Posted: April 19th, 2021

# Elasticity of demand and consumer surplus

Demonstrate how the concept of utility affects purchasing decisions by individuals and consumer surplus.

Questions

1. The accompanying table shows the price and monthly demand for barrels of gosum berries in Gondwanaland.

 Price of gosum berries per barrel Native Demand for gosum berries per month \$100 0 \$90 100 \$80 200 \$70 300 \$60 400 \$50 500 \$40 600 \$30 700 \$20 800 \$10 900 \$0 1000

1. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of barrel of gosum berries rises from \$10 to \$20. What does this estimate imply about the price elasticity of demand of gosum berries?

1. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of barrel of gosum berries rises from \$70 to \$80. What does this estimate imply about the price elasticity of demand of gosum berries?

1. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?

As an assignment for her Microeconomics course, Matilda used the marginal utilities that she gave to her 3rd music download and her 2nd video download to complete the Experiment Tally Sheet below.

a.     A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is Matilda maximizing her utility? Explain your answer.

3. Brandon and his family often rent movies from the new internet movie streaming service, Xanadu. The table below shows Brandon’s demand schedule for eight movie rentals that Brandon’s family is interested in watching.

 Number of internet video rentals Willingness to pay each rental 1st movie rental \$7 2nd movie rental \$6 3rd movie rental \$5 4th movie rental \$4 5th movie rental \$3 6th movie rental \$2 7th movie rental \$1 8th movie rental \$0

a. If the price of the price of each movie rental from Xanadu is \$3, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer.

b. If the price of the price of each movie rental from Xanadu is \$5, how many

movie rentals will Brandon buy and how much consumer surplus does

e. If the Xanadu’s market research showed that Brandon’s demand represented what most of Xanadu’s customers wanted, what would be the most that Xanadu could charge as a one-time annual fee for all the downloads that the customer wanted?

4. Newspaper vending machines are designed so that once you have paid for one paper; you have access to all the papers in the machine and could take multiple papers at a time. However, other vending machines dispense only one item (the item you bought). You do not have access to all the goods (sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ?

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