Using The Information About Individuals And Their Will

using The Information Below About Individuals And Their Willingness

Using the information below about individuals and their willingness to pay for a bottle of ginger ale, calculate the total consumer surplus at a market price of $5. The maximum amount a buyer would pay for ginger ale is as follows: Scott $10, Dennis $4, Greg $8, Dave $7, Mike $5. Additionally, using the information about willingness to supply ginger ale, calculate the total producer surplus at a market price of $5. The marginal cost of producing ginger ale is as follows: Gene $6, Brandon $3, Matt $2, Cooper $11, Jed $5. Furthermore, analyze how your answers would change if the price falls to $2.

Paper For Above instruction

Economic surplus analysis, encompassing consumer and producer surplus, provides insight into the overall efficiency of a market. By examining the willingness to pay and supply at specific prices, we can assess how well resources are allocated and the impact of price fluctuations on market participants. This paper explores the calculation of consumer and producer surpluses at a market price of $5 and considers changes when the market price decreases to $2.

Consumer Surplus Calculation at Price of $5

Consumer surplus represents the difference between what consumers are willing to pay and what they actually pay. To determine total consumer surplus at a market price of $5, we analyze each individual’s maximum willingness to pay and compare it with the market price. Only individuals whose willingness to pay exceeds or equals the market price contribute to consumer surplus.

Individuals and their willingness to pay:

  • Scott: $10
  • Dennis: $4
  • Greg: $8
  • Dave: $7
  • Mike: $5

Calculations:

  • Scott: $10 - $5 = $5
  • Dennis: willingness to pay is $4, which is less than $5, so no surplus
  • Greg: $8 - $5 = $3
  • Dave: $7 - $5 = $2
  • Mike: $5 - $5 = $0

Sum of consumer surpluses: $5 (Scott) + $3 (Greg) + $2 (Dave) + $0 (Mike) = $10

Producer Surplus Calculation at Price of $5

Producer surplus is the difference between the market price and the marginal cost of production for each producer willing to supply. Producers whose marginal costs are less than or equal to the market price contribute to producer surplus. For each producer, we analyze their marginal costs and determine whether they participate in supplying ginger ale at $5.

Individuals and their marginal costs:

  • Gene: $6
  • Brandon: $3
  • Matt: $2
  • Cooper: $11
  • Jed: $5

Calculations:

  • Gene: $6 > $5, so no supply or surplus
  • Brandon: $3 ≤ $5, surplus: $5 - $3 = $2
  • Matt: $2 ≤ $5, surplus: $5 - $2 = $3
  • Cooper: $11 > $5, no supply or surplus
  • Jed: $5 ≤ $5, surplus: $5 - $5 = $0

Total producer surplus = $2 (Brandon) + $3 (Matt) + $0 (Jed) = $5.

Effects of Falling Price to $2

When the market price declines to $2, the consumer and producer surpluses change accordingly. For consumers, only those willing to pay at least $2 will participate, and for producers, only those with marginal costs at or below $2 will supply.

At $2, consumer surplus is calculated for individuals whose willingness to pay is greater than or equal to $2:

  • Scott: $10 - $2 = $8
  • Greg: $8 - $2 = $6
  • Dave: $7 - $2 = $5
  • Mike: $5 - $2 = $3
  • Dennis: $4

>Total consumer surplus at $2: $8 + $6 + $5 + $3 = $22.

Producer surplus at $2 considers marginal costs at or below $2:

  • Brandon: $3 > $2? No, so no supply
  • Matt: $2 ≤ $2, surplus: $2 - $2 = $0
  • Jed: $5 > $2, no supply
  • Gene: $6 > $2, no supply
  • Cooper: $11 > $2, no supply

Thus, total producer surplus at $2 is zero, as only Matt supplies at marginal cost equal to the price.

In summary, a decrease in market price from $5 to $2 significantly increases consumer surplus but results in a decline in producer surplus, illustrating the typical trade-off in market dynamics. Consumers benefit from lower prices, but producers with higher costs cease to supply, leading to potential reductions in output and market efficiency.

Conclusion

Market prices critically influence the distribution of surpluses among consumers and producers. At a higher price of $5, total consumer surplus is $10, and producer surplus is $5. When the price drops to $2, consumer surplus increases to $22, but producer surplus drops to zero. These shifts highlight the importance of pricing strategies and market conditions in determining economic welfare. Understanding these surpluses helps policymakers and businesses optimize market outcomes and anticipate the impacts of price changes within competitive markets.

References

  • Mankiw, N. G. (2020). Principles of Economics (8th ed.). Cengage Learning.
  • Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
  • Krugman, P., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
  • Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.
  • Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
  • Perloff, J. M. (2019). Microeconomics (8th ed.). Pearson.
  • Frank, R. H., & Bernanke, B. S. (2016). Principles of Economics (6th ed.). McGraw-Hill Education.
  • Hubbard, R. G., & O'Brien, A. P. (2018). Microeconomics (7th ed.). Pearson.
  • Acemoglu, D., & Restrepo, P. (2018). The Economics of Artificial Intelligence: An Overview. National Bureau of Economic Research.
  • Smith, A. (1776). The Wealth of Nations. Modern Library Edition, 1937.

Related Assignments