Chapter 7 Problem Solutions
1. Analyzing the market for DVDs in Lincoln, Nebraska: a. Consumer surplus is the triangular area between the demand curve and the equilibrium price. Its area is equal to 0.5bh, where b is the base of the triangle and h is the height. The base is 6 units and the height is 1.5 units, measured in dollars. Therefore, consumer surplus is 0.5($1.50/unit)(6 units/week) = $4.50 per week. b. Producer surplus is the triangular area between the equilibrium price and the supply curve. Using the base-height formula, it is (0.5)($4.50/unit)(6 units/week) = $13.50 per week. c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in used DVDs is the sum of gains from trading in used DVDs—namely, the total economic surplus generated per week, which is $18 per week. 2. Effects of a price ceiling the market for DVDs: a. At a price of $7.50, the quantity supplied per week = 2. The quantity demanded at this price is 18 per week, which implies a weekly shortage of 16 used DVDs. b. The weekly economic surplus lost as a result of the price ceiling is the area of the dark-shaded triangle in the supply and demand diagram below, i.e. the sum of the areas of the two triangles ABC and ACD in the more detailed diagram that is circled. Using the information given in the graph, this amount is calculated as (0.5)($1/unit)(4 units per week) + (0.5)($3/unit)(4 units per week) = $8 per week.
3. First-come, first-served versus soliciting volunteers: a. When there is no charge for the tour, the surplus enjoyed by someone who takes it equals his or her reservation price for the tour. If the warden operates the tour on a first-come-first served basis, Herman, Jon, Kate and Jack will get to take the tour and their combined consumer surplus is $20 + $14 + $30 + $15 = $79. b. An offer of $15 compensation generates 3 volunteers to return another day: Fran, Jack and Jon. The four people who go on the tour (Penny, Kate,