Question

You read a newspaper article that says the unemployment rate rose this month. Are we in a recession? Explain.

&

Determine the amount of consumer surplus generated in each of the following situations.

1. Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to $10. He picks out one he likes with a price tag of exactly $10. When he is paying for it, he learns that the T-shirt has been discounted by 50%.

2. Alberto goes to the music store hoping to find a used copy of Nirvana’s Nevermind for up to $30. The store has one copy of the record selling for $30, which he purchases.

3. After soccer practice, Stacey is willing to pay $2 for a bottle of mineral water. The 7-Eleven sells mineral water for $2.25 per bottle, so she declines to purchase it.

Answer 1

Ans: If the unemployment rate rose this month we first have to see by how much percent it has increased; if unmployment rate has increased by 0.50 or more precentage then Sahm Recession indicator predicts that there are 97% chances that a recession is underway; Although rising unemployment is a sign of upcoming recession but we have to see whether the unemployment has risen due to lack in demand side or supply side, if there is contraction in GDP due to reduced spending or investment activity then it is a sign that firms are cutting back production and the recession is underway. If there is reduction in supply of labor due to subsidized programs by the government and cash benefits are given then it can be that people are not willing to work andthere is no recession and due to technological changes demand is reduced due to capital efficient technology then also there is no recession; thus only unemployment rate is not a sign of recession we also have to check whether there is reduction in investment, production, rise in interest rates, decline in consumption,etc then only we canhave a true picture of recession.

Ans: Consumer surplus is the difference between the price that consumers are wiiling to pay and the price what they actually pay.

1. Consumer surplus = $10 - $5 = $5. because Leon is willing to pay $10 for t-shirt and the discount is 50% which is cost of t-shirt for Leon = 50% of $10 = $5. Thus $10 is price that he is willing to pay and $5 is the price that he actually pays.
2. Price that Alberto is willing to pay for music copy = $30

Price that he actually pays = $30

So consumer surplus = $30 - $30 =$0. Thus conssumer surplus is $0.

3. Price that Stacey is wiiling to pay = $2.00

Price that 7- Eleven asks her to pay = $2.25  

Consumer surplus = $2 - $2.25 = - $0.25

Thus in this case consumer surplus is negative and Stacey does not purchases the bottle and in this case actual price is more than the willingness to pay.