Homework Question on Consumer Surplus
Question 1
(i) What is Consumer Surplus?
(ii) Provide one example to explains consumer surplus
(iii) What is producer surplus?
(iv) Provide an example to explain consumer surplus
(v) Draw a demand and supply curve to show both consumer surplus and
producer surplus when the market price of a good is $5 but a consumer is
willing to pay at maximum, $9 and the producer is willing to sell it at
the lowest, $2
Question 2
(i) Explain what is price ceiling and what is price floor
(ii) What are the advantages and disadvantages of price ceiling and price floor
(iii) Who sets market price (price at equilibrium)
(iii) Who sets price floor and or price ceiling?
(v) Explain very briefly why sometimes authorities set price floor?
Also explain very briefly why sometimes authorities set price ceiling
Question 3
(i) What is elasticity?
(ii) What is price elasticity of demand?
(iii) What are the characteristics of price elasticity of demand?
(iv) What are the determinants of the characteristics of price elasticity of demand?
(v) What is the income elasticity of demand?
Homework Answer on Consumer Surplus
Question 1
Consumer Surplus is the gain in the monetary form by the consumers when they purchase goods and services at a price below the highest price; they were willing to pay for such goods and services. For example, if a consumer was willing to buy a good or a service at $ 30 and finds that the commodity or service now costs $ 23, the difference, $ 7 becomes the consumers’ surplus.
Producer surplus refers to the monetary gain that producers benefit from because of selling their goods and services at a price that is higher than the least price at which they would be willing to offer such goods and services to the consumers. For example, if the producer was willing to sell his products at a minimum price of $ 79 per product and he end up selling the same product at $ 87 per product, then the difference, $ 8 becomes the producer surplus.
Question 2
Price ceiling is the maximum amount of money set by the government that a consumer can pay for a particular product in the market and price floor is the minimum amount of money that a consumer can pay for a particular product in the market.
Price ceiling: The advantages include; it discourages the probable tendency of suppliers of charging outrageous high prices simply because of limited goods or services.