Question

S = MC $100 Consumer surplus 244 producer surplus Shoptage 350 - 480 = 27.6 80 200 350 5000 Part 1: Assume that the market is in equilibrium. Calculate the producer surplus, consumer surplus, and total surplus (-5 points) consumer Surplus - (200) (40) ñ 4000 producer Surplus: (200)(50) – 5990 totar surplus = 9000 Part 2: Now suppose that a price ceiling is set in this market at $30. Calculate the new producer surplus, consumer surplus, and total surplus (.5 points) consumer surplus = 80 (54) + (80) (16) = 4960 4320 & 640 producer surplus I (20)(80)=800 total surplus 5760 Part 3: When you calculate surplus in part 2, you are actually calculating a best-case scenario given the price ceiling. Why is surplus likely to be lower than this amount when producers and consumers actually trade in this market? Alternatively, what are we implicitly assuming happens by the method we use to calculate surplus? (1 point)

Could you please make sure part 1 and part 2 are right; in addition, explain part three. Thank you!

Answer 1

Part 1:

CS = 0.5[($100 - $60) * 200] = $4,000

PS = 0.5[($60 - $10) * 200] = $5,000

Total Surplus = CS + PS = $4,000 + $5,000 = $9,000

Part 2:

CS = 0.5[($100 - $84) * 80] = $640

PS = [($84 - $30) * 80] + 0.5[($30 - $10) * 80] = $4,320 + $800 = $5,120

Total Surplus = CS + PS = $640 + $5,120 = $5,760

Part 3:

At a price ceiling of $3, the demand is 350 and supply is only 80. So, there is a shortage of 270. So, when producer and consumer actually trade in market, consumers are willing to pay more than $30 and seller is also willing to sell more than 80 units at a higher price which the consumer willing to pay. Therefore, by the mutual understanding between consumer and producer, they trade at a higher price than $30. Thus, the total surplus increases than $5,760.