Use only the information given in a question to answer that question—assume ceteris paribus unless otherwise...

Use only the information given in a question to answer that question—assume ceteris paribus unless otherwise specified.

Answer all questions correctly.

Consider a Perfectly Competitive market where the demand is given by

P = 100 – Q. Use this same demand function for each part of the question.

Suppose the market supply is given by Q = 50. Calculate the equilibrium price, quantity, and total Producer Surplus. Draw the graph of the supply and demand functions. Show all calculations.

Suppose the market supply is given by P = Q. Calculate the equilibrium price, quantity, and total Producer Surplus. Draw the graph of the supply and demand functions. Show all calculations.

Suppose the market supply is given by P = 50. Calculate the equilibrium price, quantity, and total Producer Surplus. Draw the graph of the supply and demand functions. Show all calculations.

Explain what is happening to the total Producer Surplus and why.

Solutions

Expert Solution

d. Producer surplus is the excess of the market equilibrium price over the minimum price at which the producer is willing to supply the good.

In part a, producer is willing to sell the good at any price with a fixed quantity that is 50. He/she would have supplied the good even at price 0. But the good is sold for $50 each. So, the producer surplus is the area bounded by equilibrium price and supply curve. So, this area equals 50*50 = 2500.

In part b, the producer is willing to supply the good with respect to the supply curve P=Q. For example, at P = 1, he is willing to supply 1 good but he is paid $50 for that good. So, the surplus on that unit of good is $49.

This way total producer surplus is the shaded triangle in the second graph. This equals 50*50*0.5 = 1250.

In part c, producer surplus is 0. Because here, the producer is willing to supply any quantity at a minimum price of $50. There are 50 units sold but he is paid exactly the price at which he's willing to supply. So, the surplus earned on each unit is (50-50) = 0. So, there is a zero producer surplus in this case.

Rahul Sunny answered 1 year ago

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