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Problems and Applications 1.

If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left, as shown in Figure 7-5. The result is a rise in the price of lemons and a decline in consumer surplus from A + B + C to just A. So consumer surplus declines by the amount B + C.

Figure 7-5

In the market for lemonade, the higher cost of lemons reduces the supply of lemonade, as shown in Figure 7-6. The result is a rise in the price of lemonade and a decline in consumer surplus from D + E + F to just D, a loss of E + F. Note that an event that affects consumer surplus in one market often has effects on consumer surplus in other markets.

Figure 7-6

2.

A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread, as shown in Figure 7-7. The shift of the demand curve leads to an increased price, which increases producer surplus from area A to area A + B + C.

Figure 7-7

The increased quantity of French bread being sold increases the demand for flour, as shown in Figure 7-8. As a result, the price of flour rises, increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in one market leads to effects on producer surplus in related markets.

Figure 7-8

3.

Price More than $7 Quantity Demanded 0 a.

Bert’s demand schedule is:

$5 to $7 $3 to $5 $1 to $3 $1 or less 1 2 3 4

b.

c.

4. a.

b.

Bert’s demand curve is shown in Figure 7-9.

Figure 7-9

When the price of a bottle of water is $4, Bert buys two bottles of water. His consumer surplus is shown as area A in the figure. He values his first bottle of water at $7, but pays only $4 for it, so has consumer surplus of $3. He values his second bottle of water at $5, but pays only $4 for it, so has consumer surplus of $1. Thus Bert’s total consumer surplus is $3 + $1 = $4, which is the area of A in the figure.

When the price of a bottle of water falls from $4 to $2, Bert buys three bottles of water, an increase of one. His consumer surplus consists of both areas A and B in the figure, an increase in the amount of area B. He gets consumer surplus of $5 from the first bottle ($7 value minus $2 price), $3 from the second bottle ($5 value minus $2 price), and $1 from the third bottle ($3 value minus $2 price), for a total consumer surplus of $9. Thus consumer surplus rises by $5 (which is the size of area B) when the price of a bottle of water falls from $4 to $2.

Ernie’s supply schedule for water is:

Price Quantity Supplied More than $7 4 $5 to $7 3 $3 to $5 2 $1 to $3 1 Less than $1 0 Ernie’s supply curve is shown in Figure 7-10.

Figure 7-10

When the price of a bottle of water is $4, Ernie sells two bottles of water. His producer surplus is shown as area A in the figure. He

c.

5. a.

b.

c.

d.

6.

a.

receives $4 for his first bottle of water, but it costs only $1 to produce, so Ernie has producer surplus of $3. He also receives $4 for his second bottle of water, which costs $3 to produce, so he has producer surplus of $1. Thus Ernie’s total producer surplus is $3 + $1 = $4, which is the area of A in the figure.

When the price of a bottle of water rises from $4 to $6, Ernie sells three bottles of water, an increase of one. His producer surplus consists of both areas A and B in the figure, an increase by the amount of area B. He gets producer surplus of $5 from the first bottle ($6 price minus $1 cost), $3 from the second bottle ($6 price minus $3 cost), and $1 from the third bottle ($6 price minus $5 price), for a total producer surplus of $9. Thus producer surplus rises by $5 (which is the size of area B) when the price of a bottle of water rises from $4 to $6.

From Ernie’s supply schedule and Bert’s demand schedule, the quantity demanded and supplied are:

Price Quantity Supplied Quantity Demanded $ 2 1 3 4 2 2 6 3 1 Only a price of $4 brings supply and demand into equilibrium, with an equilibrium quantity of 2.

At a price of $4, consumer surplus is $4 and producer surplus is $4, as shown in problems 3 and 4. Total surplus is $4 + $4 = $8.

If Ernie produced one fewer bottle, his producer surplus would decline to $3, as shown in problem 4. If Bert consumed one fewer bottle, his consumer surplus would decline to $3, as shown in problem 3. So total surplus would decline to $3 + $3 = $6.

If Ernie produced one additional bottle of water, his cost would be $5, but the price is only $4, so his producer surplus would decline by $1. If Bert consumed one additional bottle of water, his value would be $3, but the price is $4, so his consumer surplus would decline by $1. So total surplus declines by $1 + $1 = $2.

The effect of falling production costs in the market for stereos results in a shift to the right in the supply curve, as shown in Figure 7-11. As a result, the equilibrium price of stereos declines and the equilibrium quantity increases.