Question

What is consumer surplus?

a.It is the sum of the value consumers place on the product above the price they paid for it

b.It is the amount of income a consumer has remaining after purchasing a product

c.It is the profit margin on the product

Producer surplus is:

a.Revenue minus fixed costs

b.The area above the supply curve below the equilibrium price line

c.The area above the supply curve and beneath the demand curve to the left of the equilibrium point

The demand function for a pair of a popular new brand of athletic shoe has been estimated to be as follows:

Q_d = 500 – 2.5*Po + 1.5*Pc + .5*I + .02*A

Where Po is the own price of the pair of shoes, Pc is the price of a pair of close competitor’s shoes, I is the average income in the area measured in thousands of dollars, and A is spending on advertising measured in millions of dollars. At the current time, the new shoes are priced at $125 a pair, a pair of the competitor’s shoe is selling for $100, I = 37.5 and A = 5 .

Based on the cross price elasticity of the new shoe and its closest competitor, the 2 types of shoes are best described as:

a.unrelated

b.Substitutes

c.Complements

Answer 1

1.

Since the consumer surplus is the area below the demand curve and above the price.

In other words, the consumer surplus is the difference of maximum willingness to pay for any good and price of that good.

Hence it can be said that consumer surplus is the sum of the value consumers place on the product above the price they paid for it.

Hence option a is the correct answer.

2.

Since producer surplus is the area below the price and above the supply curve.

In other words it is the difference in the price of the good and minimum willingness to accept for the good.

Hence it can be said that producer surplus is the area above the supply curve below the equilibrium price line.

Hence option b is the correct answer.

3.