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Chapter 4: Problem 5

Assume that due to an increase in demand, the average domestic airline fare increased from \(\$ 319.85\) in the fourth quarter of 2013 to \(\$ 328.12\) in the first quarter of \(2014,\) an increase of \(\$ 8.27\). The number of passenger tickets sold in the fourth quarter of 2013 was 151.4 million. Over the same period, the airlines' costs remained roughly the same: the price of jet fuel averaged around \(\$ 2\) per gallon in both quarters, and airline pilots' salaries remained roughly the same, averaging \(\$ 117,060\) per year in 2013). Can you determine precisely by how much producer surplus has increased as a result of the \(\$ 8.27\) increase in the average fare? If you cannot be precise, can you determine whether it will be less than, or more than, a specific amount?

Short Answer

Expert verified
Answer: The increase in producer surplus is more than $1.285 billion.

Step by step solution

01

Calculate the revenue before the fare increase

We can calculate the total revenue before the fare increase by multiplying the number of tickets sold by the old average fare. OldAverageFare = $319.85 TicketsSold = 151.4 million RevenueBeforeIncrease = OldAverageFare * TicketsSold
02

Calculate the revenue after the fare increase

We can calculate the total revenue after the fare increase by multiplying the number of tickets sold by the new average fare. NewAverageFare = $328.12 RevenueAfterIncrease = NewAverageFare * TicketsSold
03

Calculate the increase in revenue

The increase in revenue can be calculated by subtracting the total revenue before the fare increase from the total revenue after the fare increase. IncreaseInRevenue = RevenueAfterIncrease - RevenueBeforeIncrease
04

Analyze the results

Since the costs for the airlines remained roughly the same during this period, the increase in producer surplus can be approximated as the increase in revenue. However, we cannot determine the precise increase in producer surplus due to the costs staying "roughly the same" rather than "exactly the same". Therefore, we can only determine that the increase in producer surplus will be more than a specific amount. To finish, let's evaluate the expressions: RevenueBeforeIncrease = $319.85 * 151.4 million = \approx \$48.365 billion RevenueAfterIncrease = $328.12 * 151.4 million = \approx \$49.65 billion IncreaseInRevenue = \$49.65 billion - \$48.365 billion = \approx \$1.285 billion So, we can say that the increase in producer surplus due to the fare increase of \(8.27 is more than \)1.285 billion, but we cannot be precise with the given information.

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Most popular questions from this chapter

11\. Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will receive \(10 \%\) of the revenue from every video rental of a movie they authored. They have no such agreement for movies shown on on-demand television. a. When the new writers' agreement comes into effect, what will happen in the market for video rentals-that is, will supply or demand shift, and how? As a result, how will consumer surplus in the market for video rentals change? Illustrate with a diagram. Do you think the writers' agreement will be popular with consumers who rent videos? b. Consumers consider video rentals and on-demand movies substitutable to some extent. When the new writers' agreement comes into effect, what will happen in the market for on-demand movies-that is, will supply or demand shift, and how? As a result, how will producer surplus in the market for on-demand movies change? Illustrate with a diagram. Do you think the writers' agreement will be popular with cable television companies that show on-demand movies?

Determine the amount of producer surplus generated in each of the following situations. a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of \(\$ 75 .\) After five days of bidding, the final high bid is exactly \(\$ 75 .\) He accepts the bid. b. So-Hee advertises her car for sale in the used-car section of the student newspaper for \(\$ 2,000,\) but she is willing to sell the car for any price higher than \(\$ 1,500 .\) The best offer she gets is \(\$ 1,200,\) which she declines. c. Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is \(\$ 80,000\)

a. In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example, in two auctions of identical iPods, the one with the larger number of bidders brought a higher selling price. According to Galinsky, this explains why smart sellers on eBay set absurdly low opening prices (the lowest price that the seller will accept), such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky's reasoning. b. You are considering selling your vintage 1969 convertible Volkswagen Beetle. If the car is in good condition, it is worth a lot; if it is in poor condition, it is useful only as scrap. Assume that your car is in excellent condition but that it costs a potential buyer \(\$ 500\) for an inspection to learn the car's condition. Use what you learned in part a to explain whether or not you should pay for an inspection and share the results with all interested buyers.

There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay \(\$ 40\) for a computer game, consumer 2 is willing to pay \(\$ 35\), consumer 3 is willing to pay \(\$ 30\), consumer 4 is willing to pay \(\$ 25\), consumer 5 is willing to pay \(\$ 20\), and consumer 6 is willing to pay \(\$ 15\). a. Suppose the market price is \(\$ 29 .\) What is the total consumer surplus? b. The market price decreases to \(\$ 19 .\) What is the total consumer surplus now? c. When the price falls from \(\$ 29\) to \(\$ 19\), how much does each consumer's individual consumer surplus change? How does total consumer surplus change?

In \(2010,\) a New York district judge ruled in a copyright infringement lawsuit against the popular filesharing website LimeWire and in favor of the 13 major record companies that had brought the lawsuit. The record companies, including Sony, Virgin, and Warner Brothers, had alleged that the file-sharing service encourages users to make illegal copies of copyrighted material. Allowing internet users to obtain music for free limits the record companies' right to dispose of the music as they choose; in particular, it limits their right to give access to their music only to those who have paid for it. In other words, it limits the record companies" property rights. a. If everyone obtained music and video content for free from websites such as LimeWire, instead of paying the record companies, what would the record companies' producer surplus be from music sales? What are the implications for record companies' incentive to produce music content in the future? b. If the record companies had lost the lawsuit and music could be freely downloaded from the internet, what do you think would happen to mutually beneficial transactions (the producing and buying of music) in the future?
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