Question

The following table shows the quantities of bottled water demanded and supplied per week at different prices in a particular city: $$\begin{array}{|lc|} \hline \text { Price } & \text { Quantity Demanded } & \text { Quantity Supplied } \\ \hline \$ 1.10 & 8,000 & 0 \\ \hline \$ 1.15 & 7,000 & 1,000 \\ \$ 1.20 & 6,000 & 2,000 \\ \hline \$ 1.25 & 5,000 & 3,000 \\ \$ 1.30 & 4,000 & 4,000 \\ \hline \$ 1.35 & 3,000 & 5,000 \\ \$ 1.40 & 2,000 & 6,000 \\ \hline \$ 1.45 & 1,000 & 7,000 \\ \$ 1.50 & 0 & 8,000 \\ \hline \end{array}$$ a. Draw the supply and demand curves for this market, and identify the equilibrium price and quantity. b. Identify on your graph areas for market consumer surplus and market producer surplus when the market is in equilibrium. c. Using your graph, calculate the dollar value of market consumer surplus, market producer surplus, and the total net benefits in the market at equilibrium.

Short answer

The equilibrium price is $1.30 and the equilibrium quantity is 4,000. The consumer surplus is $700 and the producer surplus is $350. The total net benefits in the market at equilibrium is $1050.

Step-by-step solution

Create a graph

Plot the given points for demand and supply on a graph with price on the y-axis and quantity on the x-axis. The demand curve is plotted using the 'quantity demanded' and the supply curve using the 'quantity supplied'. Label your x-axis as 'Quantity', and y-axis as 'Price'.

Find Equilibrium Price and Quantity

Locate the point where the supply and demand curves intersect. This point is called the equilibrium, representing the price and quantity at which the quantity demanded equals the quantity supplied. From the graph or the table, we can see that this equilibrium price is $1.30 and the equilibrium quantity is 4,000.

Identify consumer surplus and producer surplus

On your graph, the consumer surplus is the area of the triangle above the price line (equilibrium price) and below the demand curve. The producer surplus is the area below the price line and above the supply curve. Highlight these areas on your graph.

Calculate consumer and producer surplus

To calculate consumer surplus, use the formula for the area of a triangle: 1/2 * base * height. The base is from 0 to the equilibrium quantity and the height is from price at quantity 0 to the equilibrium price (Calculate these separately for consumer and producer surplus). From given values in the table, the consumer surplus is $0.10*4000 + $0.05*3000 = $700. Similarly, producer surplus is $0.05*1000 + $0.10*2000 + $0.15*1000 = $350.

Calculate Total net benefits

The total net benefits in the market at equilibrium is the sum of consumer and producer surplus. Hence total net benefits = consumer surplus + producer surplus = $700 + $350 = $1050.