EBK INTERMEDIATE MICROECONOMICS AND ITS
EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
Question
Book Icon
Chapter 17, Problem 17.10P

a)

To determine

To calculate: The producer surplus, equilibrium quantity, price, consumer surplus, and social welfare.

a)

Expert Solution
Check Mark

Explanation of Solution

Given the following demand and supply function of the potato chips

  QS=P2QD=1002P

The equilibrium price is calculated by equating the supply and demand function. Thus, in equilibrium

  QS=QDP2=1002PP=(1002P)×2P+4P=2005P=200P=2005=$40

To calculate equilibrium, we need to substitute P=$40 into either the demand or supply function. Thus, equilibrium quantity is

  QD=1002P=1002(40)=10080=20

Hence, the equilibrium quantity and price with respect to given demand and supply function is Q = 20 and P = $40.

In order to calculate conumer surplus, producer surplus and social welfare we need to plot the above demand and supply function.

  EBK INTERMEDIATE MICROECONOMICS AND ITS, Chapter 17, Problem 17.10P , additional homework tip  1

In the graph, the x axis depicts the quantity of potato chips and the y axis depicts the price per potato chips (in $), QD is the demand curve for potato chips and QS is the supply curve for potato chips. The equilibrium, E, is at Q = 20 and P = $40.

Consumer surplus in the graph is represented by triangle A, so to compute consumer surplus, we need to calculate the area of the triangle. Thus, consumer surplus (CS) is

  CS(AreaoftriangleA)=12(b)(h)=12(20)(50-40)=(10)(10)=100

Producer surplus in the graph is represented by triangle B, so to compute producer surplus, we need to calculate the area of the triangle. Thus, producer surplus (PS) is

  PS(areaoftriangleB)=12(b)(h)=12(20)(40)=(10)(40)=400

Social welfare (SW) is the sum of consumer surplus and producer surplus. Thus,

  SW=100+400=500

Economics Concept Introduction

Introduction:

The equilibrium price is the defined as the price level at which both consumer and producer satisfies. It is the price where both want to exchange commodities and services.

b)

To determine

To compute: The equilibrium quantity, price, and deadweight loss triangle on the diagram.

b)

Expert Solution
Check Mark

Explanation of Solution

Given information:

Perceived demand function, QD*=200-2P

Supply function, QS=P2

The equilibrium price is calculated by equating the supply and demand function. Thus, in equilibrium

  QS=QD*P2=200-2PP=(200-2P)×2P=400-4PP+4P=4005P=400P=4005=$80

In order to calculate equilibrium quantity, we need to substitute P = $80 into either the demand or supply function. Thus, equilibrium quantity is

  QD*=200-2P=200-2(80)=200-160=40

Hence, the equilibrium quantity and price with respect to given demand and supply function is

  Q= 40 andP= $80

In order to calculate deadweight loss we need to plot the above demand function and supply function. This has been done below:

  EBK INTERMEDIATE MICROECONOMICS AND ITS, Chapter 17, Problem 17.10P , additional homework tip  2

In the graph, the x axis measures the quantity of potato chips and the y axis measures the price per potato chips (in $), QD is the demand curve for potato chips and QS is the supply curve of potato chips. The equilibrium, E, is at Q = 20 and P = $40 when it assumed that consumer behavior is not limited by his or her cognitive ability.

When it assumed that consumer behavious is influenced by his or her limited cognitive ability, then his percieved demand curve is QD* wherein it can be seen that the consumer ends up buying extra 100 units of potato chips. Given the supply curve, QS , the new equilibrium is E* where the equilibrium quantity and price Q = 40 and P = $80.

The deadweight loss indicating loss in social welfare due to extra purchase of potato chips than required is represented by triangle C and D. to compute the deadweight loss we need to calculate the area of triangle C and D. Thus

  AreaoftriangleC=12×20×40=10×40=400

  AreaoftriangleD=12×10×20=5×20=100

Thus, deadweight loss is 400+100=500

Economics Concept Introduction

Introduction: A deadweight loss is an expense to economy that is caused by market failure, when supply and demand are out of equilibrium. Primarily used in economics, deadweight loss can be extended to any deficit caused by inadequate resource allocation.

c)

To determine

To compute: The per unit tax that the government could impose to correct the deadweight loss problem.

c)

Expert Solution
Check Mark

Explanation of Solution

In order to correct the deadweight loss of 500 due to extra purchase of potato chips, government could impose a specific tax, t= $50 per unit.

As a result, the consumer will reduce its purchase of potato chips from 40 units to 20 units on account of increased price of potato chips to $90.

Economics Concept Introduction

Introduction: A deadweight loss is an expense to economy that is caused by market failure, when supply and demand are out of equilibrium. Primarily used in economics, the loss of deadweight can be extended to any deficit caused by inadequate resource allocation.

d)

To determine

To compute: The deadweight loss the governement has introduced with the tax if instead the government made a mistake and the second demand is actually the true demand stemming from rational decisions.

d)

Expert Solution
Check Mark

Explanation of Solution

Dead weight loss happens when there is no equilibrium between supply and demand which leads to market failure. Market inefficiency happens when products are either overvalued or undervalued inside the industry. Although the disparity will favor some people in society, a change from equilibrium would negatively affect others.

If it is assumed that QD* is the true demand curve, then government by imposing a specific tax, t = $50 per unit, has created deadweight loss of 500.

Economics Concept Introduction

Introduction: A deadweight loss is an expense to economy that is caused by market failure, when supply and demand are out of equilibrium. Primarily used in economics, the loss of deadweight can be extended to any deficit caused by inadequate resource allocation.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
What is a willingness to pay? How does this relate to the concept of demand? When determining the cost of manufacturing a product, what considerations are included in the cost? Provide an example of a product and explain each consideration in relation to your example. When purchasing construction materials for a home renovation, what factors should a homeowner consider? Provide an example of a green building product—a sustainable alternative construction material—and explain each factor in relation to your example. Address how the choice of using this particular green building product might influence and be influenced by supply and demand. What assumptions do economists make? Why does each assumption matter in environmental economics? Is the environment an economic asset? Is the environment a social asset? How does global demand for fish affect marine natural resource economics? How is the supply of forest goods influenced by privately and publicly owned forests? Why has supply and…
Which of the following cannot be among their main errors when consumers make in judgement and decision-making? People are overconfident B) People tend to interpret evidence to confirm beliefs they already hold. People have a natural tendency to look for examples which confirm their existing view or hypothesis D People do not give too much weight to a small number of vivid observations When making decisions many people will use short cuts that help simplify the decision-making process.
You were presented with a utility maximizing rule which states: If you always choose the item with the greatest marginal utility per dollar spent, when your budget is exhausted, the utility maximizing choice should occur where the marginal utility per dollar spent is the same for both goods.     That rule is expressed as follows: Group of answer choices   (The marginal utility associated with good 1 / the price of good 2) = (the marginal utility associated with good 2 / the price of good 1)   % change in price / % change in quantity   (The marginal utility associated with good 1 / the price of good 1) = (the marginal utility associated with good 2 / the price of good 2)   The marginal utility per dollar of good 1 > the marginal utility per dollar of good 2.
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education