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The minimum price at which a few of the producers are willing to sell a pound of cheese is $0.06, and the price floor is set at $0.17 per pound. With the price floor at $0.17 per pound of cheese, producers sell 212.5 billion pounds of cheese (some to consumers and some to the USDA). How much producer surplus is created now?
The producer surplus to be created will be .11 cents ($23.37 Billion)
f. The surplus cheese USDA buys is the difference between the quantity of cheese producers sell (212.5 billions of pounds of cheese) and the quantity of cheese consumers are willing to buy at the price floor (211 billions of pounds of cheese). How much money does the USDA spend on buying up surplus cheese?
The USDA will spend approx. $255,000,000 = $0.17 per 1.5 Billion lbs of Cheese.
g. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result, total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus cheese. Using your answers for parts d, e, & f, what is the total surplus when there is a price floor?
The total surplus with a price floor is 29.45 Billion h. How does this compare to the total surplus without a price floor from part c? Compare to the surplus from part c, this is much higher than the $14.8 Billion without any price support. Problem 2 The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield Island. …show more content…
|Price of Ice Cream Cones |Quantity of Ice Cream Cones Demanded |
|$1 |3000 |
|$2 |2400 |
|$3 |1600 |
|$4 |800 |
a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $1 to $2.
The percent change in quantity demanded would equal: 600/ (3000 + 2400)/2 x 100 = 600/2700 x 100 = 22.2%. Then there will be a change in percentage in price: 1/ (1 + 2) /2 x 100 = 1/1.5 x 100 = 66.7%. The price elasticity would equal = 22.2/28.6 = .33
b. What does this estimate imply about the price elasticity of demand for ice cream cones?
This implies that ice cream cones price elasticity of demand is inelastic.
c. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. The percent change in quantity demanded would equal: 800/ (1600 + 800)/2 x100 = 800/1200 x 100 = 66.7%. Then there will be a change in percentage in price: 1/ (3 + 4)/2 x 100 = 1/3.5 x 100 = 28.6%. The price elasticity would equal = 66.7/28.6 = 2.3 d. What does this estimate imply about the price elasticity of demand for ice cream cones? This implies that the price elasticity would be elastic. e. Notice that the estimates from (a) and (c) above are different. Why do price elasticity of demand estimates change along the demand curve? The estimates would change along the demand curve, because it is rare for the demand curve to be linear. If so, than the price elasticity would remain unchanged. --------------------- References: Krugman, P. & Wells, R (2012) Microeconomics, New York, NY. Worth Publishers |Microeconomics: Unit 4 Assignment: CS and PS; Elasticity | |Content (13 points) |Points Possible |Points Earned | |Problem 1: |6 | | |Computed consumer surplus for Problem 1a | | | |Computed producer surplus for Problem 1b | | | |Computed Total Surplus for Problem 1c. | | | |Computed consumer surplus for Problem 1d | | | |Computed producer surplus for Problem 1e | | | |Computed how much the USDA spends buying up surplus cheese for Problem 1f | | | |Using answers for 1b through 1d, compute the total surplus when there is a price floor for Problem 1g. |1 | | |Discussed how this compares to total surplus without a price floor. |1 | | |Problem 2: |5 | | |Calculated the price elasticity of demand when the price of an ice cream cone rises from $1 to $2. | | | |Discussed what the estimate implies about the price elasticity of demand for ice cream cones. | | | |Calculated the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. |
The producer surplus to be created will be .11 cents ($23.37 Billion)
f. The surplus cheese USDA buys is the difference between the quantity of cheese producers sell (212.5 billions of pounds of cheese) and the quantity of cheese consumers are willing to buy at the price floor (211 billions of pounds of cheese). How much money does the USDA spend on buying up surplus cheese?
The USDA will spend approx. $255,000,000 = $0.17 per 1.5 Billion lbs of Cheese.
g. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result, total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus cheese. Using your answers for parts d, e, & f, what is the total surplus when there is a price floor?
The total surplus with a price floor is 29.45 Billion h. How does this compare to the total surplus without a price floor from part c? Compare to the surplus from part c, this is much higher than the $14.8 Billion without any price support. Problem 2 The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield Island. …show more content…
|Price of Ice Cream Cones |Quantity of Ice Cream Cones Demanded |
|$1 |3000 |
|$2 |2400 |
|$3 |1600 |
|$4 |800 |
a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $1 to $2.
The percent change in quantity demanded would equal: 600/ (3000 + 2400)/2 x 100 = 600/2700 x 100 = 22.2%. Then there will be a change in percentage in price: 1/ (1 + 2) /2 x 100 = 1/1.5 x 100 = 66.7%. The price elasticity would equal = 22.2/28.6 = .33
b. What does this estimate imply about the price elasticity of demand for ice cream cones?
This implies that ice cream cones price elasticity of demand is inelastic.
c. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. The percent change in quantity demanded would equal: 800/ (1600 + 800)/2 x100 = 800/1200 x 100 = 66.7%. Then there will be a change in percentage in price: 1/ (3 + 4)/2 x 100 = 1/3.5 x 100 = 28.6%. The price elasticity would equal = 66.7/28.6 = 2.3 d. What does this estimate imply about the price elasticity of demand for ice cream cones? This implies that the price elasticity would be elastic. e. Notice that the estimates from (a) and (c) above are different. Why do price elasticity of demand estimates change along the demand curve? The estimates would change along the demand curve, because it is rare for the demand curve to be linear. If so, than the price elasticity would remain unchanged. --------------------- References: Krugman, P. & Wells, R (2012) Microeconomics, New York, NY. Worth Publishers |Microeconomics: Unit 4 Assignment: CS and PS; Elasticity | |Content (13 points) |Points Possible |Points Earned | |Problem 1: |6 | | |Computed consumer surplus for Problem 1a | | | |Computed producer surplus for Problem 1b | | | |Computed Total Surplus for Problem 1c. | | | |Computed consumer surplus for Problem 1d | | | |Computed producer surplus for Problem 1e | | | |Computed how much the USDA spends buying up surplus cheese for Problem 1f | | | |Using answers for 1b through 1d, compute the total surplus when there is a price floor for Problem 1g. |1 | | |Discussed how this compares to total surplus without a price floor. |1 | | |Problem 2: |5 | | |Calculated the price elasticity of demand when the price of an ice cream cone rises from $1 to $2. | | | |Discussed what the estimate implies about the price elasticity of demand for ice cream cones. | | | |Calculated the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. |