Week 3: Market Efficiency and Equity Learning Activity 1: Short Questions

ISIP, ERIKA MAE L.
2019-09411 ASSIGNMENT #3
ORTEGA, KYLLAMAE N. 2019-01671 THUV (AM BLOCK)
PANGILINAN, ALESSANDRA N. 2019-06318
Week 3: Market Efficiency and Equity
Learning Activity 1: Short Questions
1. Why is the marginal benefit curve downward sloping and why is the marginal cost curve
upward sloping?
The marginal benefit is the benefit arising from the increase of an activity. It is the
law of decreasing marginal utility in the consumption of a certain good that causes the
marginal benefit curve to be sloping downwards. The law states that ceteris paribus, as
consumption rises, the marginal utility gained from each supplemental unit decreases. On
the other hand, marginal cost is the opportunity cost of a rise in an activity. In this case, it
is the law of decreasing marginal returns that causes the curve of marginal cost to be
upward sloping. The law implies that all other factors held constant, the decline in the
marginal output produced as the unit of a single factor of production gradually increases.
2. Based on your readings about efficiency and equity, do you think RA 11229, the new car
seat belt law in the Philippines, which mandates the use of child restraint systems (CRS)
among children 12 years old and below with a height of 4 feet 11 inches and below,
efficient? Is it fair? Explain.
This mandate can be considered inefficient mainly because of the cost that entails
this law. According to RA 11229, every car owner, first the private owners (and later on
for public transport owners), will be obliged to purchase car seats that would cost from
Php 1,000 to Php 3,000 and would be required to change the car seat as the child reaches
a certain age. It would be inefficient since the cost that they would be paying is not in par
to the benefit that they can possibly receive. One of the reasons that the maximum benefit
will not be received is the heavy flow of traffic in the country. Car accidents involving
children often happen on roads where cars can freely drive beyond the speed limit but
traffic in the country is often called bumper to bumper which does not serve as an
enough reason to implement the mandate to all areas. Another is the cost of car seats that
can heavily burden middle to low class families and families with a bigger number of
ISIP, ERIKA MAE L. 2019-09411 ASSIGNMENT #3
children. Another thing to consider is the availability of child car seats in public transport.
Car seats can be costly because it can result in an increase in fares and some public
transports would be required to modify their vehicles to accommodate the installation of
car seats (e.g. buses, jeepneys, motorcycles, etc.). Given this situation, it would be
inefficient to implement the mandate
On the concept of fairness, it would not be fair because of income variation. Since
not everyone has the same amount of income, it may be burdensome to a portion of the
population while the others can consider it as affordable since they have more disposable
income compared to the other side. Because of this, only those who can afford the car
seat can be safe from the law and would leave those who cannot afford to suffer from the
punishments. Thus, it isn’t fair since the result is not fair.
3. Do you think the 12% value added tax imposed on all goods and services purchased in the
Philippines is fair? Is it efficient?
The 12% imposed VAT is included in all purchases being done in the country,
regardless of the income of households. Because of this, it can be said that the amount of
VAT being imposed is not fair since there are income variations to which most of the
people fall under the lower class. Given this situation, only the lower class will be greatly
impacted compared to those who belong to middle and high class who earn more and can
afford more goods despite the VAT. With this, the result is not fair to everyone since more
will suffer while those who have better income will suffer less impact.
4. Identify two sources of market failures and provide at least one specific example of each in
the Philippine context. Explain why each type of market failure may cause outcomes to be
inefficient.
One of the sources of market failures are externalities. Parkin defined externalities
as a cost or a benefit that affects someone other than the buyer or seller. A recent example
of this is the panic buying of consumers due to the implementation of ECQ during the
first months of Covid-19 pandemic. This behavior resulted in the short-term shortage and
underproduction of supply of basic goods and sanitary products like alcohol, antibacterial
soap and facemasks, which lead to the price gouging of some retailers.
Another source of market failure is imperfect competition or monopolies which is

