Name: _______________________________
Open Response Review Problems
1. Use the market below:
a) Find the total surplus at equilibrium
b) If a price floor of $10 is imposed on the market, who gains and by how much? Who losses and by how
much? How much does the market lose?
c) Challenge: Is a $5 price floor is imposed on the market, what is consumer surplus? Explain
Use the market below
a)
b)
a)
b)
c)
Find the consumer surplus in equilibrium
Find the producer surplus in equilibrium
Find the consumer surplus after a $40 price ceiling is imposed
Find the producer surplus after a $40 price ceiling is imposed
Find the loss of total surplus as a result of the price control
5. The city government is losing millions of dollars on the mass transit system (buses and subways). The
government proposes to increase the fare of a ticket by 20% to raise revenue and has asked your advice. You
know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75. What do you
think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.
OPEN REPONSE ANSWER KEY
1.
a) Total Surplus = $200
b) Consumers loss by $60. Producers gain by $10. Market losses $50
c) Consumer Surplus = $80. A price floor below equilibrium is non – binding so the market will
remain in equilibrium
2.
3.
4.
a)
b)
c)
d)
e)
$900
$450
$700
$50
$600
5. Because the elasticity of demand is 0.75, it is inelastic. Therefore a 20% increase in the price of mass
transit will decrease ridership (quantity demanded) by only 15%. Because the percentage increase in the
price outweighs the percentage decrease in quantity demanded, total revenue from sales of mass transit
tickets will increase.