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Tutorial 6

Consumers, producers
and the efficiency of markets

1. It is a hot day, and Jamel is very thirsty. Here is the value he places on a bottle of water:

Value of the first bottle Tnd7


Value of the second bottle 5
Value of the third bottle 3
Value of the fourth bottle 1

a. From this information, derive Jamel’s demand schedule. Graph his demand curve for
bottled water.
b. If the price of a bottle of water is Tnd4, how many bottles does Jamel buy? How much
consumer surplus does he get from his purchases? Show Jamel’s consumer surplus in your
graph?
c. If the price falls to Tnd2, how does quantity demanded change? How does Jamel’s
consumer surplus change? Show these changes in your graph?

2. Samir owns a water pump. Because pumping large amounts of water is harder than pumping
small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost
he incurs to produce each bottle of water:

Cost of the first bottle Tnd1


Cost of the second bottle 3
Cost of the third bottle 5
Cost of the fourth bottle 7

a. From this information, derive the Samir’s supply schedule. Graph his supply curve for
bottled water.
b. If the price of a bottle of water is Tnd4, how many bottles does Samir produce and sell?
How much producer surplus does he get from these sales? Show Samir’s producer surplus
in your graph?
c. If the price rises to Tnd6, how does quantity supplied change? How does Samir’s producer
surplus change? Show these changes in your graph?
3. Consider a market in which Jamel from problem 1 is the buyer and Samir from problem 2 is the
seller:
a. Use Samir’s supply schedule and Jamel’s demand schedule to find the quantity supplied
and the quantity demanded at prices Tnd2, Tnd4 and Tnd6. Which of these prices bring
supply and demand into equilibrium?
b. What are consumer surplus, producer surplus and total surplus in this equilibrium?
c. If Samir produced and Jamel consumed one less bottle of water, what would happen to
total surplus?
d. If Samir produced and Jamel consumed one additional bottle of water, what would happen
to total surplus?

4. Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are shown
in the diagram. Calculate and graph:

Price (DVDs/week)
$12
S

$10.5 D

$6
6 Quantity (DVDs/week)

a. The weekly consumer surplus.


b. The weekly producer surplus.
c. The maximum weekly amount that producers and consumers in Lincoln (as a group) would
be willing to pay to be able to buy and sell used DVDs in any given week.
d. Suppose a coalition of students from Lincoln High School succeeds in persuading the local
government to impose a price ceiling of $7.50 on used DVDs, on the grounds that local
suppliers are taking advantage of teenagers by charging exorbitant prices.
And suppose that demand equation is P=12-0.25Q and supply equation is P=6+0.75Q
- Calculate the weekly shortage of used DVDs that will result from this policy.
- Calculate and graph the total economic surplus lost every week as a result of the price
ceiling.
e. Is a company’s producer surplus the same as its profit? Explain.
f. Suppose the weekly demand for a certain good, in thousands of units, is given by the
equation Q = 8 - P, and the weekly supply is given by the equation Q = P - 2.
where P is the price in dollars.
- What is the equilibrium price and quantity? Calculate and graph consumer surplus,
producer surplus, and the total weekly economic surplus generated at the market
equilibrium.