Question

For this exercise you will need to first build a graph to these specifications: Draw a downward sloping demand curve with vertical intercept (0,150) and horizontal intercept (25,0). Draw a supply curve with vertical intercept (0,50) and with slope=4 i.e. the market equilibrium occurs at (10, 90).

a. Compute consumer, producer, and total surplus at the market equilibrium.

b. Label consumer surplus and producer surplus if the government imposes a price floor of $120, then compute deadweight loss.

c. Compute deadweight loss when the government imposes a price floor of $70.

2.) Excellent weather in California creates a bumper crop of grapes. As a result of the favorable weather, what happens to the consumer surplus in the market for grapes and to the consumer surplus in the market for red wine? Draw the necessary graphs to represent this scenario and then write a sentence or two with your answer

Answer 1

Total surplus=CS+PS=300+200=500

For DWL,quantity must be known.

2.Grapes is a complement of wine.Due to bumper crops,the production of grapes rise.Since,grapes is used in wine production,production of wine also rises.Supply curve shifts to the right.

Consumer's surplus before=ABC

CS after=AEG.

Producer's surplus because=BCD

Producer's surplus after=HGE

Both consumer's and producer's surplus rises.