Purchase Solution

# Consumer Surplus, Producer Surplus, Consumer Deadweight Loss, and Producer Deadweight Loss

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Draw out multiple supply/demand graphs and identify (in color) where you have: 1) Consumer Surplus, 2) Producer Surplus, 3) Consumer Deadweight Loss, and 4) Producer Deadweight Loss.

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Consumer Surplus, Producer Surplus, Consumer Deadweight Loss, and Producer Deadweight Loss are encompassed.

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Draw out multiple supply/demand graphs and identify (in color) where you have: 1) Consumer Surplus, 2) Producer Surplus, 3) Consumer Deadweight Loss, and 4) Producer Deadweight Loss.

I. What is consumer surplus?

When you buy anything, the price you are willing to pay is equal to the utility (''satisfaction'') you gain from consuming the last unit of it. Sellers in the market do not know if this is the first, second or last unit you are willing to buy. Sellers meet many consumers every day, and they will try to sell as many units as they can; hence they will lower their prices to a level where they make a ''normal'' profit per unit.
The consumption of the second unit will give you a little less satisfaction (one reason why the demand curve is downward sloping). Each additional item yields a little less satisfaction than the preceding one, so the utility of each item steadily decreases. Since the supplier does not know how many units you have already consumed, they will offer the goods at the market price of Po below. Thus, you are actually gaining more ''utility'' from the consumption of the first and second units than you are actually paying for. (because for any point left of Qo, your marginal benefit measured by the demand curve is higher than Po, the price that you actually pay for that unit. The total utility you gain is the entire green area (summation of the difference between the marginal benefit and the ...

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