1. Chapter Nine Applying the Competitive Model

2. © 2007 Pearson Addison-Wesley. All rights reserved.9–2 Figure 9.1 Consumer Surplus 5 4 3 2 1 p 1 543210 CS 2 = $1 1 = $2 E 1 = $3 E 2 = $3 E 3 = $3 Price = $3 q 1 a b c q, Magazines per week q, Trading cards per year Demand Expenditure, E Consumer surplus, CS Marginal willingness to pay for the last unit of output (a) David’s Consumer Surplus Demand (b) Steven’s Consumer Surplus

3. © 2007 Pearson Addison-Wesley. All rights reserved.9–3 Application (Page 267) Willingness to Pay on eBay Q, Number of wedding cake toppers July 2005 1234567 $? $80 $75 $70 $62 $51 $50

4. © 2007 Pearson Addison-Wesley. All rights reserved.9–4 Figure 9.2 Fall in Consumer Surplus from Roses as Price Rises Q, Billion rose stems per year 57.8 32 30 1.1601.25 b a A = $149.64 million B = $23.2 million C = $0.9 million Demand

5. © 2007 Pearson Addison-Wesley. All rights reserved.9–5 Table 9.1 Effect of a 10% Increase in Price on Consumer Surplus (Revenue and Consumer Surplus in Billions of 2004 Dollars)

6. © 2007 Pearson Addison-Wesley. All rights reserved.9–6 Page 272 Solved Problem 9.1 Q, Units per week Q 1 Q 3 Q 2 p 1 p 2 e 1 e 2 e 3 D C B A Relatively inelastic demand (at e 1 ) Relatively elastic demand (at e 1 )

7. © 2007 Pearson Addison-Wesley. All rights reserved.9–7 Figure 9.3 Producer Surplus p* Q * Market supply curve Q, Units per year Market price Variable cost,VC Producer surplus,PS (b)A Market’s Producer Surplus 4 3 2 1 43210 PS 2 = $2PS 3 = $1PS 1 = $3 MC 2 = $2MC 3 = $3MC 4 = $4MC 1 = $1 p Supply q, Units per week (a)A Firm’s Producer Surplus

8. © 2007 Pearson Addison-Wesley. All rights reserved.9–8 Page 275 Solved Problem 9.2 Q, Billion rose stems per year E = $4.05 million 30 21 01.161.25 Supply b a D = $104.4 million F

9. © 2007 Pearson Addison-Wesley. All rights reserved.9–9 Figure 9.4 Why Reducing Output from the Competitive Level Lowers Welfare Q, Units per year Supply Demand p 2 MC 1 = p 1 Q 2 Q 1 e 1 2 e 2 C E B D A F

10. © 2007 Pearson Addison-Wesley. All rights reserved.9–10 Figure 9.5 Why Increasing Output from the Competitive Level Lowers Welfare Q, Units per year Supply Demand p 2 MC 1 = p 1 Q 2 Q 1 e 1 2 e 2 C F B DE A GH

11. © 2007 Pearson Addison-Wesley. All rights reserved.9–11 Figure 9.6 Effect of a Restriction on the Number of Cabs (a) Cab Firm q 2 q 1 q, Rides per month E 1 D S 1 S 2 E 2 B A C AC 2 1 MC e 2 e 1 p 2  p 1 p 2 p 1 (b) Market n 2 q 1 Q 2 = n 2 q 2 Q 1 = n 1 q 1 Q, Rides per month

12. © 2007 Pearson Addison-Wesley. All rights reserved.9–12 Figure 9.7 Welfare Effects of a Specific Tax on Roses Q, Billion rose stems per year 32 30 21 0  = 11 1.161.25 e 1 e 2 D S Demand C E B A F         = 11¢ S + 11¢

13. © 2007 Pearson Addison-Wesley. All rights reserved.9–13 Page 287 Solved Problem 9.3 Q, Billions of rose stems per year 39¢ 30¢ 28¢ s = 11¢ 1.251.34 e 1 e 2 D G S Demand C E B A F      S  11¢ s = ¢

14. © 2007 Pearson Addison-Wesley. All rights reserved.9–14 Figure 9.8 Effect of Price Supports in Soybeans Q d = 1.9 Q 1 = 2.1 G D Q s = 2.20 Q, Billion bushels of soybeans per year Q g = 0.3 p 1 = 4.59 3.60 Supply Demand Price support e F B MC A C E p = 5.00 —

15. © 2007 Pearson Addison-Wesley. All rights reserved.9–15 Page 291 Solved Problem 9.4 2.1 G D 2.2 Q, Billions of bushels of soybeans per year p 1 = $4.59 p 2 = $4.39 Supply Demand Price support F B A C E p = $5.00 — e 1 e 2

16. © 2007 Pearson Addison-Wesley. All rights reserved.9–16 Page 293 Solved Problem 9.5 Q, Units per year p 3 p 1 p 2 Q s = Q 2 Q d Q 1 e 1 e 2 D p, Price ceiling – C E B A F Supply Demand

17. © 2007 Pearson Addison-Wesley. All rights reserved.9–17 Figure 9.9 Loss from Eliminating Free Trade 9.010.28.211.813.1 Q, Million barrels of oil per day Imports = 4.9 14.70 0 29.04 S a = S 2 S 1, World price e 2 e 1 D B A C Demand

18. © 2007 Pearson Addison-Wesley. All rights reserved.9–18 Figure 9.10 Effect of a Tariff (or Quota) 9.08.211.813.1 Q, Million barrels of oil per day Imports = 2.8 0 14.70 19.70 29.04 S a = S 2 S 3 Demand S 1, World price e 2 e 3 e 1  = 5.00 F GH B A CE D     

19. © 2007 Pearson Addison-Wesley. All rights reserved.9–19 Table 9.2 Welfare Cost of Trade Barriers (millions of 2005 dollars)