Chapter 4 Homework Page 124-126 #1, #9, #10 Don\'t worry if you have difficulty

Question

Chapter 4 Homework Page 124-126 #1, #9, #10 Don't worry if you have difficulty with parts b and c in the last two problems. Just do your best. 1. Determine the amount of consumer surplus generated in each of the following situations a. Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to $10. He picks out one he likes with a price tag of exactly $10. When he is b. Alberto goes to the CD store hoping to find a used copy of Nirvana's Greatest Hits c. After soccer practice, Stacey is willing to pay $2 for a bottle of mineral water. The paying for it, he learns that the T-shirt has been discounted by 50%. for up to $10. The store has one copy selling for S10, which he purchases 7-Eleven sells mineral water for $2.25 per bottle, so she declines to purchase it. 9. You are the manager of Fun World, a small amusement park. The accompanying dia- gram shows the demand curve of a typical customer at Fun World Price $10 Quantity of rides (per day) a. Suppose that the price of each ride is $5. At that price, how much consumer sur- does an individual consumer get? (Recall that the area of a right triangle is x the height of the triangle x the base of the triangle.) b. Suppose that Fun World considers charging an admission fee, even though it main- tains the price of each ride at $5. What is the maximum admission fee it could charge? (Assume that all potential customers have enough moncy to pay the fee.) c. Suppose that Fun World lowered the price of each ride to zero. How much con- sumer surplus does an individual consumer get? What is the maximum admission fee Fun World could charge?

Explanation / Answer

Question 1

Consumer surplus refers to the difference between maximum willingness to pay for a good and the actual amount paid for the good.

(a)

Maximum willingness to pay for T-shirt = $10

Price of T-shirt = $10

Discount = 50%

Actual price paid = $10 * 0.50 = $5

Calculate the consumer surplus -

CS = Maximum willingness to pay - Actual price paid

CS = $10 - $5 = $5

The amount of consumer surplus generated in this case is $5.

(b)

Maximum willingness to pay for the CD = $10

Price paid for the CD = $10

Calculate the consumer surplus -

CS = Maximum willingness to pay - Actual price paid

CS = $10 - $10 = $0

Thus,

The amount of consumer surplus generated in this case is $0.

(c)

Maximum willingness to pay for the bottled mineral water = $2

Price of bottled mineral water = $2.25

As price is greater than the maximum willingness to pay, Stacey has not purchased the water bottle.

When no purchase is made, no consumer surplus get generated.

So,

In this case, no consumer surplus is generated.

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