the case of Grab in many Southeast Asian countries particularly in the Philippines. Grab
has given commuters a convenient alternative to taxis that refuse to take rides during
rush-hour when there or take rides selectively at a fixed premium. In the absence of
alternatives, there will be less choices for transportation which means ride-hailing
companies such as Grab can charge higher fares to maximize their profit.
Reference:
Abrina, T., Basa, J., Capacio, J., & Lagac, J. (2020). The externalities of Pandemics: Up
CIDS: Center for integrative and development studies. Retrieved from
https://cids.up.edu.ph/covid19portal/covid19blog/the-externalities-of-pandemics/
Hilotin, J. (2020). Panic buying, price gouging reported in Manila OVER

CORONAVIRUS. Retrieved from
https://gulfnews.com/world/asia/philippines/panic-buying-price-gouging-reported-in-manil
a-over-coronavirus-1.1583946282411
Learning Activity 2: Problem Set
Chapter 5
Use the following table to work Problems 3 to 5. The table gives the demand schedules for train
travel for the only buyers in the market, Ann, Beth, and Cy.
3. a. Construct the market demand schedule.
b. What are the maximum price that Ann, Beth, and Cy are willing to pay to travel 20 miles?
Why?
The maximum price that Ann is willing to pay to travel 20 miles is $5 per mile ($100), Beth is
willing to pay for $ 4 per mile ($80) and $3 per mile ($60) is the maximum price Cy is willing to
pay. This is based on the data shown in the demand schedule that shows the maximum price each
individual is willing to pay to travel 20 miles.
4. a. What is the marginal social benefit when the total distance travelled is 60 miles?
The data from the demand schedule shows that the marginal social benefit is $4 per mile when
the distance travelled is 60 miles. This is the highest price that consumers are willing to pay for
60 miles and it is equal to the marginal social benefit.
b. What is the marginal private benefit for each person when they travel a total distance of 60
miles and how many miles does each of the people travel?
Ann,Beth and Cy travel a total distance of 60 miles when the fair is $4 per mile. So, the marginal
benefit of each person is $4.
5. a. What is each traveler’s consumer surplus when the price is $4 a mile?

b. What is the market consumer surplus when the price is $4 a mile?

Use the following table to work Problems 6 to 8. The table gives the supply schedules of hot air
balloon rides for the only sellers in the market, Xavier, Yasmin, and Zack.
6. a. Construct the market supply schedule.
Price Market Supply Schedule
100 75
90 60
80 45
70 30
60 15
50 5
40 0
b. What are the minimum prices that Xavier, Yasmin, and Zack are willing to accept to
supply 20 rides? Why?
Xavier offers 20 rides for 80 dollars, 90 dollars for Yazmin, and 100 dollars for
Zack. This is the minimum price since it is the efficient price that will allow the sellers to
sell another unit in exchange for the other.
7. a. What is the marginal social cost when the total number of rides is 30?
-The marginal cost ,when the total number of ridesis 30, would be $100.
b. What is the marginal cost for each supplier when the total number of rides is 30 and
how many rides does each of the firm's supply?
-When the total number of rides is 30, the marginal cost would be $100 for Zach while
Xavier and Yazmin were not able to supply for 30 rides so there would be no marginal cost.
Zach’s firm supplies 50 rides, 70 rides for Yazmin, and 105 rides in total for Xavier’s firm.
8. When the price is $70 a ride,
a. What is each firm’s producer surplus?
Zach’s producer surplus = ½ (5)(70-60)
= ½ (5)(10)
= ½ (50)
= 25 is Zach’s firm’s producer surplus.
Yazmin’s producer surplus = ½ (5)(70-50)
= ½ (5)(20)
= ½ (100)
= 50 is Yazmin’s firm’s producer surplus.

