Suppose Shen is the only seller in the market for bottled water and Manuel is the only buyer. The following lists show the value Manuel places on a bottle of water and the cost Shen incurs to produce each bottle of water:
Manuel's Value -------------------------- Shen's Costs
Value of first bottle: $7 ------------- Cost of first bottle: $1
Value of second bottle: $5 ------- Cost of second bottle: $3
Value of third bottle: $3 ------------ Cost of third bottle: $5
Value of fourth bottle: $1 ---------- Cost of fourth bottle: $7
The following table shows their respective supply and demand schedules:
Price ------------ Quantity Supplied --------- Quantity Demanded
More than $7 ----------- 4 ----------------------------- 0
$5 to $7 ----------------- 3 ----------------------------- 1
$3 to $5 ----------------- 2 ----------------------------- 2
$1 to $3 ------------------ 1 ----------------------------- 3
$1 or less ---------------- 0 ----------------------------- 4
Use Shen's supply schedule and Manuel's demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Enter these values in the following table.
Price ----------- Quantity Supplied ---------- Quantity Demanded
2 ------------------------- ? ----------------------------- ?
4 ------------------------- ? ----------------------------- ?
6 ------------------------- ? ----------------------------- ?
A price of _____ brings supply and demand into equilibrium.
At the equilibrium price, consumer surplus is $___, producer surplus is $___, and total surplus is $___.
If Shen produced and Manuel consumed one less bottle of water, total surplus would _____.
If instead, Shen produced and Manuel consumed one additional bottle of water, total surplus would _____.
Price ------ Quantity Supplied ----- Quantity Demanded
2 --------------------- 1 ------------------------- 3
4 --------------------- 2 ------------------------ 2
6 --------------------- 3 ------------------------ 1
4 (quantity supplied = quantity demanded = 2)
4 ($7>$4 and $5>$4, $3<$4<$5, area above price line but under curve if price line was at $4, $7-$4=$3, $5-$4=$1, $3+$1=$4); 4 ($1<$4 and $3<$4, $3<$4<$5, area below price line and under curve if price line at $4, $4-$1=$3, $4-$3=$1, $3+$1=$4); 8 ($4 from consumer surplus + $4 from producer surplus)
fall (equilibrium = 2, 2-1=1, Shen: quantity supplied = 1 -> $2, Manuel: quantity demanded = 1 -> $6, total surplus = producer surplus + consumer surplus = ($4-$1)+($7-$4)=$6, $8>$6)
rise (equilibrium = 2, 2+1=3, Manuel: quantity demanded = 3 -> $2, Shen: quantity supplied = 3 -> $6, total surplus = consumer surplus + producer surplus = ($3-$2)+($7-$6)=$2, $8>$2, $6>$2)
