1. Ch 4 and 5 Review
Ap Econ 9/13

2. Homework Check
Get out a different colored pen and correct your answers
Remember I grade on completeness (not correctness). This means it is in YOUR best interest to correct your own work and learn from your mistakes!!!
If you have unanswered questions—TODAY IS THE DAY TO ASK!
Use this homework to study for the test tomorrow!

3. Nicole buys handbag for $220, gets CS of $80
Willingness to pay = $300
Bag on sale for $190  CS now $110
Price of bag $350  she wouldn’t buy. CS = n/a

4. 2. Cold spring ruined Florida limes.
Market for limes: supply decreases. CS decreases.
Decrease in supply of limes, so limes are expensive  leads to decrease in supply of key lime pies. Decrease in CS.
(graph will look the same for limes and lime pies)

5. 3. a) From this information, derive Wayne’s demand schedule, and graph his demand curve. (Hint: your graph should end up looking like steps)
Value of 1st bottle $7
Value of 2nd bottle $5
Value of 3rd bottle $3
Value of 4th bottle $1
3a.
Price
Quantity Demanded $7 1 6 5 2 4 3

6. b) If the price of a bottle of water is $4, how many bottles will Wayne buy? How much consumer surplus will he get? Show the area of consumer surplus in your graph.
Wayne will buy 2 bottles
CS: (7-4) + (5-4) = $4
c) If the price decreases is $2, how does quantity demanded change? How does Wayne’s consumer surplus change? Show this change on your graph.
Wayne will buy 3 bottles
CS: (7-2) + (5-2) + (3-2) = $9

7. Price Quantity Supplied $7 4 6 3 5 2 1
4.Garth owns a water pump. The cost of producing bottled water rises as he pumps more because it’s more difficult to pump larger amounts of water than smaller amounts. The cost to produce each bottle is as follows:
a. From this information, derive Garth’s supply schedule, and graph his supply curve. (Hint: your graph should end up looking like steps)
Value of 1st bottle $7
Value of 2nd bottle $5
Value of 3rd bottle $3
Value of 4th bottle $1
Price
Quantity Supplied $7 4 6 3 5 2 1

8. b) If the price of a bottle of water is $4, how many bottles does Garth produce and sell? How much producer surplus will he get? Show the area of producer surplus on your graph.
Garth will produce 2 bottles
PS = (4-1) + (4-3) = $4
c) If the price increases to $6, how does quantity supplied change? How does producer surplus change? Show this change on your graph.
Garth will produce 3 bottles
PS = (6-1) + (6-3) + (6-5) = $9

9. 5. a. Equilibrium price = $4 b. CS = ($7-4) + ($5-4) = $4
PS = ($4-1) + ($4-3) = $4
Total surplus = $8
c. One less bottle of water bought and sold:
Wayne loses $1 surplus from consumption of 2nd bottle
Garth loses $1 surplus from sale of 2nd bottle
d. One more bottle of water bought and sold:
Wayne pays $4 for a bottle he values at $3 = loses $1 surplus
Garth sells bottle worth $5 to him for $4 = loses $1 surplus
Loss of $2 total surplus
Price QD QS $6 1 3 4 2

10. 6. In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the higher the number of bidders, the higher the sales price. According to Galinsky, this explains why smart eBay sellers set absurdly low opening prices, such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky’s reasoning.
Consumer surplus could be maximized if very few people see this listing and you get away with a low bid
Producer surplus could be maximized if so many people see this listing that a bidding war ensues, which drives the price up

11. 7. You are considering selling your vintage 1969 convertible Volkswagen Beetle. If the car is in good condition, it’s worth a lot; if it is in poor condition, it is useful only as scrap. Assume your car is in excellent condition, but it costs a potential buyer $500 for an inspection. Use the concept of producer surplus to explain whether or not you should pay for the inspection and share the results with potential buyers.
Option 1: List it as-is
Pro: You save some money by not doing inspection
Con: People have no idea what condition the car is really in
Option 2: Pay for $500 inspection
Pro: People will have quality guarantee
Con: You have to pay $500
You should pay for the inspection because even though it’s $500, it’s guaranteed to be in good quality, thus attracting more potential buyers. More buyers could lead to higher sale price

12. PS = (26-10) + (26-15) + (26-20) + (26-25) = $34
8. a) Suppose the market price is $26. What is total producer surplus?
Price = $26
PS = (26-10) + (26-15) + (26-20) + (26-25) = $34
b) The market price increases to $36. What is total producer surplus now?
Price = $36
PS = (36-10) + (36-15) + (36-20) + (36-25) + (36-30) + (36-35) = $81

13. 9.
a. Price of rides = $5
CS = .5(10x5) = $25
b. Max admission fee = $50
(take all the surplus)
c. Price of rides = zero
People will ride 20 rides
CS = .5(20x10) = $100
Max admission fee = $100

14. Fans of rock music, in an attempt to revive the dying style of music, convince the government to impose a price ceiling of $30 per rock concert ticket. As a result of this policy, do more or fewer people attend rock shows? Explain, and include a diagram in your response.
Price ceiling would limit amount of available tickets (price decreases, quantity supplied decreases) so fewer people would actually get to go, even though more people would want to go now that the price has fallen.

15. 2.
a. Equilibrium: $12 per frisbee, 10 million frisbees sold
b. Price floor $2 above equilibrium = $ million supplied, only 4 million demanded, so only 4 million sold
c. Price ceiling $1 below equilibrium = $ million demanded, only 7 million supplied, so only 7 million sold.

16. 3a. Before elimination of rent control: QS apartments rented
After elimination of rent control: Q* apartments rented
Quality of apartments would increase – landlords are getting a better return on investment

17. 3b. Demand increases because of increase in income
3b. Demand increases because of increase in income. Equilibrium rent rate and quantity of apartments rented both increase.
c. Some tenants are better off – those that couldn’t find apartments now can. However, those that don’t qualify for the income supplement now have to pay more rent.
d. Landlords definitely better off – making more money per month
e. Society is better off – deadweight loss is eliminated

18. 4a. Equilibrium: 480,000 jobs at $60,000/year. No unemployment.
b. Min wage of $65,000  causes surplus of 120,000 workers
Min wage of $70,000  causes surplus of 240,000 workers
c. As min wage increases, so does unemployment. Winners: those that get a job. Losers: employers and those who cannot find a job and want to work. Missed opportunities happen when those that would work for a lower wage rate cannot be hired because of the law.

19. 5a. See diagram
Demand price for 10 million lbs cod = $20 per lb
Consumer surplus = ($22-20) x 9 million = $18 million
($20-20) x 1 million = $0
Total consumer surplus = $18 million

20. Supply price for 10 million lbs cod = $14 per lb
Producer surplus = ($14-12) x 8 million = $16 million
($14-14) x 2 million = $0
Total producer surplus = $16 million
d. Quota rent = $6 per lb. License holders make $60 million
e. If quota is 14 million lbs, 12 million lbs would be bought and sold anyway (quota has no effect on market equilibrium)

21. 8. a. Price floor at $5: quantity supplied = 1200
8. a. Price floor at $5: quantity supplied = Quantity demanded = 800. Surplus of 400 x $5 each = $2000 (cost to govt). Corn farmers sell 800 to consumers and 400 to govt: 1200 x $5 = $6000 in revenue.
b. Target price at $5: Consumers buy at market equilibrium (1000 at a price of $3 each). Govt buys nothing. Govt pays farmers $2 per bushel sold: 1000 x $2 = $2000. Farmers make $3000 from consumers and $2000 from govt = $5000 in total revenue.
c. Price floor costs consumers more ($5 compared to $3). Both policies are equally expensive for govt.
d. Target price policy is more efficient: doesn’t cause a surplus of corn that could possibly by thrown away by govt