Q: Given the supply and demand graph with equilibrium at $P = 100$, $Q = 200$, and intercepts at $P = 150$ (demand) and $P = 70$ (supply), what is the consumer surplus at the efficiency level of output?

Consumer surplus $= \frac{1}{2} \times (150-100) \times (200-60) = 50 \times 140 = 7,000$ ($8$ million)

Q: If the government restricts output to 100 units, what is the deadweight loss (DWL) in the market with demand intercept $P = 150$, supply intercept $P = 70$, and equilibrium at $P = 100$, $Q = 200$?

DWL $= \frac{1}{2} \times (100) \times (150-100) + \frac{1}{2} \times (100) \times (100-70) = 2,500 + 1,500 = 4,000$ ($4$ million)

Question 1

Suppose the price of skipping ropes rises from $1.25 to $0.75 per unit and the quantity demanded increases from 1250 to 1750 units. What is the price elasticity of demand, and how would you interpret the result?

Accepted Answer

Price elasticity of demand $= \frac{(1750-1250)/1500}{(0.75-1.25)/1} = \frac{500/1500}{-0.5/1} = -0.67$. The demand is inelastic.

Question 2

Given the demand curve for knobs $P = 75 - 6Q$ and the supply curve $P = 35 + 2Q$, what is the equilibrium price and quantity?

Accepted Answer

Equilibrium price is $P = 45$, equilibrium quantity is $Q = 5$

Question 3

If the price of knobs is fixed at $40, what will be the effect on quantity demanded and supplied given $P = 75 - 6Q$ and $P = 35 + 2Q$?

Accepted Answer

Quantity demanded is $Q = 5.8$, quantity supplied is $Q = 2.5$

Question 4

When the price of a box of cereal rises from $5 to $7, the quantity demanded falls from 800 to 400 boxes. What is the price elasticity of demand over this price range?

Accepted Answer

Price elasticity of demand $= \frac{(400-800)/600}{(7-5)/6} = \frac{-400/600}{2/6} = -2$

Question 5

Mexico can produce either 100 shirts or 40 shoes, while Chile can produce either 60 shirts or 60 shoes. What is the opportunity cost of producing 1 shirt in Mexico and Chile?

Accepted Answer

Mexico: $0.4$ shoes per shirt; Chile: $1$ shoe per shirt

Question 6

After Mexico and Chile specialize according to comparative advantage, what will be the total consumption of shirts and shoes if they trade and each country originally produced and consumed 30 shirts and 30 shoes?

Accepted Answer

Total consumption: 60 shirts and 60 shoes

Question 7

Given the supply and demand graph with equilibrium at $P = 100$, $Q = 200$, and intercepts at $P = 150$ (demand) and $P = 70$ (supply), what is the consumer surplus at the efficiency level of output?

Accepted Answer

Consumer surplus $= \frac{1}{2} 	imes (150-100) 	imes (200-60) = 50 	imes 140 = 7,000$ ($8$ million)

Question 8

If the government restricts output to 100 units, what is the deadweight loss (DWL) in the market with demand intercept $P = 150$, supply intercept $P = 70$, and equilibrium at $P = 100$, $Q = 200$?

Accepted Answer

DWL $= \frac{1}{2} 	imes (100) 	imes (150-100) + \frac{1}{2} 	imes (100) 	imes (100-70) = 2,500 + 1,500 = 4,000$ ($4$ million)

Question 9

Max has $35 to spend on windsurfing ($10/hour) and snorkeling ($5/hour). To maximize his utility, how many hours should he spend on each activity and what is his total utility?

Accepted Answer

Max should spend 3 hours windsurfing and 1 hour snorkeling; total utility is $300 + 40 = 340$

Question 10

If the price of windsurfing equipment rises from $5 to $10 per hour, is Max's demand for windsurfing elastic or inelastic?

Accepted Answer

Inelastic, because the elasticity is $-0.75$

Question 11

If Max increases his hours of snorkeling from 1 to 2 when the price of windsurfing falls, what is the cross elasticity of demand for snorkeling with respect to the price of windsurfing?

Accepted Answer

Cross elasticity $= \frac{(2-1)/1.5}{(10-5)/7.5} = \frac{0.67}{0.67} = 1$

Question 12

A medical study reports that eating chicken reduces the likelihood of suffering from certain heart problems. What is the likely effect on the demand curve for chicken?

Accepted Answer

The demand curve for chicken will shift to the right.

Question 13

Suppose the demand for designer jeans increased from 42,000 to 56,000 when per capita income rose from $65,000 to $71,500. What is the income elasticity of demand, and are designer jeans a normal or inferior good?

Accepted Answer

Income elasticity $= \frac{(56,000-42,000)/49,000}{(71,500-65,000)/68,250} = 2.9$. Designer jeans are a normal good.

Question 14

If the price of beef rises due to a widespread disease, what is the likely effect on the demand for chicken?

Accepted Answer

The demand for chicken will increase.

Question 15

If chicken is a normal good, what happens to its demand when average household income increases?

Accepted Answer

The demand for chicken increases.

Question 16

Given the supply and demand graph, what is the producer surplus at the efficiency level of output if supply intercept is $P = 70$, equilibrium $P = 100$, $Q = 200$?

Accepted Answer

Producer surplus $= \frac{1}{2} 	imes (100-70) 	imes (200-0) = 30 	imes 200 = 6,000$ ($6$ million)

Question 17

If Max spends 5 hours windsurfing and 2 hours snorkeling, what is his total utility?

Accepted Answer

Total utility is $396 + 76 = 472$

Microeconomics Study Notes: Elasticity, Market Equilibrium, Opportunity Cost, Surplus, and Utility

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