Economics

Michael Parkin

Chapter 5

Efficiency and Equity - all with Video Answers

Educators

Chapter Questions

Problem 1

At Chez Panisse, a restaurant in Berkeley, reservations are essential. At Mandarin Dynasty, a restaurant near the University of California San Diego, reservations are recommended. At Eli Cannon's, a restaurant in Middletown, Connecticut, reservations are not accepted. Describe the method of allocating scarce table resources at these three restaurants. Why do you think restaurants don't use the market price to allocate their tables?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 2

Use the following table to work. The table gives the demand schedules for train travel for the only buyers in the market, Ann, Beth, and Cy.
a. Construct the market demand schedule.
b. What is the maximum price that each traveler is willing to pay to travel 20 miles? Why?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 3

Use the following table to work. The table gives the demand schedules for train travel for the only buyers in the market, Ann, Beth, and Cy.
a. What is the marginal social benefit when the total distance traveled is 60 miles?
b. When the total distance traveled is 60 miles, how many miles does each travel and what is their marginal private benefit?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 4

Use the following table to work. The table gives the demand schedules for train travel for the only buyers in the market, Ann, Beth, and Cy.
What is each traveler's consumer surplus when the price is $\$ 4$ a mile? What is the market consumer surplus when the price is $\$ 4$ a mile?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 5

Use the table in the next column to work. The table gives the supply schedules of the only sellers of hot air balloon rides: Xavier, Yasmin, and Zack.
a. Construct the market supply schedule.
b. What are the minimum prices that Xavier, Yasmin, and Zack are willing to accept to supply 20 rides? Why?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 6

Use the table in the next column to work. The table gives the supply schedules of the only sellers of hot air balloon rides: Xavier, Yasmin, and Zack.
a. What is the marginal social cost when the total number of rides is 30 ?
b. What is the marginal cost for each supplier when the total number of rides is 30 and how many rides does each of the sellers supply?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 7

Use the table in the next column to work. The table gives the supply schedules of the only sellers of hot air balloon rides: Xavier, Yasmin, and Zack.
When the price is $\$ 70$ a ride, what is each seller's producer surplus? What is the market producer surplus?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 8

The figure shows the competitive market for cellphones.
a. What is the market equilibrium?
b. Shade in the consumer surplus and label it.
c. Shade in the producer surplus and label it.
d. Calculate total surplus.
e. Is the market for cellphones efficient?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 9

Explain why the allocation method used by each restaurant in Problem 1 is fair or not fair.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 10

In the Worked Problem (p. 161 ), how can the 50 bottles available be allocated to beach-goers? Would the possible methods be fair or unfair?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 11

At McDonald's, no reservations are accepted; at Panorama at St. Louis Art Museum, reservations are accepted; at the Bissell Mansion restaurant, reservations are essential. Describe the method of allocating tables in these three restaurants. Why do restaurants have different reservations policies?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 12

Use the following table to work.The table gives the supply schedules for jet-ski rides by the only suppliers: Rick, Sam, and Tom.
What is each owner's minimum supply-price of 10 rides a day?

Hrithvik Gadhiya

Hrithvik Gadhiya

Numerade Educator

Problem 13

Use the following table to work.The table gives the supply schedules for jet-ski rides by the only suppliers: Rick, Sam, and Tom.
Which owner has the largest producer surplus when the price of a ride is $\$ 17.50 ?$ Explain.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 14

Use the following table to work.The table gives the supply schedules for jet-ski rides by the only suppliers: Rick, Sam, and Tom.
What is the marginal social cost of 45 rides a day?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 15

Use the following table to work.The table gives the supply schedules for jet-ski rides by the only suppliers: Rick, Sam, and Tom.
Construct the market supply schedule of jet-ski rides.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 16

The table gives the demand and supply schedules for sandwiches.
a. What is the maximum price that consumers are willing to pay for the 200 th sandwich?
b. What is the minimum price that producers are willing to accept for the 200 th sandwich?
c. If 200 sandwiches a day are available, what is the total surplus?

Rashmi Sinha

Numerade Educator

Problem 17

Breakfast Staples Face Surging Prices The price of orange juice is surging because of global supply problems. Florida's orange crop is forecast to be the worst in almost a quarter of a century. A citrus greening disease, which is transmitted by tiny insects that feed on the leaves of oranges, is damaging the harvest.
a. How is the price of orange juice determined?
b. When the supply of orange juice decreases, explain the process by which the market adjusts.
c. On a graph, show the effect of the decrease in supply on consumer surplus and producer surplus.

Xiaomin Bian

Numerade Educator

Problem 18

Use the data in the table in Problem 16
a. If the sandwich market is efficient, what is the consumer surplus, what is the producer surplus, and what is the total surplus?
b. If the demand for sandwiches increases and sandwich makers produce the efficient quantity, what happens to producer surplus and deadweight loss?

