, the better. c) What will be the consumer surplus?
i. C  B d) What will be the quantity consumed, expenditures on sushi
ii. C  D and consumer surplus if the price rises to 50 zł?
iii. F  C Now suppose Max has found an “all-you-can-eat” restaurant in
iv. E  F which a fixed price is charged for entry, after which he may con-
v. F  B
sume as much food as he wishes at no extra cost.
vi. E  A
e) How much sushi will he eat in the all-you-can-eat restau-
vii. F  A
rant?
viii. A  C
ix. E  D f) What is his consumer surplus?
b) Which points in the graph represent efficient combinations g) What is the maximum level of the entrance fee he would
of manufactured goods? And inefficient ones? Why? be ready to pay?

3. How big is the consumer or producer surplus in the in the
following situations?
a) Wendy is negotiating the price of a scooter she wants to
buy. She would be willing to pay $1000, but not more. She
comes to an agreement with the seller and pays $850.
b) Molly is selling her ticket to a concert of a well-known band
at an online auction. She set the starting price at 150 zł.
The winner of the auction pays the price of 190 zł. Molly
decides to sell the ticket.
c) Mark needs new trousers and is willing to pay up to €80.
In the store he chose a pair for exactly €80. At the checkout
he learned that the trousers were on sale and their price
was reduced by 30% than on the price tag.
5. Vicky sells honey from a stall in the market square. Her supply
curve is: Q = 4P – 20 (or: P = 0.25Q + 5).
a) Graph the supply curve.
b) How much honey will Vicky sell at the price of 35 zł?
c) What is her revenue?
d) What is the producer surplus at this price?
e) Each month Vicky has got to pay a fixed fee for the stall.
What is the maximum amount she is willing to pay?
60
50
price (in zł)

d) Greg is going abroad permanently, so he wants to sell his 40

apartment. In an announcement he writes the price 250
thousand dollars, although he is ready to sell the apart- 30
ment for any price above 200 thousand dollars. The best
offer was 240 thousand dollars. Greg decides to accept it. 20
e) Alice wants to buy a new camera. She is ready to pay 2000
zł for it, but not more. In the showroom it turns out that the
10
selected model of camera costs 2500 zł. Alice decided not
to buy it.
f) Nora is a diving instructor. She likes her job so much that 0
she could do it for free. However, she receives remunera- 0 20 40 60 80 100 120 140 160 180 200 220
tion for her work equal to € 60,000 per year. quantity (in litres)
6. In the market of used economics handbooks there are poten-
tial sellers and buyers with various reservation prices. The graph
shows the prices arranged according to decreasing willingness
to pay (for buyers) and increasing willingness to accept (for
sellers). Assume the books are identical and each person may
buy or sell one copy.
55
50
reservation prices (in zł)
7. The graph below shows demand and supply curves in the
market of strawberries. Fill in the gaps in the text.
a) In equilibrium:
i. the price is $_____ and the quantity is _____,
ii. consumers spend $_____ on the good,
iii. consumer surplus is $_____, which means that buyers
would be ready to spend by $_____ more than they
actually pay, i.e. they could pay up to $_____,
iv. producers get revenue from sales equal to $_____,

45 v. producer surplus is $_____, which means that sellers

40 get by $_____ more from sales than the minimum
35 amount of money they would be willing to accept
30 (which is $_____),
vi. the total surplus is $_____, i.e. this is the monetary
25
value of benefits that buyers and sellers get from the
20 transactions;
15 b) Now suppose a price floor has been introduced at the level
10 of $14.
5 i. the quantity demanded is _____, the quantity supplied
0 is _____; as a result there is a _____________ in the
1st 2nd 3rd 4th 5th 6th market and its size is _____,
copies ii. the amount of strawberries that is actually exchanged
between sellers and buyers is _____
 buyers’ reservation prices iii. the revenue from sales is equal to $_____ and buyers’
 sellers’ reservation prices expenditures are $_____
iv. at the price floor of $14, consumer surplus is $_____
a) Can the transactions be beneficial for both sellers and and producer surplus is $_____
buyers? v. the total surplus is $_____
b) Selling how many copies is Pareto efficient? vi. the loss of social welfare is $_____
c) Suppose that the number of books sold is as indicated in vii. is the price floor Pareto-efficient? ____
your answer to question b). Why is selling another book
not a Pareto benefit?
d) Now suppose that the number of books sold is lower than 20
S
in question b). Why doesn’t it exhaust all possible benefits 19
from the transaction? 18
e) The market price of the books is 30 zł. Fill in the table. As- 17
sume the efficient amount of the good is exchanged. 16
15
book: 1st 2nd 3rd 4th 5th 6th sum 14
consumer 13
(buyer) 12
surplus 11
price

producer 10
(seller) 9 D
surplus
8
total 7
surplus 6
5
4
3
2
1
0
0 10 20 30 40 50 60 70 80
quantity

© Adrian Solek