# Elasticity of Demand and Consumer Surplus

Unit 5 Assignment: Elasticity of Demand and Consumer Surplus

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Course Number and Section: AB2240X

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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:

AB224-5: 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 0 100 200 300 400 500 600 700 800 900 1000

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?

Midpoint= (10-20)/ (10+20)/2 divide by (900-800)/ (900+800)/2

= -(2/3)*(17/2)

= 5.66%. The PED here is more than one, meaning the demand of gossum berries here is elastic.

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?

Midpoint= (70-80)/(70+80)/2 divide by (300-200)/(300+200)/2

= (2/15)*(5/2)

= 0.33%. When the PED is less than it means the demand at this level is

Inelastic.

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

The PED is different along the demand curve because of the midpoint. PED above the midpoint is elastic and those below are inelastic.

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 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.

Based on the indicated utility of the last download, Matilda’s utility is not being maximized because the marginal utility per dollar for each item is Not equal. [Downloads = 20 (60 / \$3) and Videos = 15 (45 / \$3)]. Too much of one thing will cause diminishing marginal utility.

Yes he should consume one more video as this will bring his consumption rate or his MU/\$ closer to 20, which is her current maximizing utility or even more.

Consuming one less music download and one more video download would not move Matilda closer to her optimum utility, because the marginal utility of each item is not equal, nor will she have spent all her available budget.

When he consumes one more music download he will the utility level will start dipping because it would have reached its maximum and it will now be minimizing that is go back to 0, which will not be maximizing it but reducing it, so he should not consume more music download

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 \$7 \$6 \$5 \$4 \$3 \$2 \$1 \$0

Brandon will be able to rent 5 movies. The surplus he gets will be the amount he will get by forking out for the five rentals which is (5*3=15), minus the amounts that he would be willing to fork out for the same rentals which will be 7+6+5+4+3= 25 therefore the surplus will be 25-15=10.

• 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.

If the movies were rented out at \$5 he would only be able to rent only 3 movies. The surplus would be (5*3=15) minus (7+6+5=18). Therefore, the surplus would be 3.

• 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 Brandon receive? Explain your answer.

Brandon will only be able to rent 7 movies, because at the 8th movie he is willing to pay nothing for it meaning at the 8th rental he has no interest in watching those movies. The surplus would be 28-25=3.

Brandon will still download 7 movies and he will not have a consumer surplus but a consumer deficit of 7. Which is 28-35=-7

They would charge the movie downloads at \$3 which is the price at which we see Brandon buys most movies

• 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?

These vending machines differ because the concept of marginal utility states that with the increase in the consumption of products the customer gains additional satisfaction (Attanasio & Jappelli, 1998). With the vending machine that only lets one get the goods they have paid for is that consumers will want more and more after consuming the first products and that will mean increased profits for them. With the one that sells newspapers, one newspaper has the same news like all the other papers, therefore after you read one newspaper you reach your maximum utility, you will not be interested to take more, and that is how the two machines differ.

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References:

Attanasio, O. & Jappelli, T. (1998). Intertemporal choice and the cross-sectional variance of marginal utility. Cambridge, MA: National Bureau of Economic Research.

Wessels, W. (2006). Economics. Hauppauge, N.Y.: Barron’s.

Howey, R. (1960). The rise of the marginal utility school, 1870-1889. Lawrence: University of Kansas Press.

Unit 5 Assignment: Elasticity of Demand and Consumer Surplus Grading Rubric:

Content Full Assignment Percent Possible Points Possible 100% 80 20% 16 5% 4.00 3% 2.40 3% 2.40 4% 3.20 5% 4.00 80% 64 10% 8.00 10% 8.00 10% 8.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 5% 4.00 80% 64