Exercises on chapter 5 (Efficiency)

Exercise 1: Calculate total surplus before and after a shift in Demand

Consider the market represented in Figure5P-5.

a. Calculate total surplus when demand isD₁.

b. Calculate total surplus when demand decreases to D₂.

Answer:

Exercise 2: Calculate total surplus before and after a shift in Supply

Consider the market represented in Figure5P-6.

a. Calculate total surplus when supply isS₁.

b. Calculate total surplus when supply increases to S₂.

Answer:

Exercise 3: Identify efficient and inefficient situations

Assume the market for wine is functioning at its equilibrium. For each of the following situations, say whether the new market outcome will be efficient or inefficient. Why?

a. A new report shows that wine is good for heart health.

b. The government sets a minimum price for wine, which increases the current price.

c. An unexpected late frost ruins large crops of grapes.

d. Grape pickers demand higher wages, increasing the price of wine.

Answer:

Exercise 4: Indicate the change in consumer surplus that results from a policy decision

In which of the following situations can you say, without further information, that consumer surplus decreases relative to the market equilibrium level? Why?

a. Your state passes a law that pushes the interest rate (i.e., the price) for payday loans below the equilibrium rate.

b. The federal government enforces a law that raises the price of dairy goods above the equilibrium.

c. Your city passes a local property tax, under which buyers of new houses have to pay an additional 5 percent on top of the purchase price.

d. The government lowers the effective price of food purchases through a food-stamp program.

Answer:

Exercise 5: Calculate the deadweight loss

Consider the market represented in Figure5P-11.

a. Suppose the government sets a minimum price of $25 in the market. Calculate the deadweight loss.

b. Suppose the government sets a maximum price of $25 in the market. Calculate the deadweight loss.

Answer:

Exercise 6: Calculate the value of a missing market

We can consider the market for traveling to Mars to be missing, because no technology exists

that allows this service to be bought and sold. Suppose that someone has invented space-travel technology that will enable this service to be provided. Figure5P-13 shows the estimated market for trips to Mars. Calculate the surplus that could be generated by filling in this missing market.

Answer: