Celina Bianca I.

Salazar

BSBA-MM 1

6. Consider a market in which Bert from problem 4 is the buyer and Ernie from problem 5 is the
seller.

a) Shown in the table below is when the quantity supplied and quantity demanded will be in the

Price ($) Quantity Supplied Price($) Quantity demanded

by Ernie
$<1 4 bottles
2 3 bottles
4 2 bottles
6 1 bottle
7 0 bottle
state of equilibrium at a price of $4
by Bert
$<1 0 bottle
2 1 bottle
4 2 bottles
6 3 bottles
7 4 bottles

a) Base from the table, at equilibrium the consumer surplus and producer surplus are same.
Thus, the consumer and producer surplus will be $4. However, the total surplus is the sum of
both consumer and producer surplus. So $4 added to $4 has the sum of $8 which becomes
the total surplus.
b) If the consumption and production of water bottles decreases by 1 unit, the consumers and
producers are surplus only on the first bottle. Thus, the total surplus would be $6.
c) If additional bottles are consumed and produced above the equilibrium quantity of 2 bottles
and the price of $4, both consumer and producer surpluses decrease. Thus, the total surplus
would be $6.

7. The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider some
implications of this fact.

a) Draw a supply-and-demand diagram to show the effect of falling production costs on the price
and quantity of flat-screen TVs sold.
Price
S₁
A E₁ S₂
P₁
P₂ cB D HF E₂
G

Demand
Q₁ Q₂ Quantity Demanded
a) Based on my diagram, the consumer surplus is the area above the supply curve S1 and below
the price curve P1 this would pertain to B+C. However, due to lower production costs, the
area above the new supply curve is S2, below the new price P2. That is, (C + G + H) gives the
producer surplus. Therefore, producer surplus changes by (G + H - B). In fact, changes in
producer surplus can be positive or negative. It depends on an increase in quantity and a
 decrease in price, with an increase in quantity increasing producer surplus and a decrease in
price decreasing producer surplus.
b) Suppose that the supply of flat TV screens is very elastic, then the shift of the supply curve
benefits the consumers.

8. There are four consumers willing to pay the following amounts for haircuts:

Gloria: $35 Jay: $10 Claire: $40 Phil: $25

There are four haircutting businesses with the following costs:

Firm A: $15 Firm B: $30 Firm C: $20 Firm D: $10

a) To be efficient, three companies should offer discounts. This is because Company B's costs
are too high compared to other competitors. Companies A, C, and D cut their hair, and
Gloria, Clair, and Phil cut their hair. This is because Company B costs too much compared
to other competitors, and Jay is unwilling to pay enough for a haircut. So they don't
participate. Total Surplus = $55

9. One of the largest changes in the economy over the past several decades is that technological
advances have reduced the cost of making computers.

a) Draw a supply-and-demand diagram to show what happened to price, quantity, consumer

surplus, and producer surplus in the market for computers.

Price
per S
unit 1
P S₁
P₁ 2 34
5
7
6

Quantity
Q Q₁
Market for computers

b)
Price
S
1
2 E
P 4 3
P₁ 5 E₁

D
D₁
Quantity
Q₁ Q
Market for typewriters

Declining demand for typewriters due to

falling prices of substitutes (computers) caused typewriter prices to fall from P to P1 and quantities to
fall from Q to Q1, reducing both consumer surplus and producers surplus. Therefore, it will make
typewriter producers sad due to technological advancements of computers.

c. Following the same graph of market for typewriters, an increase in demand for software due to
falling prices of complements (computers) has led to an increase in software prices from P to P1,
an increase in quantity from Q to Q1, and an increase in both consumer surplus. and producer
surplus. As technological advances in computing increase their producer surplus, software
makers will appreciate such technological improvements.
d. Yes, the analysis presented suggests that as the cost of computers falls, the demand for
software increases, enabling software makers not only to sell at higher prices, but in larger
volumes. It explains the statement given. It leads to an increase in total income and producer
surplus which explains the reason for wealth.

10. A friend of yours is considering two cell phone service providers. Provider A charges $120 per
month for the service regardless of the number of phone calls made. Provider B does not have a
fixed service fee but monthly demand for minutes of calling is given by the equation QD 5 150 2 50P,
where P is the price of a minute.

a) Provider A = fixed fee (every call is free of cost after)

Provider B = $1 per minute per call
Therefore, provider A the cost of an extra minute is $0 while provider B the cost of an
extra minute is $1
b) Formula: Q d =150−50 P
When the price is zero:
Qd = 150 – 50 x $0
= 150 – 0
= 150 minutes
When price is $1:
Qd = 150 – 50 x $1
= 150 – 50
= 100 minutes
Thus, the number of minutes a friend calls provider A is 150 minutes, and the number of
minutes a friend calls provider B is 100 minutes.
c) Provider A only charges an entry fee of $120. So the friend will pay Provider A her $120.
Provider B has no joining fee, but charges him $1 per minute. Provider B requested 100
minutes, so your friend will pay Provider B $100 (=$1 x $100).
d) How much consumer surplus would she obtain with each provider? (Hint: Graph the
demand curve and recall the formula for the area of a triangle.)
Price per Qd = 150 – 50P
minute 3 a

1 c

100 150
 Quantity (minute)

Provider A:
CS = (½ x height of the triangle x base of triangle) – (entry fee)
= ½ x 3 x (150)
= 150 dollars
Provider B:
CS = (½ x height of the triangle abc x base of triangle abc) – (entry fee)
= ½ x (3 -1) x (100 – 0)
= 100 dollars
e) Which provider would you recommend that your friend choose? Why
Friend will get more consumer surplus from provider A. Therefore, we recommend Vendor
A.