5 ECO101 Tutorial questions Surplus PDF

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week 5 Tutorial questions Surplus Prof Freitas...

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ECO 101H1: Principles of Microeconomics

Prof. Freitas, University of Toronto

ECO 101 Tutorial Questions Tutorial: Surplus

Questions 1) Consider a perfectly competitive market with our usual assumptions, including no externalities. Market Supply is given by QS = P . We have only two individuals in the market. Amanda’s Marginal Willingness to Pay function is given by MW T P A = 10 − Q and Bashir’s is given by MW T P B = 10 − 2Q. a) Calculate market price, Consumer Surplus (CS), Producer Surplus (PS) and Total Surplus (TS) in the market. b) Suppose the market price is $6. What is Amanda’s CS and what is Bashir’s CS? How is this related to the CS you calculated in part (a)? 2) Consider a perfectly competitive market with our usual assumptions, including no externalities. Market Supply is given by QS = 4P . Market demand is given by QD = 200 − P . a) Suppose that the quantity produced and exchanged in this market is 180. What is Total Surplus? Don’t worry too much about why the market quantity is this quantity. You can assume for now that it is due to some government intervention. We will think about types of interventions in the Price Controls and Taxes topic. I have purposely not given you price to drive home the insight that prices determine allocation of surplus only. Revisit the lecture videos if this is still not clear or go to the discussion boards. b) What is the efficient quantity and what is Total Surplus at this quantity? Is there a loss in surplus (compared to the efficient) due to the restriction imposed above? 3) The rule in a school is that kids can’t share their snacks. They have to eat what they bring from home. Suppose there are no safety reasons students should not share food (e.g. allergies, etc.). Convince the school that allowing students to trade their snacks will increase surplus.

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