ECN 104 Lecture Notes - Lecture 3: Demand Curve, Opportunity Cost, Economic Surplus

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15 Oct 2016

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Supply and demand model is also a model of how much consumers and producers gain from participating in that market. (not just competitive market) 4. 1 consumer surplus and the demand curve de(cid:373)a(cid:374)d (cid:272)u(cid:396)(cid:448)e is de(cid:396)i(cid:448)ed f(cid:396)o(cid:373) (cid:271)uye(cid:396)s" tastes o(cid:396) preferences and that those same preferences also determine how much they gain from the opportunity to buy used books. Willingness to pay - the maximum price a consumer is prepared to pay for a good. A(cid:374) i(cid:374)di(cid:448)idual (cid:449)o(cid:374)"t (cid:271)uy the good if it (cid:272)osts (cid:373)o(cid:396)e tha(cid:374) this amount but will be eager to do so if it (cid:272)osts less. If the p(cid:396)i(cid:272)e is just e(cid:395)ual to a(cid:374) i(cid:374)di(cid:448)idual"s (cid:449)illi(cid:374)g(cid:374)ess to pay, he o(cid:396) she is indifferent to buying or not buying. Individual consumer surplus - the net gain to an individual buyer from the purchase of a good. Total consumer surplus - the sum of the individual consumer surpluses of all the buyers of a good in a market.

Related Questions

Suppose that US Airways aggregate demand curve for seats in this quarter is
Q = 20000-20*P for P < 1000
where P is its price in dollars. Its marginal cost is $100 per passenger.
(i) What is US Airways prot-maximizing price?
(ii) When US Airways sets the prot-maximzing price, what is the value of consumer surplus and
deadweight loss? What is the rms prot?

(b) Lets suppose we write demand in a different way. Marginal cost is still $100. Suppose that there are 20,000 potential passengers on the National-Charlotte market. The willingness to pay of an individual potential passenger is uniformally distributed between $0 and $1000, and a passenger will travel if and only if the price set by US Airways, which has to be the same for all passengers, is less than their willingness to pay.

(i) What will be the quantity of seats sold (i.e., number of travellers) if US Airways sets a price of $100? $550 dollars?

(ii) What is the rms aggregate demand curve (i.e., given an expression like the one above)?

(iii) What would be its aggregate demand curve if valuations (i.e., willingness to pay) were uniformally distributed between $0 and $800? In this case what would be the prot-maximizing price, the consumer surplus, deadweight loss and prot?

(c) It takes about 7.5 hours to drive from DC to Charlotte. For business travellers driving is not an option. Suppose that there are 10,000 potential business travellers with willingness to pay uniformally distributed between $0 and $1000. There are 10,000 potential leisure travellers with willingness to pay to go to Charlotte also uniformally distributed between $0 and $1000, but they will drive if US Airways charges a price of more than $200 (i.e., you can think of the e

ECN 104 Lecture Notes - Lecture 3: Demand Curve, Opportunity Cost, Economic Surplus

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