Economics question

[etalns]

Question 1

anyone know why the answer is D?

 

[simms]

Hmm.. not the same economics I took... I took more management type stuff.

 

[So]

Originally posted by: simms
i can't read

Clearly.

 

[KLin]

I have no fscking clue.

 

[imported_Ziggy]

42

 

[Einz]

it's D, you're right

*EDIT* Crap, i'm a dumbass
Consumer surplus is the area above the price line and below the demand line.
Producer surplus is the area below the price line and above the supply line.
When the price moves down to 8, PS decreases, but CS incerases. An extra little triangle is gained when you subtract the change in PS from the change in CS, so overall surplus increases.

 

[etalns]

I know I'm right 😉 I'm just wondering why the last part is true. I found the answer by a process of elimination.

 

[GigaCluster]

Using this definition, I can sort of explain why the first two clauses of the answer are correct. The citizens of that island (if that's what it is) are paying $10 per bottle while the rest of the world pays $8. The island's manufacturers can maintain this price as long as import is restricted. Once free trade is established, $8 bottles will flood the market, customers will benefit (thus have greater consumer surplus) while the original manufacturers (those that offered it for $10) will suffer (thus have less producer surplus).

 

[jagec]

OK, complete shot in the dark here.

Consumer surplus is higher because, due to free trade, there is practically an unlimited amount of $8 sunscreen available.
Producer surplus is lower because a lot of producers will drop out of the market when the price gets lowered (once again due to free trade), so all the people who are still able to sell sunscreen, manage to sell out.

And the sum of consumer+producer surplus is higher because the increase in consumer surplus > the decrease in producer surplus (once again, almost an unlimited amount of sunscreen is available through international trade)

Can I have my MBA now? 😉

 

[TechnoKid]

domestic demand is higher (the quantity is highger that is) if the price is lower, so more supply is being used up if people are buying more product at a world price of $8. At least thats how I figure it. Equilibrium appears to be at $10, but the equilibrium intersection point is not labled as equilibrium, so it really is just where two curves are meeting on the graph and nothing more imho.

Supply and demand graphs or schedules are difficult to comprehend at first.

 

[etalns]

I know that much GigaCluster. The thing I don't understand is how the sum of consumer surplus is higher as a result. I mean, I can think of why it would happen hypoethtically, but I was hoping to get a better understanding of it.

 

[etalns]

Originally posted by: jagec
OK, complete shot in the dark here.

Consumer surplus is higher because, due to free trade, there is practically an unlimited amount of $8 sunscreen available.
Producer surplus is lower because a lot of producers will drop out of the market when the price gets lowered (once again due to free trade), so all the people who are still able to sell sunscreen, manage to sell out.

And the sum of consumer+producer surplus is higher because the increase in consumer surplus > the decrease in producer surplus (once again, almost an unlimited amount of sunscreen is available through international trade)

Can I have my MBA now? 😉

You need to be able to prove that on the graph based on the intersection of the demand curve as it pertains to consumer surplus. If econ was that easy anyone could do well in it 😉

 

[Einz]

Okay, excuse the bad hack job:
http://web.mit.edu/einz/www/explain.jpg
When the price goes down to 8, the red area plus the blue area is the gain in consumer surplus.
The red area is also the loss in producer surplus.
The sum of those two, is the blue area, so there's a positive change in total surplus, but the producers loses and the consumers gain.