Nick Johnson

Numerade Educator

Problem 19

Apple's $\$ 1.29$ -for-the-latest-songs model isn't perfect and isn't it too much to pay for music that appeals to just a few people? We need a system that will be profitable but fair to music lovers. The solution: Price song downloads according to demand. The more people who download a particular song, the higher will be the price of that song; the fewer people who buy a particular song, the lower will be the price of that song. That is a free-market solution - the market would determine the price.
Assume that the marginal social cost of downloading a song from the iTunes Store is zero. (This assumption means that the cost of operating the iTunes Store doesn't change if people download more songs.)
a. Draw a graph of the market for downloadable music with a price of $\$ 1.29$ for all the latest songs. On your graph, show consumer surplus and producer surplus.
b. With a price of $\$ 1.29$ for all the latest songs, is the market efficient or inefficient? If it is inefficient, show the deadweight loss on your graph.

Sarah Wharton

Numerade Educator

Problem 20

Apple's $\$ 1.29$ -for-the-latest-songs model isn't perfect and isn't it too much to pay for music that appeals to just a few people? We need a system that will be profitable but fair to music lovers. The solution: Price song downloads according to demand. The more people who download a particular song, the higher will be the price of that song; the fewer people who buy a particular song, the lower will be the price of that song. That is a free-market solution - the market would determine the price.
Assume that the marginal social cost of downloading a song from the iTunes Store is zero. (This assumption means that the cost of operating the iTunes Store doesn't change if people download more songs.)
If the pricing scheme described in the news clip were adopted, how would consumer surplus, producer surplus, and the deadweight loss change?

Doris Bennett

Numerade Educator

Problem 21

Apple's $\$ 1.29$ -for-the-latest-songs model isn't perfect and isn't it too much to pay for music that appeals to just a few people? We need a system that will be profitable but fair to music lovers. The solution: Price song downloads according to demand. The more people who download a particular song, the higher will be the price of that song; the fewer people who buy a particular song, the lower will be the price of that song. That is a free-market solution - the market would determine the price.
Assume that the marginal social cost of downloading a song from the iTunes Store is zero. (This assumption means that the cost of operating the iTunes Store doesn't change if people download more songs.)
a. If the pricing scheme described in the news clip were adopted, would the market be efficient or inefficient? Explain.
b. Is the pricing scheme described in the news clip a "free-market solution"? Explain.

Doris Bennett

Numerade Educator

Problem 22

Only 1 percent of the world supply of water is fit for human consumption. Some places have more water than they can use; some could use much more than they have. The 1 percent available would be sufficient if only it were in the right place.
a. What is the major problem in achieving an efficient use of the world's water?
b. If there were a global market in water, like there is in oil, how do you think the market would be organized?
c. Would a free world market in water achieve an efficient use of the world's water resources? Explain why or why not.

Prashant Bana

Numerade Educator

Problem 23

Use the information in Problem 22. Would a free world market in water achieve a fair use of the world's water resources? Explain why or why not and be clear about the concept of fairness that you are using.

Prashant Bana

Numerade Educator

Problem 24

The winner of the ICC Cricket World Cup is paid $\$ 3,975,000,$ twice as much as the runner-up who receives $\$ 1,750,000 .$ But it takes two teams to have a Cricket World Cup final. Is the compensation arrangement fair?

AG

Ankit Gupta

Numerade Educator

Problem 25

Storm Surge: Uber Just Doubled Car Service Pricing in NYC In the wake of Hurricane Sandy, Uber, which provides a mobile application for locating and booking car service, has reinstated "Surge Pricing" in New York City. This means that car drivers can charge exorbitant fees to shuttle riders around. This is an incentive for more drivers to ferry passengers. The higher fares tripled the number of cars on the road and kept the drivers out longer, the company says, but it also cost Uber more than $\$ 100,000$ in additional payments to drivers.
a. Who is practicing price gouging: Uber or the car drivers or both? Explain.
b. Evaluate the fairness of "surge pricing" reinstated by Uber in the wake of Hurricane Sandy.

Xiaomin Bian

Numerade Educator

Problem 26

After you have studied Economics in the News on pp. $158-159$, answer the following questions.
a. What is the method used to allocate highway space in the United States and what is the method used in singapore?
b. Who benefits from the U.S. method of highway resource allocation? Explain your answer using the ideas of marginal social benefit, marginal social cost, consumer surplus, and producer surplus.
c. Who benefits from the singaporean method of highway resource allocation? Explain your answer using the ideas of marginal social benefit, marginal social cost, consumer surplus, and producer surplus.
d. If road use were rationed by limiting drivers with even-date birthdays to drive only on even days (and odd-date birthdays to drive only on odd days), would highway use be more efficient? Explain your answer.

Alejandro Ruiz

Numerade Educator

Problem 27

Water rates in California have little relation to water's replacement cost. For farmers, who account for 80 percent of the nation's water consumption, water costs virtually nothing. The urban users who use a mere 20 percent of the water pay higher rates.
a. Do you think that the allocation of water between farmers and urban users is likely to be efficient? Explain your answer.
b. If farmers paid a higher price, would the allocation of resources be more efficient?
c. If farmers paid a higher price, what would happen to consumer surplus and producer surplus from water?
d. Is the difference in price paid by farmers and urban users fair?

Dennis Howard

Numerade Educator