Answer to Question #303935 in Microeconomics for zar

Question

Draw a demand curve for MP3 downloads. In your diagram, show a price of MP3 downloads per tune and the consumer surplus that results from that price. Explain in words what this consumer surplus measures.

Draw a supply curve for MP3 downloads. In your diagram show a price of MP3 downloads and the producer surplus that results from that price. Explain in words what this producer surplus measures.

Answer 1

a)

PRICE 6 - is the price of MP3 downloads per tune

Consumer surplus is the area below the demand curve and above the observed price.

It measures consumer welfare since it shows the excess of social valuation of a product over the actual price paid.

b)

P- is the price of MP3 downloads per tune

Producer surplus measures the benefits that the seller gets from participating in a market. It is calculated by subtracting the cost of producing a product from the selling price.