3) It is a hot day, and Bert is thristy.  Here is the value he places
on a bottle of water:
Value if first bottle $7
value of second bottle 5
value of third bottle 3
value of fourth bottle 1

a) from this information, derive Bert's demand schedule. Graph his
demand curve for bottled water.
b)If the price of a bottle of water is $4, how many bottles does Bert
buy? How much consumer surplus does Bert get from his purchases? Show
Bert's consumer surplus in your graph.
c) If the price falls to $2, how does quantity demanded change? How
does Bert's consumer surplus change? Show these changes in your graph.

4)Ernie owns awater pump.  Because pumping large amounts of water is
harder than pumping small amouonts, the cost of producing a bottle
rises as he pumps more.  Here is the cost he incurs to produce each
bottle of water:
cost of first bottle $1
cost of second bottle 3
costs of third bottle 5
cost of fourth bottle 7

a) from this information, derive Ernie's supply schedule.  Graph his
supply curve for bottled water.

b)if theprice of a bottle of water is $4, How many bottles does Ernie
produce and sell? How much producer surplus does Ernie get from these
sales?Show Ernie's producer surplus in your graph.

c) If the price rises to $6, how does quantity supplied change? How
does Ernie's producer surplus change? Show these changes in your
graph.

5) Consider a market in which Bert from problem 3 is the buyer and
Ernie from problem 4 is the seller.
a)Use Ernie's supply schedule and Bert's demand schedule to find the
quantity supplied and quantity demanded at prices of $2, $4, and $6.
Which of these prices brings supply and demand into equilibrium?

b) What are consumer surplus, producer surplus, and total surplus in
this equilibrium?

c)If Ernie produced and Bert consumed one fewer bottles of water, what
would happen to total surplus?

d)If Ernie produced and Bert consumed one additional bottle of water,
what would happen to total surplus?

3) a) "demand curve (or demand schedule).  A schedule or curve showing
the quantity of a good that buyers would purchase at each price, other
things equal.  Normally a demand curve has price on the vertical or
y-axis and quantity demanded on the horizontal or x-axis."  Page 734

So, we plot Bert's demand by placing dots at the intersection of $7
and 1, $5 and 2, $3 and 3, and $1 and 4, and then drawing a line
connecting them.

b) " Consumer surplus.  The difference between the amount that a
consumer would be willing to pay for a commodity and the amount
actually paid.  This difference arises because the marginal utilities
(in dollar terms) of all but the last unit exceed the price.  Hence
the monetary equivalent of the total utility of the commodity consumed
may be well above the amount spent.  Under rigorous assumptions, the
money value of consumer surplus can be measured (using a demand-curve
diagram) as the area under the demand curve but above the price line."
 Page 732

A line drawn across the graph at $4 intersects the demand curve at a
quantity of 2.5, so Bert buys two bottles.  Using the definition of
consumer surplus, we find that Bert has obtained a surplus of four
dollars.

c) a line drawn across the graph at $2 intersects the demand curve at
a quantity of 3.5, so Bert buys three bottles.  Using the definition
of consumer surplus, we find the Bert has achieved a surplus of nine
dollars.

4) a) "supply curve (or supply schedule).  A schedule showing the
quantity of a good that suppliers in a given market desire to sell it
each price, holding other things equal."  Page 747

So, we plot Ernie's supply by placing dots at the intersection of $1
and 1, $3 and 2, $5 and 3, and $7 and 4, and then drawing a line
connecting them.

b) a line drawn across the graph at $4 intersects the supply curve at
a quantity of 2.5, so Ernie sells two bottles.  His producer surplus
is four dollars.

c) a line drawn across the graph at $6 intersects the supply curve at
a quantity of 3.5, so Ernie sells three bottles.  His producer surplus
is nine dollars.

5) a) the demand curve and the supply curve intersect at four dollars.
 This is the equilibrium point.  At two dollars, four dollars, and six
dollars, Bert demands three bottles, two bottles, and one bottle,
respectively.  At two dollars, four dollars, and six dollars, Ernie
supplies one bottle, two bottles, and three bottles, respectively.

b) at equilibrium, both the consumer surplus and the producer surplus
are four dollars, making the total surplus eight dollars.

c) if Ernie produces and Bert consumes one fewer bottle of water,
assuming the equilibrium price is maintained at four dollars, each
achieves a three dollar surplus, resulting in a total surplus of six
dollars.

d) if Ernie produces and Bert consumes one additional bottle of water,
assuming the equilibrium price is maintained at four dollars, each
incurs a deficit of one dollar, yielding a total deficit of two
dollars.

Source: "Economics" 14th edition by Samuelson & Nordhaus, McGraw-Hill
Inc., 1992

Sincerely,

Wonko