Practice Questions Chapter 1 1. People respond to incentives ...

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a. Plot Peter Painter's cost in Exhibit 2.Exhibit 2b. If the price of painting apartment houses is €2000 each, how many willhe paint? What is the value of his producer surplus?c. Suppose the price to paint apartments rises to €4000 each. How manyapartments will Peter choose to repaint? What is the value of hisproducer surplus?d. What happened to Mr. Painter's producer surplus when the price topaint apartments rose? Why?3. Use the information about willingness to pay and cost from (1) and (2)above to answer the following questions.a. If a benevolent social planner sets the price for painting apartmenthouses at €5000, what is the value of consumer surplus? Producersurplus? Total surplus?b. If a benevolent social planner sets the price for painting apartmenthouses at €1000, what is the value of consumer surplus? Producersurplus? Total surplus?c. If the price for painting apartment houses is allowed to move to its freemarket equilibrium price of €3000, what is the value of consumersurplus, producer surplus, and total surplus in the market? How doestotal surplus in the free market compare to the total surplus generatedby the social planner?Practice Questions to accompany Mankiw & Taylor: Economics 18
4. In Exhibit 3, plot the linear supply and demand curves for paintingapartments implied by the information in questions (1) and (2) above(draw them so that they contact the vertical axis). Show consumer andproducer surplus for the free market equilibrium price and quantity. Isthis allocation of resources efficient? Why?Exhibit 35. Suppose Lauren Landlord has difficulty renting her dilapidated housesso she increases her willingness to pay for painting by €2000 perapartment. Plot Lauren’s new willingness to pay along with Peter's costin Exhibit 4. If the equilibrium price rises to €4000, what is the value ofconsumer surplus, producer surplus, and total surplus? Showconsumer and producer surplus on the graph. Compare your answer tothe answer you found in 3 (c) above.Exhibit 4Practice Questions to accompany Mankiw & Taylor: Economics 19
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