Krugman_SolMan_CH06.pdfVIP

ch ap te r 6Consumer and Producer Surplus1. a. Paul’s consumer surplus is $5. This is the difference between how much he is will-ing to pay ($10) and how much he does pay ($5). b. Since Robin’s willingness to pay is $10 and the price of the CD is $10, she gets no consumer surplus if she buys the CD. c. No trade will take place since Phil’s willingness to pay is less than the price. So no consumer surplus is created. 2. a. Bob will receive no producer surplus since the price paid for the trains is equal to his cost. b. No trade will take place since Jenny’s cost is $1,500, which is higher than the price of $1,200 she is offered. So no producer surplus is created. c. Sanjay’s cost is zero. The price he is paid for his time is $80,000, so his producer surplus is $80,000. 3. a. The payment to writers will increase the cost of providing video rentals. In the accompanying diagram, the supply curve shifts leftward from S1 to S2, the equi- librium price of video rentals rises from P1 to P2 and the quantity of video rentals bought and sold falls from Q1 to Q2. As a result, consumer surplus will decrease by the shaded amount. The writers’ agreement will not be popular with consumers. E1 E2 Q2 Q1 P2 P1 Quantity of video rentals Price of video rental S1S2 D 57 Krugman_SolMan_CH06 11/11/04 4:02 PM Page 57 b. The higher price of video rentals will make pay-per-view movies more popular. They are substitute goods, and the demand for them will increase when the price of video rentals rises. In the accompanying diagram, demand shifts rightward from D1 to D2. The price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. Producer surplus will increase by the shaded amount. This change will be popular with the cable television companies that show pay-per-view movies. 4. a. Consumer 1 buys a game since her willingness to pay is greater than the price. She gains $40 ? $29 = $11. Consumer 2 buys a game since his willingness to pay is greater than the price. He gains