Xavier’s producer surplus = ½ (5)(70-40)
= ½ (5)(30)
= ½ (150)
= 75 is Xavier’s firm’s producer surplus.
b. What is the market producer surplus?
Market surplus = Zach’s producer surplus + Yazmin’s producer surplus +Xavier’s producer
surplus
= 25 + 50 +75
=150 is the market surplus
11. The figure illustrates the competitive market for cell phones.
a. What are the equilibrium price and equilibrium quantity of cell phones?
The equilibrium price and quantity is identified (and visualized in the graph) by the
intersection of the supply and demand curves. Hence, the equilibrium price is $30 per cell phone
and the equilibrium quantity is 100 cell phones per month.
b. Shade in and label the consumer surplus at the competitive equilibrium.
c. Shade in and label the producer surplus at the competitive equilibrium.
d. Calculate total surplus at the competitive equilibrium
e. Is the competitive market for cell phones efficient?

Equilibrium takes place when quantity demanded equates to quantity supplied at the
intersection of the demand curve and supply curve. The equilibrium quantity of cell phones per
month is 100. Moreover, marginal social benefit on the demand curve equals marginal social cost
on the supply curve at the intersection. It is also at this point that the efficient quantity can be
determined, hence the quantity is also 100 per month. The competitive market for cell phones is
efficient because both the equilibrium and efficient quantity equal at 100 per month.
12. The table gives the demand and supply schedules for sunscreen.
Sunscreen factories are required to limit production to 100 bottles a day.
a. What is the maximum price that consumers are willing to pay for the 100th bottle?
It can be seen in the demand schedule that the maximum price that consumers are willing
for the 100th bottle of sunscreen is $15.
b. What is the minimum price that producers are willing to accept for the 100th bottle?
The supply schedule shows that the minimum price for the producers are willing to
accept for the 100th bottle of sunscreen is $5.
c. Describe the situation in this market.
The efficient quantity equals the equilibrium quantity that is 200 bottles. There is less
than the efficient quantity being produced because the factories are required to limit production
to 100 bottles per day. Therefore, the marginal bottle of sunscreen is highly valued more than the
cost of its production.
Additional problems:
1. The current price charged by a local movie theater is $8 per ticket. At the current ticket
price, the theater typically sells 300 tickets per showing. If the theater raises ticket prices to
$9, the theater will sell 270 tickets. What is the price elasticity of demand at $8? Given the
computed elasticity, if the theater wants to maximize its ticket revenue, should they raise
ticket prices to $9? Why or why not? What will be the theater’s ticket revenue if it raises
ticket prices to $9 compared to its revenue when the ticket price is $8?
Answer: Based on the solution found on the next page, the price elasticity of the movie tickets
is 0.895. This means that it is inelastic because the elasticity is less than 1 and the percentage
change in the price is greater than the percentage change in quantity demanded. So, when the
price increases the revenue also increases. This is evident on the $30 increases in the revenue
when the ticket price increased to $9.
2. Suppose that the short-run world demand and supply elasticities for crude oil are -0.076 and
0.088, respectively. The current price per barrel is $30 and the short-run equilibrium quantity is
23.84 billion barrels per year. Derive the linear demand and supply equations.
3. The market for gravel has been estimated to have these supply and demand
relationships:
Supply P = 10 + 0.01Q
Demand P = 100 - 0.01Q,
where P represents price per unit in dollars, and Q represents sales per week in tons.
Determine the equilibrium price and sales. Determine the amount of shortage or surplus
that would develop at P = $40/ton.
4. Refer to the figure below.
a. How much is consumer surplus, producer surplus and total surplus in this
market at the equilibrium price?
*Consumer Surplus = ½ (base)(height)
= ½ (36)(36-18)
= ½(36)(18)
= ½ (648)
=324 is the consumer surplus
*Producer Surplus = ½ (base)(height)
= ½ (36)(18-0)
= ½ (36)(18)
= ½ (648)
=324 is the producer surplus
*Total Surplus = CS + PS
=324+324
=648 is the total surplus
b. Suppose demand shifts such that consumers wish to purchase 12 fewer units at
every price, how much is the consumer surplus, producer surplus and total surplus
at the new equilibrium price?
*Consumer Surplus = ½ (30)(30-15)
= ½ (30)(15)
= ½ (450)
= 225 is the consumer surplus
*Producer Surplus = ½ (30)(15-0)
= ½ (30)(15)
= ½ (450)
= 225 is the producer surplus
*Total surplus = 225+ 225
= 450 is the total surplus
9. One of the largest changes in the economy over the past several decades is that
technological advances have reduced the cost of making computers.
a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer

