Question

1. If Ming is willing to pay $75 to attend the Broadway production of The Lion King but actually pays $50, what is her consumer surplus?

2. If it cost $5.00 to make a pizza and you sell it for $15.00, what is your producer surplus?

3. What predictable effects result from price ceilings such as rent control?

4. What predictable effects result from price floors such as the minimum wage?

5. What is the definition of elasticity of Supply? FORMULA

Answer 1

1. Consumer surplus = Willingness to pay - What you actually pay = 75 - 50 = $25

2. Producer surplus = Profit - fixed cost = 15 - 5 = $10

3. There are three broad predictable effects resulting from price ceilings -

• Reduced amounts of the controlled good being made available by suppliers (shortage)
• Quality reduction of the controlled good
• Discrimination gap increases among potential buyers of the good.

4. There are three broad predictable effects resulting from price floors -

• Reduced amounts of the controlled good being purchased by demanders (surplus)
• Increase in the quality of the controlled good
• Discrimination gap increases among potential sellers of the good.

5. Price elasticity of supply (PES) measures the relationship between change in quantity supplied following a change in price.

It tells how sensitive is supply of good to price change.