Economic surplus

Chapter 7 Exercise 6-10. Consumers, producers, and the efficiency of Markets. Gregory Mankiw

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Exercises 6-10Chapter 7. Consumers, producers, and the efficiency of Markets. Gregory Mankiw. Principles of Economics 6. The cost of producing stereo systems has fallen over the past several decades. Let’s consider some implications of this fact.A. Use a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of stereos sold. b. In your diagram, show what happens to consumer surplus and producer surplus. c. Suppose the supply of stereos is very elastic. Who benefits most from falling production costs-consumers or producers of stereos? 7. There are four consumers willing to pay the following amounts for haircuts:Jerry:$7 Oprah:$2 Sally Jessy:$8 Montel:$5There are four haircutting businesses with the following costs:Firm A:3$ Firm B:$6 Firm C:$4 Firm D:$2Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair, and which consumers should have their hair cut? How large is the maximum possible total surplus? 8. Suppose a technological advance reduces the cost of making computers.A. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for computers. b. Computers and adding machines are substitutes. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for adding machines. Should adding machine producers be happy or sad about the technological advance in computers? C. Computers and software are complements. Use a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for software. Should software producers be happy or sad about technological advance in computers? d. Does this analysis help explain why Bill Gates a software producer, is one of the world’s richest men? 9. Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out-of-pocket when she chooses to have an additional procedure performed. Her insurance company pays the remaining $80. (The insurance company will recoup the $80 through higher premiums for everybody, but the share paid by this individual is small.)A. Draw the demand curve in the market for medical care. (In your diagram, the horizontal axis should represent the number of medical procedures.) Show the quantity of procedures demanded if each procedure has price of $100. b. On your diagram, show the quantity of procedures demanded if consumers pay only $20 per procedure. If the cost of each procedure to society is truly $100, and if individuals have health insurance as just described, will the number of procedures performed maximize total surplus? Explain. c. Economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as “excessive”? What sort of policies might prevent this excessive use? 10. Many parts of California experienced a severe drought in the late 1980s and early 1990s.A. Use a diagram of the water market to show the effects of the drought on the equilibrium price and quantity of water. b. Many communities did not allow the price of water to change, however. What is the effect of this policy on the water market? Show on your diagram any surplus or shortage that arises. c. A 1991 op-ed piece in The Wall Street Journal stated that “all Los Angeles residents are required to cut their water usage by 10 percent as for March 1 and another 5 percent starting May 1, based on their 1986 consumption levels.” The author criticized this policy reward families who ‘wasted’ more water back in 1986, it does little to encourage consumers who could make more drastic reductions, {and}… punishes consumers who cannot so readily reduce their water use.” In what way is the Los Angeles system for allocating water inefficient? In what way does the system seem unfair? d. Suppose instead that Los Angeles allowed the price of water to increase until the quantity supplied. Would the resulting allocation of water be more efficient? In your view, would it be more or less fair than the proportionate reductions in water use mentioned in the newspaper article? What could be done to make the market solution more fair?