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ECON 101 Study Guide - Midterm Guide: Economic Surplus, Pareto Efficiency, Marginal Utility

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School
U of M
Department
Economics
Course
ECON 101
Professor
Justin Wolfers

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ECON 101 Full Course Notes
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ECON 101 Full Course Notes
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Document Summary

Economic surplus the benefits of an action minus the costs. Markets reallocate stuff to their best uses, you have some stuff, other people have some stuff and you want some of what they have more than they do so you swap. Gains from trade the benefits that come from reallocating stuff to its best uses, measured by economic surplus. Willingness to pay the maximum price at which a consumer would buy a good. Consumer surplus the difference between your willingness to pay and the price. Total consumer surplus in a market is the area under the demand curve and above the price, out to the quantity sold area of a triangle x base x height. Producer surplus the economic surplus you get from selling something difference between the price you get and the lowest price you"re willing to sell at. Willingness to accept the minimum amount a seller would accept in exchange for a good.

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Related Questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

PLEASE ANSWER EACH QUESTION WITH A, B, C, and D. NOT ANSWERING ALL QUESTIONS OR INCORRECT ANSWERS WILL RESULT IN A THUMBS DOWN.

Question 1: Which of the following is not needed for price discrimination to be possible?

   

A. The firm must have market power.
   

B. The firm must be able to prevent resale and arbitrage.
   

C. The firm must eventually learn about its customers' demands.
   

D. The firm's customers must have different demand curves.

 

Question 2: Relative to standard monopoly pricing, first-degree price discrimination results in:

  A.

higher consumer surplus, higher producer surplus, and higher total surplus.
  B.

lower consumer surplus, higher producer surplus, and higher total surplus.
  C.

lower consumer surplus, higher producer surplus, and lower total surplus.
  D.

lower consumer surplus, lower producer surplus, and lower total surplus.

 

Question 3: Relative to perfect competition, first-degree price discrimination results in:

   

A. higher consumer surplus, higher producer surplus, and higher total surplus.
   

B. lower consumer surplus, higher producer surplus, and equal total surplus.
   

C. lower consumer surplus, higher producer surplus, and equal total surplus.
   

D. lower consumer surplus, lower producer surplus, and lower total surplus.

Question 4: If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:

A.

$800.
B.

$1,600.
C.

$2,400.
D.

$3,200.

Question 5: For third-degree discrimination to be possible, which of the following features is not required?

   

A. market power
   

B. prevention of resale
   

C. identification of each customer's demand before purchase
   

D. customers with different demand curves

 

Question 6: A golf course has frequent players whose demand is Qf = 260 - 0.4P and infrequent players whose demand is Qi = 10 - 0.1P. The combined market demand is Q = 34 - 0.4P. The marginal cost and average total cost of providing a round of golf are $20. How much higher will the profit be if the golf course uses third-degree price discrimination instead of charging all golfers the same price?

A.

$0
B.

$7.50
C.

$10
D.

$110

 

Question 7: An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and vacation travelers whose demand is QV = 150 - 0.5P. The combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?

A.

$0
B.

$250
C.

$400
D.

$1,000

 

Question 8: If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:

  A.

Higher.
  B.

Lower.
  C.

More price elastic.
  D.

Less price is elastic.

 

Question 9: The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:

   

A. resale is possible.
   

B. customers have the same demand curves.
   

C. firms have market power.
   

D. firms can identify customers' demand before the customers make a purchase.

 

Question 10: For price discrimination via a quantity discount to work:

   

A. customers who purchase larger quantities must have relatively elastic demand.
   

B. customers who purchase larger quantities must have relatively inelastic demand.
   

C. customers who pay a relatively high price must have relatively elastic demand.
   

D. customers who pay a relatively low price must have relatively inelastic demand.

 

Question 11: A firm wants to offer a quantity discount to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have a demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for obsessed customers is incentive compatible?

  A. 

60 units at a price of $10 each
  B.

40 units at a price of $10 each
  C.

60 units at a price of $20 each
  D.

40 units at a price of $20 each

 

Question 12: Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?

   

A.The firm's customers must have different demand curves.
   

B. The marginal costs of producing each version of the product must be the same.
   

C. The firm must be able to prevent resale.
   

D. The firm must have market power.

 

 

Willingness to pay (per month)
 

Weight machines

Indoor pool

Abe

$60

$50

Betty

50

125

Chris

25

140

 

QUESTION 13
This table shows the willingness to pay off the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?

   

A. $60 for the weight room, $140 for the pool, or $175 for both
   

B. $50 for the weight room, $125 for the pool, or $165 for both
   

C. $25 for the weight room, $50 for the pool, or $70 for both
   

D. $60 for the weight room, $130 for the pool, or $175 for both

 

Question 14: Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?

   

A. Customers must have identical demand curves.
   

B. The firm does not learn about customer demand until after purchase.
   

C. Demand for two products must be negatively correlated.
   

D. The firm must not have market power.

 

Question 15: Which of the following features is not needed for price discrimination using a two-part tariff to work?

   

A. The firm must have market power.
   

B. The firm must be able to prevent resale.
   

C. The firm must learn about its customers' demands before purchases are made.
   

D. The firm's customers must have different demand curves.

 

Question 16: A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each, but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?

   

A. Consumer surplus would decrease by $10, and producer surplus would increase by $20.
   

B. Consumer surplus would increase by $10, and producer surplus would increase by $20.
   

C. Consumer surplus would increase by $20, and producer surplus would increase by $10.
   

D. Consumer surplus would increase by $20, and producer surplus would increase by $20.

 

Question 17: Relative to standard monopoly pricing, block pricing:

   

A. decreases consumer surplus, increases producer surplus, and increases total surplus.
   

B. increases consumer surplus, increases producer surplus, and increases total surplus.
   

C. decreases consumer surplus, increases producer surplus, and decreases total surplus.
   

D. decreases consumer surplus, decreases producer surplus, and decreases total surplus.

 

Question 18: Which of the following results in the highest amount of producer surplus?

  A.

bundling
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

Question 19: Which of the following results in the highest amount of consumer surplus?

  A.

first-degree price discrimination
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

Question 20: Which of the following results in the highest amount of total surplus?

  A.

third-degree price discrimination
  B.

block pricing
  C.

first-degree price discrimination
  D.

bundling

 

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