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17 Cards in this Set

  • Front
  • Back
Welfare Economics
The study of how the allocation of resources affects economic well-being.
Willingness to Pay
The maximum amount that a buyer will pay for a good.
Consumer Surplus
A buyer's willingness to pay minus the amount the buyer actually pays.
Cost
The value of everything a seller must give up to produce a good.
Producer Surplus
The amount a seller is paid for a good minus the seller's cost.
Efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society.
Equity
The fairness of the distribution of well-being among the members of society.
Market Failure
The inability of some unregulated markets to allocate resources efficiently.
If the price to repaint her aperments is $5,000 each, how many will she repaint? What is the vvalue of her consumer surplus?

*Value of new paint on first apartment house=$5,000
*Value of new paint on second apartment house=$4,000
*Value of new paint on third apartment house=$3,000
*Value of new paint on fourth apartment house=$2,000
*Value of new paint on fifth apartment house=$1,000
One apartment painted. $5,000-$5,000=0, therefore she has no consumer surplus.
Suppose the price to repaint her apartments falls to $2,000 each. How many apartments will Lori choose to have repainted? What is the value of her consumer surplus?

*Value of new paint on first apartment house=$5,000
*Value of new paint on second apartment house=$4,000
*Value of new paint on third apartment house=$3,000
*Value of new paint on fourth apartment house=$2,000
*Value of new paint on fifth apartment house=$1,000
Four apartments painted. ($5000-$2,000)+($4,000-$2,000)+($3,000-$2,000)+($2,000-$2,000)=$6,000 of consumer surplus.
What happen to Ms. Landlord's consumer surplus when the price of having her apartments repainted fell? Why?
Her consumer surplus rose because she gains surplus on the units she would have already purchased at the old price plus she gains surplus on the new units she now purchases due to the lower price.
If the price of painting apartment house is $2,000 each, how many will he paint? What is the value of his producer surplus?

*Cost of painting first apartment house=$1,000.
*Cost of painting second apartment house=$2,000.
*Cost of painting third apartment house=$3,000.
*Cost of painting fourth apartment house=$4,000.
*Cost of painting fifth apartment house=$5,000.
Two. ($2,000-$1,000)+($1,000-$1,000)=$1,000 of producer surplus.
Suppose the price to paint apartments rises to $4,000 each. How many apartments will Peter choose to repaint? What is the value of his producer surplus?

*Cost of painting first apartment house=$1,000.
*Cost of painting second apartment house=$2,000.
*Cost of painting third apartment house=$3,000.
*Cost of painting fourth apartment house=$4,000.
*Cost of painting fifth apartment house=$5,000.
Four apartments. ($4,000-$1,000)+($4,000-$2,000)+($4,000-$3,000)+($4,000-$4,000)=$6,000 of producer surplus.
What happens to Mr. Painter's producer surplus when the price to paint apartments rose? Why?
He received greater producer surplus on the unit he would have produced anyway plus additional surplus on the units he now chooses to produce due to the increase in price.
If a benevolent social planner sets the price for painting apartment houses at $5,000, what is the value of consumer surplus? Producer surplus? Total surplus?

*Value of new paint on first apartment house=$5,000.
*Value of new paint on second apartment house=$4,000.
*Value of new paint on third apartment house=$3,000.
*Value of new paint on fourth apartment house=$2,000.
*Value of new paint on fifth apartment house=$1,000.

*Cost of painting first apartment house=$1,000.
*Cost of painting second apartment house=$2,000.
*Cost of painting third apartment house=$3,000.
*Cost of painting fourth apartment house=$4,000.
*Cost of painting fifth apartment house=$5,000.
Only one unit will be purchased so consumer surplus=($5,000-$5,000)=$0, producer surplus=($5,000-$1,000)=$4,000, and total surplus=$0+$4,000=$4,000.
If a benevolent social planner sets the price for painting apartment houses at $1,000, what is the value of consumer surplus? Producer surplus? Total surplus?

*Value of new paint on first apartment house=$5,000.
*Value of new paint on second apartment house=$4,000.
*Value of new paint on third apartment house=$3,000.
*Value of new paint on fourth apartment house=$2,000.
*Value of new paint on fifth apartment house=$1,000.

*Cost of painting first apartment house=$1,000.
*Cost of painting second apartment house=$2,000.
*Cost of painting third apartment house=$3,000.
*Cost of painting fourth apartment house=$4,000.
*Cost of painting fifth apartment house=$5,000.
Only one unit will be produced so consumer surplus=($5,000-$1,000)=$4,000, producer surplus=($1,000-$1,000)=$0, and total surplus=$4,000+$0=$4,000.
If the price for painting apartment houses is allowed to move to its free market equilibrium price of $3,000, what is the value of consumer surplus, producer surplus, and total surplus in the market? How does totl surplus in the free market compare to the total surplus generated by the social planner?

*Value of new paint on first apartment house=$5,000.
*Value of new paint on second apartment house=$4,000.
*Value of new paint on third apartment house=$3,000.
*Value of new paint on fourth apartment house=$2,000.
*Value of new paint on fifth apartment house=$1,000.

*Cost of painting first apartment house=$1,000.
*Cost of painting second apartment house=$2,000.
*Cost of painting third apartment house=$3,000.
*Cost of painting fourth apartment house=$4,000.
*Cost of painting fifth apartment house=$5,000.
Consumer surplus=($5,000-$3,000)+($4,000-$3,000)+($3,000-$3,000)=$3,000. Producer surplus=($3,000-$1,000)+($3,000-$2,000)+($3,000-$3,000)=$3,000. Total surplus=$3,000+$3,000=$6,000. Free market total surplus is greater than social planner total surplus.