Consider a market in which Bert from Exercise 1 is the buyer and Ernie from Exercise 2 is the seller. (a.) Use Ernie’s supply schedule and Bert’s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these prices brings supply and demand into equilibrium? (b.) What are consumer surplus, producer surplus, and total surplus in this equilibrium? (c.) If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus? (d.) If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?
When the price is $4, the consumer would buy only two bottles because the value the consumer would get from the first bottle is $7. This implies, the surplus is $3.
Similarly for the second bottle, the value the consumer would get from consuming it is $5 where the price the consumer will pay is $4, this implies the surplus is $1.
Lastly, for the third bottle the value is $3 and the price is $4 so the price surpasses the value, therefore the consumer will not consumer beyond two bottles.
The consumer surplus could be calculated as:
Consumer Surplus = (7-4) + (5-4)
= 3 + 1
= 2
This means the consumer will buy two bottles.
- If the price falls to $2, the consumer would only buy three bottles because the value the consumer gets from the first bottle valued at $7 versus the $2 paid implies a consumer surplus of $5.
Similarly with the second bottle, the value the consumer would get from consuming is $5 where the price is $2, this implies the consumer surplus is $2 and for the third bottle, the consumer surplus will be $1.
Lastly, for the fourth bottle, the price surpasses the value meaning the consumer will not consume beyond three bottles.
The consumer surplus is as follow:
Consumer Surplus: = (7-2) + (5-2) + (3-2)
= 5+3+1
= 9
- From the graph, when the price is at $4, the quantity supplied by Ernie is $2.
When the price is $4, the cost of producing one bottle is $1 which results in a surplus equal to $4 - $1 = $3.
Similarly, the cost of producing one bottle is $1 which results in surplus of $4 - $3 = $1.4.
The total producer surplus Ernie will incur will be equal to $3 + $1 = $4.
- In the graph above, when the price of bottled water changes to $6, the quantity supplied is 3. Meaning, the change in quantity supplied will be equal to 1 bottle as at the price of $4, only two bottles were supplied.
When the price of bottled water is $6, then the cost of producing one bottle is $1 which gives the producer surplus equal to $6 - $1 = $5.
The cost of producing two units of bottled water is $3, which gives a producer surplus equal to $6 - $3 = $3.
The cost of producing three units of bottled water is $5 which results in a surplus of $6 - $5 = $1.
The total producer surplus Ernie will incur will be equal to $5 + $3 + $1 = $9.
QUESTIONS:
Consider a market in which Bert from Exercise 1 is the buyer and Ernie from Exercise 2 is the seller.
(a.) Use Ernie’s supply schedule and Bert’s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these prices brings supply and demand into equilibrium?
(b.) What are consumer surplus, producer surplus, and total surplus in this equilibrium?
(c.) If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus?
(d.) If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?
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