Practice exer Ch 4 (BECN 150 (st) F-23

Practice exercise: Ch.4 1 Complete the following table regarding Consumer Surplus {CS} CS = Maximum price consumer is willing to pay – Actually price paid by consumer Quantity (Kg. Price the consumer would have paid ($) Price actually paid by the consumer ($) Consumer Surplus ($) 1 1.85 1 0.85 2 3.45 2 1.45 3 4.8 3 1.8 Total 10.10 6 4.10 Q2 Complete the following table regarding the Producer Surplus:{PS}: PS = Actual price received by producer – Price the producer would have accepted Quantity (Kg. Price the producer would have accepted ($) Price actually received by the producer ($) Producer Surplus ($) 1 0.75 0.9 0.15 2 0.95 1.25 0.3 3 1.5 2.1 0.6 Total 3.20 4.25 1.05 Q3: Consumer surplus and Producer surplus: Graphic form Consumer Surplus : 1250 Producer Surplus : 2750 1

Total surplus: 1250 + 2750= 4000 Q4 Harry is a fresh fruit juice maker. He wants to get at least $4 per glass of fresh fruit juice. Consumers are willing to pay maximum $5.20 per glass of juice. Find Producer Surplus, Consumer Surplus and Social surplus if 525 glasses of juice are sold at $4.80 each? Producer surplus = 420 (525x0.80) Consumer surplus = 210 (5.25x0.40) Social surplus or total surplus = 630 (420+210) Q5 Cost-benefit analysis for a National Highway construction project (billions of dollars). Project Total cost (TC) Marginal cost (MC) Total benefits (TB) Marginal benefits (MB) Net benefits (NB) Single roads 56 17 81 25 Widen the single roads 73 17 104 23 31 2-lane highways 91 18 125 21 34 Widen 2-lane highways 110 19 144 19 34 3-lane highways 130 20 161 17 31 4-lane highways 170 40 165 4 -5 Marginal cost= change in total cost ,marginal benefit= change in total benefits, nb= tb-tc a) Which projects are beneficial ? Why ? Widen the single roads and 2 lane highways MB>MC b) Which project will be the optimal project ? Why ? Widen 2 lane highways MB=MC + HIGHEST NB 2

At equilibrium wage rate: Wage rate = 60 Consumer surplus {CS} = 2000 Workers employed = 200 Producer surplus {PS} = 3000 Total wage revenue = 12000 Total surplus {TS} = 5000 Q8: Suppose the supply curve of labour (S L ) and the demand curve of labour (D L ) are shown in the graph with the hourly wage (like price) and the number of workers (like quantity). Assume that minimum wage rate is $70. W orkers willing and able to work but cannot find jobs = 325 Workers demanded = 100 Involuntary unemployment = 225 Involuntary unemployment can be decomposed in to two effects: Adverse employment effect = 100 (200-100) Induced unemployment = 125 (325-200) Total wage revenue at equilibrium wage rate = 12000 (60x200) Total wage revenue at minimum wage rate = 7000 Loss in wage revenue = 5000 After minimum wage rate: Consumer surplus = 500 Producer surplus = 3250 4

Area of Trapezoid (which consists of one rectangle in the upper portion and a triangle in the lower portion). Total surplus = 3750 Deadweight loss or efficiency loss: It means market is out of equilibrium. Deadweight loss or efficiency loss = 1250 Q9 Consider the diagram and answer the given questions. What term is used for the output level like Q 1 ? Under allocation of recourses or under production where MB> MC What term is used for the output level like Q 2 ? Optimal product where MB=MC What term is used for the output level like Q 3 ? Over production or allocation where MB<MC What is total surplus at overproduction level? 5