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.
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-anddemand 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?
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?
d. Does this analysis help explain why software producer Bill Gates is one of the world's richest men?
A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend's monthly demand for minutes of calling is given by the equation
QD = 150 - 50P, where P is the price of a minute.
a. With each provider, what is the cost to your friend of an extra minute on the phone?
b. In light of your answer to (a), how many minutes with each provider would your friend talk on the phone?
c. How much would she end up paying each provider every month?
d. How much consumer surplus would she obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle.)
e. Which provider would you recommend that your friend choose? Why?