PRINCIPLES OF ECONOMICS

Marks: 60
Assignment No.3
Give answers to the following questions.
1. What is consumer surplus? How consumer surplus can be measured using a
demand curve?
2. Regis is hungry for a snack. Here is the value he places on a cupcake
Regis Willingness to pay
Value of First cupcake $5
Value of Second cupcake $4
Value of Third cupcake $3
Value of Fourth cupcake $2
a. From the above schedule, derive the Regis demand schedule diagrammatically.
b. If the price of cupcake is $3.50, how many cupcakes Regis would buy? What
would be his consumer surplus?
c. If the price falls to $2.50, how does the quantity demanded changes? What
would be his consumer surplus then? Explain with the help of diagram.
3. What is producer surplus? How producer surplus can be measured using a supply
curve?
4. Kelly enjoy baking cupcakes and selling them, because of limited space in her
kitchen, making large number of cupcakes is more costly as compared to fewer ones.
Cost schedule for different number of cupcakes is give as
Kelly Value of cupcakes
Cost of First cupcake $1
Cost of Second cupcake $2
Cost of Third cupcake $3
Cost of Fourth cupcake $4
a. From the above schedule, derive the Kellys supply schedule diagrammatically.
b. If the price of cupcake is $3.50, how many cupcakes Kelly would produce? What
would be her producer surplus?
c. If the price rises to $4.50, how does the quantity supply changes? What would be
her producer surplus then? Explain with the help of diagram.
5. What is market efficiency and how the market equilibrium is evaluated when the
market is efficient?
6. Consider a market in which Regis is a buyer and Kelly is a seller of cupcakes.
a. Use Regis demand schedule and Kelly supply schedule to find the quantity
supplied and quantity demanded at the prices of $2.50, $3.50, and $ 4.50. Which
of these prices will bring supply and demand into equilibrium?
b. What are the consumer surplus, producer surplus and total surplus at
equilibrium point?