EC102: CLASS 7 Christina Ammon

Overview  Fill out evaluation  Moodle Quiz 7  If time: one question from old problem set

Question 1 In this figure consumer surplus, producer surplus and total surplus are respectively represented as areas: A, B, A+B A, B, A-B B, A, A+B A, A+B, B

Question 2  When quantity grows from X a to X 1, the changes in the benefit from consuming and total surplus are respectively given by: G, G+F F, F+G G+F, G -G, F+G

Question 3  Total surplus is maximized at the perfectly competitive equilibrium because changing quantity: From X 1 to X a and from X 1 to X h reduces consumer surplus From X 1 to X a and from X 1 to X h reduces total surplus From X a to X 1 and from X h to X 1 reduces total surplus From X a to X 1 and from X h to X 1 reduces consumer surplus

Question 3 1. Move from X 1 to X a Consumption decreases from X 1 to X a => consumer surplus falls by G+F Production decreases from X 1 to X a => total cost of production decreases by the F. Total surplus decreases by (G+F)-F=G. 2. Move from X 1 to X h Consumption increases from X 1 to X h =>consumer surplus increases by I Production increases from X 1 to X h => total costs of production increase by J+I Total surplus decreases by (J+I)-I=J.  So, if we change the quantity supplied, total output falls

Question 4  In the figure the tax is represented by: The vertical distance between S’ and S The horizontal distance between S’ and S The difference between p 2 and p 1 The distance between e 2 and e 1

Question 5  The figure shows that the tax: Increases consumer surplus, decreases producer surplus, and decreases total surplus Decreases consumer surplus, decreases producer surplus, and decreases total surplus Decreases consumer surplus, increases producer surplus, and decreases total surplus Decreases consumer surplus, increases producer surplus, and increases total surplus

Consumer Surplus

Producer Surplus

Question 6 Market failure is:  A situation in which an economy with freely operating markets may fail to generate an efficient allocation of resources  A situation in which an economy with regulated markets may fail to generate an efficient allocation of resources  A situation in which an economy with freely operating markets may fail to generate a fair allocation of resources  A situation in which an economy with regulated markets may fail to generate a fair allocation of resources

Monopoly  How does it compare to perfect competition?  Perfect competition assumptions: Many, small buyers Many, small sellers Output is homogeneous Perfect information There are no barriers to entry  This implies for the equilibrium: Sellers are price takers Buyers are price takers Profits are zero in the long run Sellers do not behave strategically

Question 7 “And how are monopolies lost? Think about it. Some very good product people invent some very good products, and the company achieves a monopoly. But after that, the product people aren’t the ones that drive the company forward anymore. Because what’s the point of focusing on making the product even better when the only company you can take business from is yourself?”

Question 1 h Assume now that the two goods are “leisure” and “consumption”: 1. Explain the equation for the budget constraint between leisure and consumption. 2. Use the appropriate diagram to show how the optimal amount of labour supply can be derived in the setting of leisure- consumption model. 3. Use the appropriate diagram to show how this equilibrium choice would be affected if the wage were reduced. 4. Discuss how the supply curve of labour can be derived using information about the leisure demand curve. What determines whether it will slope upwards or downwards?

Question 1h  What is the labour supply curve?  What is the relationship between leisure demanded and labour supplied?  Hence, we can find the labour supply curve by finding the optimal amount of leisure demanded (and hence labour supplied) at different wage rates  Shape depends on the income or substitution effect Income effect Substitution effect  Graphs  How do we often assume the labour supply curve to look like?