Working an example question for Microeconomics Question: In a market for cars the research has recently shown that consumers will no longer pay extra money for added comfort but instead are more concerned with safety and fuel economy than ever before. Color choices remain much as they were with a preference for white, followed by black and bright colors such as red and orange at the bottom of the rating scale. Automatic transmissions remain the most popular. In fact while the reservation price for a family sedan used to be $20,000 it has now fallen to $15,000 and while the trade off between money in the bank being saved for a “rainy day” and the need to have a reliable mode of transportation used to be 2:1 it is now 1:1. What is the percentage reduction in consumer surplus caused by this change in market conditions if 100 cars per hour are still being sold?

Analytics 1.This is a supply and demand problem with a fixed quantity outcome. 2.The model starts at the reservation price and drops downward for the demand curve at the tradeoff which is the slope. The quantity sold is based on the supply which is fixed for the analysis. The approach is to compute the market price and then evaluate the consumer surplus under the two sets of conditions. 3.The colors are irrelevant as is the discussion about the transmissions.

Analytic Evaluation Visual 20,000 15,000 Enter all relevant information. Remember that the demand equation is Pd=RP – slope (Q) and CS= (RP-Pd)/2*Q in each of the two cases. 100 Price in case 1 Price is case 2 Price Quantity

Do the analysis In case 1 the demand curve is Pd=$20,000-2(100)=$19,800 and the consumer surplus is ($20,000-$19,800)/2*100=$10,000 In case 2 the demand curve is $15, =$14,900 and the consumer surplus is $15,000-$14,900/2*100=$5,000 The difference in consumer surplus is therefore $10,000-$5,000 or $5,000.