INDIVIDUAL ASSIGNMENT 2 – MK17C

1. Suppose there is an early freeze in California that reduces the size of the lemon crop.
What happens to consumer surplus in the market for lemons?
a. Consumer surplus increases.
b. Consumer surplus decreases.
c. Consumer surplus is not affected by this change in market forces.
d. We would have to know whether the demand for lemons is elastic or inelastic to make
this determination.
2. If the cost of producing sofas decreases, then consumer surplus in the sofa market will
a. increase.
b. decrease.
c. remain constant.
d. increase for some buyers and decrease for other buyers.
3. Which of the following will cause an increase in consumer surplus?
a. an increase in the production cost of the good
b. a technological improvement in the production of the good
c. a decrease in the number of sellers of the good
d. the imposition of a binding price floor in the market
4. Producing a quantity larger than the equilibrium of supply and demand is
inefficient because the marginal buyer’s willingness to pay is
a. negative.
b. zero.
c. positive but less than the marginal seller’s cost. d. positive and greater than the
marginal seller’s cost
5. Jonh, Marry and Ed are available to work as tutors for the semester. The
opportunity cost of tutoring is $100 for John, $200 for Marry, and $400 for Ed. The
iniversity is hiring tutors at a price of $300. Producer surplus equals
a. $100
b. $200
c. $300
d. $400
6. Henry owns the only well in town that produces clean drinking water. He faces the
following demand, marginal revenue, and marginal cost curves:
Demand: P = 70 - Q
Marginal Revenue: MR =70 - 2Q
Marginal Cost: MC = 10 + Q
a. Graph these three curves. Assuming that Henry maximizes profit, what quantity does
he produce? What price does he charge? Show these results on your graph. (1 mark)
b. Mayor George Bailey, concerned about water consumers, is considering a price ceiling
that is 10 percent below the monopoly price derived in part (a). What quantity would be
demanded at this new price? Would the profit-maximizing Henry produce that amount?
Explain. (Hint: Think about marginal cost.) (1 mark)
c. George’s Uncle Billy says that a price ceiling is a bad idea because price ceilings cause
shortages. Is he right in this case? What size shortage would the price ceiling create?
Explain. (1mark)
d. George’s friend Clarence, who is even more concerned about consumers, suggests a
price ceiling 50 percent below the monopoly price. What quantity would be demanded at
this price? How much would Henry produce? (1 mark) In this case, is Uncle Billy right?
What size shortage would the price ceiling create? (1marrk)