Unit 5 Assignment: Elasticity of Demand and Consumer Surplus

Name:

Course Number and Section:

Date:

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NOTE:

Before attempting to complete the Unit 5 Assignment, it is strongly recommended that you complete the TWO Learning Activities associated with this Assignment. The links to the Learning Activities are found within the course by selecting “Content”, then on “Unit 5”, then on “Assignment”, and then on “Unit 5 Assignment.” The links appear within the paragraph entitled “Learning Activity.”

Assignment:

In this Assignment, you will calculate the Price Elasticity of Demand, demonstrate a firm understanding of consumer choices based on differing marginal utilities, consumer surplus, and how the buying choice and amount of consumer surplus changes based on various pricing schemes.

In this Assignment, you will be assessed on the following outcome:

BU224-5: Examine how the concept of utility affects purchasing decisions by individuals and consumer surplus.

Questions

- 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

a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $10 to $20. What kind of elasticity is this value that you computed for the price elasticity of demand and what does it mean for how demand will change based on a change in price within this price range? (10 points)

b. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $70 to $80. What kind of elasticity is this value that you computed for the price elasticity of demand and what does it mean for how demand will change based on a change in price within this price range? (10 points)

c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve? (10 points)

- Matilda is downloading music and videos from an online site. She is currently buying three music downloads that cost $3 each and two video downloads that also cost $3 each. The table below indicates what she reports as the marginal utility of the last music download and of the last video download in this combination of purchases.

Quantity

Price per Download

MU per download

Music downloads

3

$3

60

Video downloads

2

$3

45

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. Her available budget was $19.00.

Downloads of

mu (score) from

1 to 100

Price of each

$3.00

Money spent on

Downloads of

mu (score) from 1 to 100

Price of each

$3.00

Money spent on

Total Money

Total Budget

music

mu

mu/$

music

videos

mu

mu/$

videos

Spent

Remaining

1st

?

?

$3.00

1st

?

?

$3.00

$6.00

$13.00

2nd

?

?

2nd

45

15

$3.00

$12.00

$7.00

3rd

60

20

$3.00

3rd

$15.00

$4.00

4th

4th

Total money spent on music

$9.00

Total money spent on videos

$6.00

$15.00

$4.00

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 points)

b. Should Matilda consume one more video download, to move her closer to her optimum utility? Explain your answer. (3 points)

c. Should Matilda consume one less music download and one more video download, to move her closer to her optimum utility? Explain your answer. (3 points)

d. Should Matilda consume one more music download, to move her closer to her optimum utility? Explain your answer. (3 points)

- 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 movie rentals

Willingness to pay each rental

1st

$7

2nd

$6

3rd

$5

4th

$4

5th

$3

6th

$2

7th

$1

8th

$0

a. If 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. (5 points)

b. If the price of each movie rental from Xanadu is $5, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer. (5 points)

c. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time fee of $25.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer. (5 points)

d. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time fee of $35.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer. (5 points)

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 fee for all the downloads that the customer wanted? (4 points)

- 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? (6 points)

References:

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