Utility is a function often considered in economics. When a consumer buys x unit

Question

Utility is a function often considered in economics. When a consumer buys x units of product, he or she receives a certain amount of utility, U. For example, the number of movies that you see in a month gives you a certain utility. If you see four movies, you get more utility that if you see no movies. The same notion applies to having a meal in a restaurant or paying your heating bill to warm your home. ider To help explain the concepts of consumer surplus and producer surplus, we will cons the utility of seeing movies over 1 month. Example 1: Mary loves to go to the movies a few times per month. The number of times she goes to the movies depends on how much they charge per movie. Let's say that Mary's Demand curve for going to the movies is D(x)-12-1.2r where x is the number of movies watched and D(x) represents the cost per movie. a) How much Mary will pay to watch one movie per month? b) How much Mary will pay to watch two movies per month? At a ticket price of , Mary sees one movie. Her total expenditure is As shown by the blue region in figure 1. However, the area under her demand curve over[0,1] is S11.4, this is what going to one movie per month is worth to Maria. When she spends , the difference in area, represented by the orange triangle, can be interpreted as the extra utility she gets, but does not have to pay for, from the one movie. Economists define this amount as the consumer surplus. It is the extra utility that consumers enjoy the prices decrease. Price Consumer surplus Total expenditure D(x) Units

Explanation / Answer

(a) DEMAND FUNCTION (CURVE) D(X) = 12- 1.2 X IT SHOWS THAT IF MOVIE PRICE WILL INCREASE

MARY WILL DECREASE SEEING NUMBER OF MOVIES AND IF PRICE $12 SHE WILL NOT SEE ANY.

LET SHE WANTS TO SHE 4 MOVIES BUT FOR THIS SHE IS AGREE TO PAY ONLY D (4) = 12 - 1.2 (4)

= 12- 4.8 = $7.2 ONLY PER TICKET AND SO ON

NOW FOR ONE MOVIE ONLY SHE HAS TO PAY

D (1) = 12 - 1.2 (1) = $ 10.8

(B) FOR TWO MOVIES PRICE EACH TICKET WILL BE GIVEN AS

D ( 2) = 12 - 1.2 (2) =12 - 2.4 = $ 9.6

AT A PRICE OF $ 10.8 , MARY SEES ONE MOVIE .HER TOTAL EXPENDITURE IS $ 10.8 . AREA UNDER HER DEMAND CURVE OVER [ 0, 1] IS $ 11.4 THIS IS WHAT GOING TO ONE MOVIE WORTH TO MARY. WHEN SHE SPENDS $ 10.8 , THE DIFFERENCE IN AREA,REPRESENTED BY THE ORANGE TRIANGLE ($ 11.4 - $10.8 ) = $ 0.6 ,CAN BE INTERPRETED AS EXTRA UTILITY.

NOTE :- MARY IS AGREE TO PAY $11.4 FOR ONE MOVIE BUT GETS THIS FOR ONLY $10.8 . THIS DIFFERENCE I.E WHAT CUSTOMER WAS AGREE TO PAY AND WHAT WAS ACTUALLY PAID IS CALLED

CUSTOMER SURPLUS

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.