Chapter 5 Homework (SHOW YOUR WORK) Two point questions: Mike bought a new guita
ID: 1214151 • Letter: C
Question
Chapter 5 Homework (SHOW YOUR WORK)
Two point questions:
Mike bought a new guitar for $800 and gets consumer surplus of $400.
What was his willingness to pay?
If he had bought the guitar for $975, what would his consumer surplus have been?
If the price of the guitar had been $1300, what would his consumer surplus have been?
A better than expected growing season in California results in a larger than expected grape harvest.
Explain what happens to consumer surplus in the market for grapes.
b. What happens to consumer surplus in the market for wine?
3. Suppose that in 2013 PECO generated 100 billion kilo-watt-hours (kwh) of electricity that it provided to its customers at a charge of $.08 per kwh. Suppose that as a result of excessive earnings, the state regulatory commission ordered PECO to reduce its rates from $.08 per kwh to $.07 per kwh. Had the decrease been in effect in 2013, the state commission’s economic consultant believed the quantity demanded would have been 103 billion kwh of electricity, providing an increase in consumer surplus of _____. What would have been the increase in consumer surplus? (quantify the change in consumer surplus using the same approach used in the slides to determine Lisa’s increase in her consumer surplus.)
Explanation / Answer
Answer 1:
Consumer Surplus=Maximum amount that the consumer is willing to pay - Amount actually paid
400 = Willingness to pay - 800
Willingness to pay = $1200
Answer 2 :
Consumer Surplus=Maximum amount that the consumer is willing to pay - Amount actually paid or Price of the good
= 1200 - 975
= 225
Answer 3:
Consumer Surplus = 1200 - 1300 = - $100
Answer 4:
The excess supply of the good will result in decline in the prices.
Decline in the price level will lead to increase in the consumer surplus.
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