Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 137
producer surplus, while the decline in the price reduces producer surplus. Because
consumer surplus rises by B + C + D and producer surplus rises by F + G – B, total
surplus rises by C + D + F + G.
area A to area A + B.
Figure 12
8. Figure 13 shows supply and demand curves for haircuts. Supply equals demand at a quantity
of three haircuts and a price between $4 and $5. Firms A, C, and D should cut the hair of
Claire, Gloria, and Phil. Jay’s willingness to pay is too low and firm B’s costs are too high, so
they do not participate. The maximum total surplus is the area between the demand and
Figure 13
1
2
3
4
1
2
3
4
5
6
7
8
Quantity of Haircuts
Price of Haircuts
Claire
Gloria
Phil
Jay
D
A
C
B
A
B
S1
S2
Demand
Quantity of flat-screen TVs
Price of flat-screen TVs
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 139
c. Software and computers are complements. When the price of computers decreases, the
demand for software increases. The demand for software shifts to the right, as shown in
Figure 16. The result is an increase in both the price and quantity of software. Consumer
surplus in the software market changes from B + C to A + B, a net change of A – C.
Producer surplus changes from E to C + D + E, an increase of C + D, so software
producers should be happy about the technological progress in computers.
Figure 16
d. Yes, this analysis helps explain why Bill Gates is one the world’s richest people. His
company produces a lot of software and the producer surplus in the software market
increased with the technological advance in computers.
10. a. With Provider A, the cost of an extra minute is $0. With Provider B, the cost of an extra
minute is $1.
b. With Provider A, my friend will purchase 150 minutes [= 150 – (50)(0)]. With Provider B,
my friend would purchase 100 minutes [= 150 – (50)(1)].
c. With Provider A, she would pay $120. With Provider B, he would pay $100.
140 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
Figure 17
d. Figure 17 shows the friend’s demand. With Provider A, she buys 150 minutes and her
consumer surplus is equal to (1/2)(3)(150) – 120 = 105. With Provider B, her consumer
surplus is equal to (1/2)(2)(100) = 100.
e. I would recommend Provider A because she receives greater consumer surplus when
buying from that provider.
11. a. Figure 18 illustrates the demand for medical care. If each procedure has a price of $100,
quantity demanded will be
Q
1 procedures.
Figure 18
Because the cost to society is $100, the number of procedures performed is too large to
is less than
Q
2.
Chapter 7/Consumers, Producers, and the Efficiency of Markets ❖ 141
c. The use of medical care is excessive in the sense that consumers get procedures whose
value is less than the cost of producing them. As a result, the economy’s total surplus is
reduced.
company does not get the benefits of the procedure, so its decisions may not reflect the
value to the consumer.