Microeconomics and mathematics (with answers)

7 Consumer surplus and producer surplus

Consumer surplus (CS) Producer surplus (PS)

CS is the difference between the price PS ist difference between the price actually
consumers are willing to pay and the price paid and the price producers are willing to get
actually paid. paid.

P P

18 18
Demand Demand

CS Supply CS Supply
Pe=9 Pe=9
PS PS
A A
3 3
B B
Q Q
e e
Q =18 36 Q =18 36

1 1
Demand: P = f(Q) = 18 - Q Supply: P = g(Q) = 3 + Q
2 3
(18 - 9) * 18 PS e e
= P *Q - A - B
CS = = 81
2 (9 - 3) * 18
= 9*18 - - 3*18 = 54
2
(9 - 3) * 18
or PS = = 54
2

z z
Qe Qe
Formula CS = f (Q )dQ - Pe*Qe Formula PS = Pe*Qe - g (Q )dQ
0 0

z Q 18

z
18
1 1
CS again = (18 − Q )dQ - Pe*Qe PS again = Pe*Qe - (3 + Q )dQ
0
2 3
0
1 1
= 18Q - Q2 - Pe*Qe = Pe*Qe - 3Q - Q2
4 6
1 1
= 18*18 - *182 - 9*18 = 81 = 9*18 - 3*18 - 182 = 54
4 6

7.1 Consumer surplus (CS)

Demand: P = 15 - Q (Pe = 9)

Calculate consumer surplus (diagram and formula).

QUESTI07.DOC Page 1 (of 2) 7 CS and PS 1st June 2012

7.2 Consumer surplus (CS)

1 2
Demand: P = 32 - Q - Q (Qe = 10)
10

Calculate consumer surplus (formula).

7.3 Producer surplus (PS)

Supply: P = 5 + 2Q (Qe = 4)

Calculate producer surplus (diagram and formula).

7.4 Producer surplus (PS)

1
Supply: P = Q2 + Q + 2 (Pe = 26)
2

First calculate Qe (quadratic equation), then calculate producer surplus (formula).

7.5 Consumer surplus (CS) and producer surplus (PS)

Demand: P = 32 - 8Q d
Supply: P = 12 + 2Q s

Calculate consumer surplus and producer surplus at the market equilibrium.

7.6 Consumer surplus (CS) (Monopoly vs competition)

Demand (monopoly): P = AR = 30 - 2Q
Marginal cost (MC) of the monopolist = 12

7.61 Calculate Q and P if the monopolist targets a maximum profit.

7.62 Calculate consumer surplus: Monopoly vs competition
Monopoly: P > MC Competition: P = MC
[We assume that in the case of competition demand and marginal cost are the
same as in the case of monopoly.]
7.63 Graph 7.61 and 7.62 in the same diagram and verify both CS.
7.7 Consumer surplus (CS), producer surplus (PS) and the effects of a per unit tax

Demand: P = 240 - 6Q d
Supply: P = 120 + 4Q s

Answering 7.71 and 7.72 graph two different diagrams.

7.71 Calculate consumer surplus and producer surplus at the market equilibrium.
7.72 Now a new per unit tax of 20 is introduced. Calculate the tax receipts and the
new CS, the new PS as well as the deadweight loss.

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QUESTI07.DOC Page 2 (of 2) 7 CS and PS 1st June 2012

 Answers Microeconomics and mathematics
7 Consumer surplus and producer surplus
7.1 Consumer surplus (CS)
P

15

CS
9 Demand

Q
6 15

Qe: → 9 = 15 - Qe → Qe = 6
(15 - 9) * 6
CS = = 18
2

z
6
1 1
CS = (15 − Q )dQ - Pe*Qe = 15Q - Q2 - Pe*Qe = 15*6 - 62 - 6*9 = 90 - 18 - 54 = 18
2 2
0

7.2 Consumer surplus (CS)

1 2
Pe = 32 - 10 - 10 = 12
10

z
10
1 1 1
CS = (32 − Q − Q 2 )dQ - Pe*Qe = 32Q - Q2 - Q3 - Pe*Qe
0
10 2 30
1 1 1 2
= 32*10 - 102 - 103 - 12*10 = 320 - 50 - 33 - 120 = 116
2 30 3 3
7.3 Producer surplus (PS)
P