surplus, and producer surplus in the market for computers.
Technological advancement reduces the cost of production of computers and

increases the supply of it. This will result in a decrease in price while increasing the
quantity being produced. The consumer surplus and consumer producer surplus increased
as well.
b. Forty years ago, students used typewriters to prepare papers for their classes; today they
use computers. Does that make computers and typewriters complements or substitutes?
Use a supply-and-demand diagram to show what happened to price, quantity, consumer
surplus, and producer surplus in the market for typewriters. Should typewriter producers
have been happy or sad about the technological advance in computers?
Computers are a substitute for typewriters. This is why the advancement of
technology on computers decreased the demand for typewriters. Moreover, price,
consumer surplus, and producer surplus also decreased.
c. Are computers and software complements or substitutes? Draw a supply-and-demand

diagram to show what happened to price, quantity, consumer surplus, and producer
surplus in the market for software. Should software producers have been happy or sad
about the technological advance in computers?
Computers and softwares are complementary goods hence the decrease in the
price of computers brought about by the advancement of technology would lead to an
increase in the demand for computer software, a complement. In this light, the consumer
surplus increased as the producers surplus did that is software producers should be glad
about this.
d. Does this analysis help explain why software producer Bill Gates is one of the world’s
richest men?
Indeed this analysis helped enlighten our understanding regarding why Bill Gates
is one of the world’s richest men. Through the years, there has been a lot of advancement
in technology specifically with laptops, computers, and smartphones all of which are a
complementary good of what his company produces, software.

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ISIP, ERIKA MAE L.

Week 3: Market Efficiency and Equity

Learning Activity 1: Short Questions

Another source of market failure is imperfect competition or monopolies which is

Hilotin, J. (2020). Panic buying, price gouging reported in Manila OVER

3. a. Construct the market demand schedule.

5. a. What is each traveler’s consumer surplus when the price is $4 a mile?

b. What is the market consumer surplus when the price is $4 a mile?

6. a. Construct the market supply schedule.

Price Market Supply Schedule

8. When the price is $70 a ride,

a. What is each firm’s producer surplus?

Zach’s producer surplus = ½ (5)(70-60)

= 25 is Zach’s firm’s producer surplus.

Yazmin’s producer surplus = ½ (5)(70-50)

= 50 is Yazmin’s firm’s producer surplus.

= 75 is Xavier’s firm’s producer surplus.

b. What is the market producer surplus?

=150 is the market surplus

c. Shade in and label the producer surplus at the competitive equilibrium.

d. Calculate total surplus at the competitive equilibrium

e. Is the competitive market for cell phones efficient?

Sunscreen factories are required to limit production to 100 bottles a day.

c. Describe the situation in this market.

Demand P = 100 - 0.01Q,

4. Refer to the figure below.

*Consumer Surplus = ½ (base)(height)

*Producer Surplus = ½ (base)(height)

=324 is the producer surplus

=648 is the total surplus

*Consumer Surplus = ½ (30)(30-15)

*Producer Surplus = ½ (30)(15-0)

= 225 is the producer surplus

*Total surplus = 225+ 225

= 450 is the total surplus

a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer

Technological advancement reduces the cost of production of computers and

consumer surplus, and producer surplus also decreased.

c. Are computers and software complements or substitutes? Draw a supply-and-demand

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