Reference no: EM132592887
University of Maryland has a limited number (600) of parking spaces for faculty use. If the market were used to allocate the 600 spaces, the equilibrium price would be $600 per year. Furthermore, UMD believes that at a price of $0, faculty would demand 1500 spots.
a) Compute consumer surplus, producer surplus, and total surplus if UMD sells the spaces for $600 each. (Hint: draw a graph and assume the supply for spaces is constant. Consider UMD to be a producer)
b) Suppose that UMD sells the spaces for $400 each and that UMD is able to allocate the spaces to those faculty who value them most. Compute consumer surplus, producer surplus, and total surplus in this case.
c) Suppose, instead, that UMD sells the spaces for $400 each but now uses a lottery to determine which faculty will get a spot. Compute consumer surplus, producer surplus, and total surplus in this case. (Hint: how many people will enter the lottery? You can then calculate ratio of people who will win the lottery. Then multiply this ratio by surplus if all lottery participants would get a parking spot)
d) Why are answers to b) and c) different?
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: Compute consumer surplus, producer surplus, and total surplus if UMD sells the spaces for $600 each. (Hint: draw a graph and assume the supply for spaces
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