## Key concepts and economic tools

Problem Set 2: Due 7/6 This problem set is designed to help you review the essential material from Chapters 4, 5 and 6. It covers many of the key concepts and economic tools discussed in these chapters. Part 1: Consumer and Producer Surplus (52 points) 1a. Complete the table below, by adding each person’s consumer surplus corresponding with both prices (i.e. Price 1 and Price 2)– along with the change in consumer surplus for each person when the price increases from \$5 to \$9. This is a hypothetical 5 person economy for basketballs where each person is considering buying a single basketball. (6 pts)

Consumer Willingness to Pay (\$)

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Price 1 (\$)

Consumer Surplus 1 (\$)

Price 2 (\$)

Consumer Surplus 2 (\$)

Change in Consumer Surplus when Price increases from Price 1 to Price 2 (\$)

Scottie 15 5 9

Yolanda 12 5 9

Michael 8 5 9

Cappie 6 5 9

Dennis 4 5 9

1b. What’s the Total Consumer Surplus at Price 1? What’s the Total Consumer Surplus at Price 2? (4 pts)

TCS at Price 1 = _____________ TCS at Price 2 = _____________ 1c. Complete the sentences by circling the correct answer (4 pts) When the price increased from \$5 to \$9, consumer surplus (increased, decreased). Based upon this, we can also conclude that ​if​ the price went from \$9 to \$5, consumer surplus would (increase, decrease). 1d. Complete the sentences by circling the correct answer (4 pts) The people most affected by the policy are those (never bought the good, always bought the good). The people least affected by the policy are those who (never bought the basketball, always bought the basketball).

1e. Draw the demand curve for this 5 person economy. Then, set the price equal to 9, and “shade in” or clearly indicate the area of the Consumer Surplus using your graph. (8 pts)

2a. Complete the table below, by adding in each business’s producer surplus corresponding with both prices (i.e. Price 1 and Price 2)– along with the change in producer surplus for each business when the price increases from \$5 to \$9. This is a hypothetical 5 business economy for basketballs where each business is considering selling a single basketball. (6 pts)

Producer Cost (\$)

Price 1 (\$)

Producer Surplus 1 (\$)

Price 2 (\$)

Producer Surplus 2 (\$)

Change in Producer Surplus when Price increases from Price 1 to Price 2 (\$)

Marquette’s 2 5 9

Jackson’s 4 5 9

Margaret’s 6 5 9

Horner’s 8 5 9

Washington’s 10 5 9

2b. What’s the Total Producer Surplus at Price 1? What’s the Total Producer Surplus at Price 2? (4 pts) TPS at Price 1 = _____________ TPS at Price 2 = _____________ 2c. Complete the sentences by circling the correct answer. (4 pts) When the price increased from \$5 to \$9, total producer surplus (increased, decreased). Based upon this, we can also conclude that ​if​ the price went from \$9 to \$5, total producer surplus would (increase, decrease).

2d. Complete the sentences by circling the correct answer. (4 pts) The people most affected by the policy are those (never sold the good, always sold the good). The people least affected by the policy are those who (never sold the good, always sold the good). 2e. Draw the supply curve for this 5 business economy. Set the price equal to 9 and “shade in” or clearly indicate the area of the producer surplus. (8 pts)

Part II: Price Controls (48 points) 3. Below you have a graph modelling rent control– where the price ceiling for rent is set at \$400.

a. Suppose there were no rent control– and so the market is at equilibrium at a price of \$600 and a quantity of 5. What’s the producer, consumer and total surplus? Show your work for partial credit. (9 pts.) Producer Surplus: \$ ________ Consumer Surplus: \$ ________ Total Surplus: \$ ________ b. Now suppose we enact rent control at \$400. Calculate the total shortage amount, the new Producer, Consumer and Total Surplus, and the deadweight loss. Show your work for partial credit. (15 pts.) Shortage: ________ (in 100,000’s of apartments) Consumer Surplus: \$ ________ Producer Surplus: \$ ________ Total Surplus: \$ ________ Deadweight Loss: \$ ________

4. Below is a model for the minimum wage. We have Supply of Labor (or Labour) from workers, Demand for Labor from businesses — and the minimum price of labor (i.e the wage).

a. Suppose there were no minimum wage– and so we are at the standard equilibrium. Find

the producer, consumer and total surplus. Show your work for partial credit. (9 pts.) Producer Surplus: \$ ________ Consumer Surplus: \$ ________ Total Surplus: \$ ________

b. Now we enact a minimum wage at \$15, represented above. Find the surplus (difference between Quantity Supplied and Quantity Demanded), consumer surplus, producer surplus, total surplus, and deadweight loss. Show your work for partial credit. (15 pts.)

Producer Surplus: \$ ________ Consumer Surplus: \$ ________ Total Surplus: \$ ________ Surplus: ________jobs (millions) Deadweight Loss: \$ ________