A state park is selling firewood at $5/bundle and juice at $4/bottle. Firewood costs the park $4/bundle and juice costs $2/bottle. The elasticities of demand for firewood and juice are 1.2 and 1.8. In what direction could the park change prices to increase profit while leaving consumer surplus unchanged? Briefly explain. (Hint: Use Ramsey pricing)

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Market Surplus and Shortage Analysis

In everyday language, a “surplus” indicates that there is an excess of something, while a “shortage” means that there is a scarcity of it. In economics, “market surplus” refers to the condition where the quantity of a certain good more available than what is required or “demanded” by the market. In the same way, a “market shortage” refers to the condition where the quantity of a certain good is less available than what is “demanded” by the market. If quantity in demand is written as Qd and quantity that is supplied is written as Qs, then, the condition Qs > Qd indicates market surplus and condition Qd > Qs indicates market shortage.