Supply
13
PS

A
5
B

Q
4
Pe = 5 + 2*4 = 13

ANSWER07.DOC Page 1 (of 3) 07 CS and PS 1st June 2012

7.3 PS = Pe*Qe - A - B = 13*4 - 4*8 - 4*5 = 52 - 16 - 20 = 16
cont. 2

z
4
PS = Pe*Qe - (5 + 2Q )dQ = 13*4 - 5Q - Q2 = 52 - 5*4 - 42 = 52 - 20 - 16 = 16
0

7.4 Producer surplus (PS)

Qe
• 26 = 0.5Q 2 + Q + 2
- 0.5Q 2 - Q + 24 = 0
Q2 + 2Q - 48 = 0
• Factorization:
(Q + 8)*(Q - 6) = 0
(Q1 = - 8 < 0) → (Q must be positive.))
Q2 = 6
Qe = 6
• Formula:
−b ± b 2 − 4 ac −2 ± 2 2 + 4 * 48 - 2 + 14 -2 - 14
= = = 6 and ( = -8)
2a 2 2 2
Qe = 6

z
6
1 1 1 1 1
PS = Pe*Qe - ( Q 2 + Q + 2)dQ = 26*6 - Q3 - Q2 - 2Q = 156 - 63 - 62 - 2*6
0
2 6 2 6 2
= 156 - 36 - 18 - 12 = 90
7.5 Consumer surplus (CS) and producer surplus (PS)
• Market equilibrium:
Qe: 32 - 8Q e = 12 + 2Q e
10Q e = 20
Qe = 2
e
P = 32 - 8*2 = 16

z
2
• CS = (32 − 8Q )dQ - Pe*Qe = 32Q - 4Q 2 - 16*2 = 32*2 - 4*22 - 32
0
= 64 - 16 - 32 = 16

z
2
• PS = Pe*Qe - (12 + 2Q )dQ = 16*2 - 12Q - Q2 = 32 - 12*2 - 22 = 4
0

7.6 Consumer surplus (CS) (Monopoly vs competition)

7.61 Q and P if maximum profit as target

• AR = 30 - 2Q
TR = 30Q - 2Q 2
MR = 30 - 4Q
• MC = MR
12 = 30 - 4Q
4Q = 18
Q = 4.5
P = 30 - 2*4.5 = 21

ANSWER07.DOC Page 2 (of 3) 07 CS and PS 1st June 2012

7.6 7.62 • Prices Monopoly: 21 Competition: 12
cont. Quantities Monopoly: 4.5 Competition: 12 = 30 - 2Q = 9

z
4.5
• CS Monopoly = (30 − 2Q )dQ - Pe*Qe = 30Q - Q2 - 21*4.5
0
= 30*4.5 - 4.52 - 94.5 = 135 - 20.25 - 94.5 = 20.25

z
9
• CS Competition = (30 − 2Q )dQ - Pe*Qe = 30Q - Q2 - 12*9
0
= 30*9 - 92 - 108 = 270 - 81 - 108 = 81
7.63
P

30 CS Monopoly:
CS Monopoly (30 - 21) * 4.5 = 20.25
21 2
CS Competition
12 MC CS Competition:

Demand (30 - 12) * 9

= 81
2
Q
4.5 9 15
MR
7.7 CS, PS and the effects of a per unit tax
7.71 7.72
P P
Supply 2 tax
240 240
Supply 2
Supply tax
CS CS
180 receipts
168 160
PS dead-
140
weight
120 120
Demand PS loss

Demand

Q
Q
12 40 10 12 40
CS = 0.5*(240 - 168)*12 = 432 CS = 0.5*(240 - 180)*10 = 300
PS = 0.5*(168 - 120)*12 = 288 PS = 0.5*(160 -120)*10 = 200
CS + PS = 432 + 288 = 720 Tax receipts = 10*20 = 200
Deadweight loss = 720-300-200-200 = 20

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