Question

4. The diagram below shows supply and demand in a perfectly competitive local market for cubic metres (m3) of garden soil. Price is per LLL LLD 10 20 30 40 50 60 70 NO90 100 110 120 Quantity (m' day) a. At the equilibrium market price, determine the following values: - total revenue received by sellers -consumer surplus producer surplus total economic surplus b. Now suppose that sellers in this market cooperate and restrict their total output to 30m3 per day. At the resulting price of $45 per m3, m3, determine each of the same values as in part (a). c. What is the change in consumer surplus when output is restricted? What is the change in producer surplus? d. What is the deadweight loss to the economy in this market when output is restricted? Show the area of this loss in the diagram.

Answer 1

(as Total Revenue Consumer al Revenue received by sellers = Gole $30x 60 = 11800 sumer I Deadweight surplus ar I ODEF) = X 60x315 brice - 1900 educer surples- ar lOFEO) s+- AZ = x 60x30 - 9900 K Total Economic surplus - cs+PS = $900 + to Quantity 120 $900= $1800 6) is Total Rev. received by sellers 30x45- &1350. Consumer surplus = are (ODxY) = (x30x (60-45) = Ix Box 15 = q 225. Producer Surplus = 4.300 (45-17) + 1 x 3 x 15 - 30 x 30 + 225 - P1125 Total Economic surplus - PS + cs={1125 + $225= 91350. ( change in consumer surplus = $225 - 8900 - - $675. change in producer surplus = $ 22 $1125 - $900 - d Readweight loss = ar (OXEZ) - 1x 160-30) x (45-15) 2. tx 30 x 30 = $450