Chapter 6

Yangon University of Economics
Executive Master of Development Studies Programme (EMDevS)

16th Batch (2018-2019)
Principle of Microeconomics (EMDevS 111)
Assignment - VI
Name : Hnin Yee Hpwe

Roll No: EMDevS - 14
Date : 4th Nov 2018
Problem and Applications
1.Melissa buys an iPod for $120 and gets consumer surplus of $80.
a) What is her willingness to pay?
b) If she had bought the iPod on sale for $90, what would her consumer surplus have been?
c) If the price of an iPod were $250, what would her consumer surplus have been?
a. $200
b. $110
c. $0
2. An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for
lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagrams.
If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left.
The result is a rise in the price of lemons and a decline in consumer surplus from A + B + C to just A. So consumer surplus
declines by the amount B + C.
In the market for lemonade, the higher cost of lemons reduces the supply of lemonade.
The result is a rise in the price of lemonade and a decline in consumer surplus from D + E + F to just D, a loss of E + F.
Note that an event that affects consumer surplus in one market often has effects on consumer surplus in other markets.
3. Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French
bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams.
A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread. The shift
of the demand curve leads to an increased price, which increases producer surplus from area A to area A + B + C.
The increased quantity of French bread being sold increases the demand for flour. As a result, the price of flour rises,
increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in one market
leads to effects on producer surplus in related markets.
4. It's a hot day, and Bert is thirsty. Here is the value he places on each bottle of water:
Value of 1st bottle: $7.
Value of 2nd bottle: $5.
Value of 3rd bottle: $3.
Value of fourth bottle: $1.
a. From this information, derive Bert's demand schedule. Graph his demand curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus does
Bert get from his purchases?
c. If the price falls to $2, how does the quantity demanded change? How does Bert's consumer surplus
change?
a. The demand curve is as follows

b. If the price is 4, Bert will buy 2 bottles of water, consumer surplus = (7 - 4) + (5 - 4) = 3.
c. If the price is 2, Bert will buy 3 bottles of water, consumer surplus = (7 -2) + (5 -2) + (3 - 2) = 9.
5. Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the
cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of
water:
Cost of first bottle $1
Cost of second bottle $3
Cost of third bottle $5
Cost of fourth bottle $7
a. From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus
does Ernie get from these sales? Show Ernie’s producer surplus in your graph.
c. If the price rises to $6, how does quantity supplied change? How does Ernie’s producer surplus change? Show
these changes in your graph.
a.
b. When the price of a bottle of water is $4, Bert buys two bottles of water. His consumer surplus is shown as area
A in the figure. He values his first bottle of water at $7, but pays only $4 for it, so has consumer surplus of $3. He
values his second bottle of water at $5, but pays only $4 for it, so has consumer surplus of $1. Thus Bert’s total
consumer surplus is $3 + $1 = $4, which is the area of A in the figure.
c. When the price of a bottle of water falls from $4 to $2, Bert buys three bottles of water, an increase of one. His
consumer surplus consists of both areas A and B in the figure, an increase in the amount of area B. He gets
consumer surplus of $5 from the first bottle ($7 value minus $2 price), $3 from the second bottle ($5 value
minus $2 price), and $1 from the third bottle ($3 value minus $2 price), for a total consumer surplus of $9. Thus
consumer surplus rises by $5 (which is the size of area B) when the price of a bottle of water falls from $4 to $2.

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Yangon University of Economics

Executive Master of Development Studies Programme (EMDevS)

Name : Hnin Yee Hpwe

a. The demand curve is as follows

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