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 Xa to X1, 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 X1 to Xa and from X1 to
Xh reduces consumer surplus
• From X1 to Xa and from X1 to
Xh reduces total surplus
• From Xa to X1 and from Xh to
X1 reduces total surplus
• From Xa to X1 and from Xh to
X1 reduces consumer surplus
Question 3
Move from X1 to Xa
1.
•
•
•
Consumption decreases from X1 to Xa =>
consumer surplus falls by G+F
Production decreases from X1 to Xa=> total cost
of production decreases by the F.
Total surplus decreases by (G+F)-F=G.
Move from X1 to Xh
2.
•
•
•
Consumption increases from X1 to Xh
=>consumer surplus increases by I
Production increases from X1 to Xh => 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 p2 and
p1
• The distance between e2 and e1
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”:
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 leisureconsumption 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?
1.
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?