Homework 3:

Producer/Consumer Surplus and Elasticity

ECON 102 – Microeconomics

Professor Schenk
Due: January 25, 2009
January 19, 2010

1. Refer to the graph above. The market represented here is in equilibrium when the price is:
(a) $5.00 per unit and 220 units are bought and sold.
(b) $8.15 per unit and 220 units are bought and sold.
(c) $5.00 per unit and 400 units are bought and sold.
(d) $3.65 per unit and 400 units are bought and sold.
2. Refer to the graph above. Assume the market is in equilibrium, calculate the consumer surplus.

3. Refer to the graph above. Assume the market is in equilibrium, calculate the producer surplus.
4. Refer to your answers, what is the total surplus?
5. Now assume price is held at $8.15 per unit. What is the consumer surplus? Did consumer welfare
increase or decrease?

6. On October 28, 2008, the Des Moines Register reported gas prices fell 3 percent. The textbook, on
page 138, reported the elasticity of gasoline is 0.08. The United States consumes 9 million barrels of
oil per day.

1
(a) Will gasoline consumption rise or fall?
(b) By how much (as a percentage)?
(c) How many barrels of oil will the U.S. consume with the price change?
(d) Will total revenue for gasoline manufacturers rise or fall? Explain why using supply, demand, and
elasticities.
(e) name a substitute good for gasoline. Will the price of that good increase or decrease with the
price change? Draw a graph to support your answer. (Note: Ethanol is really not a substitute
since ethanol contains gasoline.)
(f) Name a complementry good. Will the price of that good increase or decrease with the price
change? Draw a graph to support your answer.

You’re done!