Question

Answer two of the following questions :

1)      Explain the resource allocation methods that existed or exist in your local, regional or national economy and how they work. Give specific examples of at least two of the 9 methods described in the lecture:

Market price

Command

Majority rule

Contest

First-come, first-served

Sharing equally

Lottery

Personal characteristics

Force

2)      Give two examples, one of a good and one of a service that you buy and distinguish between the price that you pay for it and how much it is really worth for you, its “value” (This is the first step necessary in order to be able to estimate your consumer surplus).

3)      Give two examples, one of a good and one of a service that your company produces (or choose a company that you want to analyze) and distinguish between the price that the company sells the good or service for and how much it is really costs the company to produce the output (This is the first step necessary in order to be able to estimate your producer surplus).

Answer 1

Ques 2.

Product: A pen right before an examination. Even though the pen costs only 20 cents, I will be willing to pay even $2 for the same pen. Hence, consumer surplus = 2 - 0.2 = $1.8

Service: Drycleaning clothes before an interview. Even though it may cost $1.5 to dryclean clothes, I am willing to pay even $5 for this. Hence, consumer surplus = $5 - $1.5 = $3.5

Ques 3.

Product: Cars. While it may cost only $20,000 to produce one unit of car, it is priced at $30,000. So, the producer may have been willing to sell the car at $20,000. Hence, producer surplus is $10,000.

Service: Car servicing: While it may cost only $20 to service the car, it prices the service at $120. Hence, producer surplus is $100.