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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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BuyFindarrow_forward

Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 7, Problem 2PA
Textbook Problem
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An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagrams.

To determine
The impact of early freeze on lemon and the lemonade market.

Explanation of Solution

The equilibrium price is determined by the demand for the cost and the supply of the cost normally. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

When there is an early freeze and the freeze sours the lemon crop, the supply curve will shift towards the left, denoting the decline in the supply of lemons. When there is a leftward shift in the supply curve, it will lead to the intersection of new supply curve with the existing demand curve and as a result, the price will increase and the consumer surplus will fall. This can be explained with the help of the following diagram:

When there is a freeze in the economy and it sours the lemon crop, it will reduce the supply of lemons in the economy. Thus, the supply curve shifts from S1 to S2 towards the left, as shown in the diagram...

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