dolution

 

1. In what situations do the substitution effect and the income effect work in the same direction to

produce a downward-sloping demand curve? In what situations do they have opposing effects?

 

2. Use the following diagram of a market for potted plants to answer the questions below about consumer surplus.

 

                                               

a. With demand curve D and supply curve S₀, the equilibrium price and quantity in this market are p0 Q0.and At the price p0 what is the area that represents total consumer surplus in this market? (Use the letter point labels to describe the area.)

 

b. Now suppose supply increases to S₁.Determine the new equilibrium price and quantity. What is the area that now represents total consumer surplus?

 

c. At the new price, what is the area that represents the increased consumer surplus earned on the original units purchased?

 

d. At the new price, what is the area that represents consumer surplus earned on the new units purchased?