Market Equilibrium and Consumer and Producer Surplus: Practice Questions (Microeconomics 2.6)

Answer: (A). At $14, quantity demanded and quantity supplied are both 70. No kites are left unsold and no buyer who will pay $14 goes without.

• (B) reads quantity demanded at $12, but sellers offer only 50 there: a shortage of 30.
• (C) reads quantity supplied at $16, but buyers want only 60 there: a surplus of 30.
• (D) adds quantity demanded and quantity supplied. At equilibrium they are equal, and 70 kites change hands.

Answer: (A). Consumer surplus is the triangle below demand and above the price: base 400, height 50 − 30 = 20. CS = ½ × 400 × 20 = $4,000.

• (B) forgets the ½: it gives the rectangle, not the triangle.
• (C) measures the height from zero to the price ($30). That area is below the price line, not above it.
• (D) is total spending, 30 × 400. Spending is what buyers pay, not the extra benefit they receive.

Answer: (A). At equilibrium, every unit whose marginal benefit is at least its marginal cost is traded, and no unit with a higher cost than benefit is. So total surplus is maximised: the market is efficient.

• (B) assumes the two triangles match. Their sizes depend on the shapes of the curves.
• (C) confuses total surplus with one part of it. Consumer surplus alone is not what equilibrium makes as large as possible.
• (D) ignores the price. Only buyers whose willingness to pay is at least the equilibrium price buy; the rest choose not to.

(a) At $31, buyers with willingness to pay of at least $31 are the first three (48, 42, 36): quantity demanded = 3. Sellers with a minimum of at most $31 are the first three (12, 18, 26): quantity supplied = 3. Quantity demanded equals quantity supplied, so $31 is an equilibrium price and 3 books are traded. (Any price above $30 and below $32 works. At $29, four want to buy but only three will sell; at $34, four will sell but only three want to buy.)

(b)

• CS = (48 − 31) + (42 − 31) + (36 − 31) = 17 + 11 + 5 = $33.
• PS = (31 − 12) + (31 − 18) + (31 − 26) = 19 + 13 + 5 = $37.
• Total surplus = 33 + 37 = $70. Check: (48 − 12) + (42 − 18) + (36 − 26) = 36 + 24 + 10 = $70.

(c) The 4th buyer values a book at $30 but the 4th seller needs $32. The trade adds 30 − 32 = −$2, so total surplus falls to $68. The book costs the seller more to give up than it is worth to the buyer.

Suggested mark points (3): 1 for showing quantity demanded and quantity supplied are both 3 at $31; 1 for CS $33, PS $37 and total $70; 1 for $68 with the reason (value below minimum price).

(a) Vertical axis: “Price ($ per kg)”. Horizontal axis: “Quantity of fish (kg per day)”. Demand D falls from $20 to 1,000 kg. Supply S rises from $6 through $15 at 600 kg. The demand curve gives $12 at 400 kg (20 − 12 = 8, and 8 is 40% of 20, so 40% of 1,000 kg). The supply curve also gives $12 at 400 kg (it rises $9 over 600 kg, so $6 over 400 kg). Equilibrium: $12 per kg and 400 kg per day, with dashed lines to both axes.

(b) Consumer surplus: the triangle between $12 and $20 on the price axis, below D, up to 400 kg. Producer surplus: the triangle between $6 and $12, above S, up to 400 kg. Use different shading (for example hatching and dots) and label each.

(c)

• CS = ½ × 400 × (20 − 12) = ½ × 400 × 8 = $1,600 per day.
• PS = ½ × 400 × (12 − 6) = ½ × 400 × 6 = $1,200 per day.
• Total surplus = $2,800 per day.

Do not award the third point if either triangle extends past 400 kg.

(a) Market equilibrium is the price and quantity at which the quantity buyers want to buy equals the quantity sellers want to sell, so the market clears with no shortage or surplus.

(b) At $50, above equilibrium, quantity supplied would exceed quantity demanded: there would be a surplus of lobster. Sellers with unsold lobster would cut their prices. As the price falls, quantity demanded rises and quantity supplied falls, until the price returns to $40.

(c) (i) The high price tells buyers lobster is scarce compared with how much people want it. Buyers who value it less eat crab or other food instead, so lobster goes to those who value it most. (ii) The high price tells people who fish that lobster is highly valued. It gives them an incentive to spend more of their time, boats and traps catching lobster, so resources move towards the good people value more.

(d) Any one of: lobster may be harder or more costly to catch, so supply is smaller at each price; demand for lobster may be higher at each price, for example because more buyers see it as a treat. The equilibrium price is higher when supply is lower or demand is higher.

(a) Demand falls $2 per 100 kg, from $20; supply rises $1.50 per 100 kg, from $6.

• 300th kg: MB = 20 − 6 = $14; MC = 6 + 4.50 = $10.50.
• 500th kg: MB = 20 − 10 = $10; MC = 6 + 7.50 = $13.50.

(b) Total surplus is the area between demand and supply up to the quantity traded.

• 300 kg: a trapezoid with parallel sides 20 − 6 = 14 (at zero) and 14 − 10.50 = 3.50 (at 300 kg). Area = ½ × (14 + 3.50) × 300 = $2,625. That is $175 less than at equilibrium.
• 500 kg: the full equilibrium triangle ($2,800) minus the loss on kilograms 400 to 500, where cost exceeds benefit: ½ × 100 × (13.50 − 10) = $175. Total = $2,625.

(c) At 300 kg, the next kilogram is worth $14 to a buyer but costs only $10.50 to supply, so trading more would add surplus. At 500 kg, the last kilograms cost more than they are worth, so they subtract surplus. Only at 400 kg, where MB = MC = $12, is there nothing left to gain. Total surplus is largest ($2,800) there, so the equilibrium quantity is efficient.

(d) Any one: there is a market failure, for example fishing harms others (such as overfishing that hurts future catches) and that cost is not in the supply curve; or buyers’ benefits are not all shown in demand; or the market is not perfectly competitive.

Accept a loss of $175 at each quantity instead of the totals if the method is clear.