ECN 302

Intermediate Microeconomics
Spring 2011
Problem Set #2
Solutions

Question 1 (0.5 points): Choose the best answer from (a), (b), (c) and (d).

Assume that beer is a normal good. If the price of beer rises, then the
substitution effect results in the person buying ______ of the good and the
income effect results in the person buying ______ of the good.

a. more, more
b. more, less
c. less, more
d. less, less

(Notes: The substitution effect is negative since it is now

relatively more expensive to buy beer. Thus, the consumer
substitutes away from beer. The income effect is also
negative. The consumer’s real purchasing power has
decreased and since beer is a normal good, the decrease in
purchasing power will lead to a decrease in the quantity of
beer demanded by the consumer.)

Question 2 (0.5 points): Choose the best answer from (a), (b), (c) and (d).

Which of the following is true regarding utility along a price consumption curve?
a. It is constant.
b. It changes from point to point.
c. It changes only if income changes.
d. It changes only for normal goods.

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 Question 3 (1.5 points): Short Answer Question

The market supply curve of rubber erasers is given by Qs=35,000+2,000P. The

demand for rubber erasers can be segmented into two components. The first
component is the demand for rubber erasers by art students. This demand is
given by QA=17,000-250P. The second component is the demand for rubber
erasers by all others. This demand is given by QO=25,000-2000P

(a) (0.75 points): Derive the total market demand curve for rubber erasers.

(b) (0.75 points): Find the equilibrium market price and market quantity.

ANSWERS:

(a) We need to first figure out if the two groups of consumers enter the
market at different prices. To do this, we need to find the price at which the
quantity demanded by art students is zero and the price at which the
quantity demanded by the other consumers is zero:
QA=0 ⇒ PA=17,000/250=68 (i.e. the art students enter the market when the
price is less than or equal to $68)
QO=0 ⇒ PO=25,000/2000=12.5 (i.e. the other students enter the market
when the price is less than or equal to $12.5)
Since the two groups of consumers enter the market at different prices, the
aggregate market demand curve (QD) is going to have a kink.

Price per
eraser

68 QD=QA if P≥$12.5

12.5
QD=QA+QO if P≤$12.5
Qo
QA
Erasers

The aggregate market demand is given by summing all positive

components of demand at each price.

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Thus, the market demand curve is:

If P≤12.5: QD=QA+QO=(17,000-250P)+(25,000-2000P)=42,000-2,250P
If P≥12.5: QD=QA =17,000-250P

(b) The equilibrium quantity occurs where quantity demanded in the market
equals quantity supplied.
Thus, we can equate supply and demand and solve for the market price.
That is,
QS=QD⇒ 35,000+2,000P=42,000-2,250P
⇒ 4250P=7,000
∴ The equilibrium price is 7,000/4,250=1.65
The equilibrium quantity is 42,000-2,250(1.65)=38,287.5≈38,300

Note that in this case, the market supply curve intersects the market
demand curve in the portion of the market demand curve where both
groups of consumers are in the market. We can ascertain that this is
indeed the case by looking at whether the market supply curve intersects
the demand curve for the art students at a price that makes sense. If we set
QA=QS and solve for the price, we would find that QA and QS intersect each
other at P= -8. Since prices cannot be negative, this confirms that the
market supply curve intersects the market demand curve in the portion of
the market demand curve where both groups of consumers are in the
market.

Question 4 (1.5 points): Short Answer Question

Suppose that the demand curve for bridge crossings at a toll bridge is given by
QD=30-2P, where P=bridge toll per crossing.

(a) (0.75 points): Suppose that the initial bridge toll is $5 per crossing. Calculate
the consumer surplus associated with having a bridge toll of $5 per crossing.
(b) (0.75 points): Suppose that bridge toll increases from $5 per crossing to $7
per crossing. Calculate the loss in consumer surplus that results from this price
increase.

ANSWERS:

(a) When P=$5, QD=30-2(5)=20

To calculate the consumer surplus at P=5, we need to calculate Pc, where
Pc is the price at which QD=0:
⇒ 0=30-2(PC)
⇒PC=30/2=$15

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 Thus, the consumer surplus when P=$5 is:
1
Consumer Surplus when P is $5 =  (15 − 5 )(20) = 100
2

Pc=15

Loss in consumer surplus when

bridge toll increases from $5 to $7

16 20 Q

(b) When P=$7, QD=30-2(7)=16

Thus, the consumer surplus when P=$7 is:
1
Consumer Surplus when P is $7 =  (15 − 7 )(16) = 64
2
∆Consumer Surplus=$64-$100= -$36
Thus, the loss in consumer surplus is $36.

Alternative method of calculating the loss in consumer surplus:

The loss in consumer surplus when the bridge toll increases from $5 to $7
is given by the shaded area in the diagram.

Thus, the loss in consumer surplus=(16)(7-5)+(1/2)(20-16)(7-5)=$36.

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