Microeconomics - Elasticity of Demand and Consumer Surplus

User Generated

gvyylorr

Economics

Description

Please fill out the attached template.

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.

Unformatted Attachment Preview

Unit 5 BU224 | Microeconomics Unit 5 Assignment: Elasticity of Demand and Consumer Surplus Name: Course Number and Section: BU224–0X Date: General Instructions for all Assignments 1. Unless specified differently by your course instructor, save this assignment template to your computer with the following file naming format: Course number_section number_Last_First_unit number. 2. At the top of the template, insert the appropriate information: Your Name, Course Number and Section, and the Date. 3. Insert your answers below, or in the appropriate space provided for in the question. Your answers should follow APA format with citations to your sources and, at the bottom of your last page, a list of references. Your answers should also be in Standard English with correct spelling, punctuation, grammar, and style (double spaced, in Times New Roman, 12–point, and black font). Respond to questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions. 4. Upload the completed Assignment to the appropriate Dropbox. 5. Any questions about the Assignment, or format questions, should be directed to your course instructor. 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: Demonstrate how the concept of utility affects purchasing decisions by individuals and consumer surplus. v.6.16.17 Page 1 of 7 Unit 5 BU224 | Microeconomics Questions 1. The accompanying table shows the price and monthly demand for barrels of gosum berries in Gondwanaland. Price of gosum berries per barrel $100 Native Demand for gosum berries per month 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 barrel of gosum berries rises from $10 to $20. What does this estimate imply about the price elasticity of demand of gosum berries? b. 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? v.6.16.17 Page 2 of 7 Unit 5 BU224 | Microeconomics c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve? 2. 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. 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. v.6.16.17 Page 3 of 7 Unit 5 BU224 | Microeconomics b. Should Matilda consume one more video download, to move her closer to her optimum utility? Explain your answer. c. Should Matilda consume one less music download and one more video download, to move her closer to her optimum utility? Explain your answer. d. Should Matilda consume one more music download, to move her closer to her optimum utility? Explain your answer. 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 1st movie rental 2nd movie rental 3rd movie rental 4th movie rental 5th movie rental 6th movie rental 7th movie rental 8th movie rental Willingness to pay each rental $7 $6 $5 $4 $3 $2 $1 $0 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. v.6.16.17 Page 4 of 7 Unit 5 BU224 | Microeconomics 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. c. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for on-time yearly subscription fee of $25.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer. d. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for on-time yearly subscription fee of $35.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer. 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? v.6.16.17 Page 5 of 7 Unit 5 BU224 | Microeconomics -------------------------------------------References: Unit 5 Assignment: Elasticity of Demand and Consumer Surplus Grading Rubric: Content Full Assignment Overall Writing: Correct coversheet information at the top of 1st page APA format for answers Correct citations Standard English, no errors At least one, or more, references Answers: provides complete information demonstrating analysis and critical thinking: Individual Questions: 1. a. - Calculate price elasticity of demand ($10-$20), Explain. 1. b. - Calculate price elasticity of demand ($70-$80), Explain. v.6.16.17 Percent Possible 100% Points Possibl e 80 20% 16 5% 3% 3% 4% 5% 80% 4.00 2.40 2.40 3.20 4.00 64 10% 8.00 10% 8.00 Page 6 of 7 Unit 5 BU224 | Microeconomics 1. c. - Why do these Dpe estimates change at various prices? 2. a. Is utility maximized at 3rd music and 2nd video? Explain. 2. b. Is utility maximized at 3rd music and 3rd video? Explain. 2. c. Is utility maximized at 2nd music and 3rd video? Explain. 2. d. Is utility maximized at 4th music and 2nd video? Explain. 3. a. Brandon's number of video rentals and Consumer Surplus at $3/rental. 3. b. Brandon's number of video rentals and Consumer Surplus at $5/rental. 3. c. Brandon's number of video rentals and Consumer Surplus at $25 subscription price. 3. d. Brandon's number of video rentals and Consumer Surplus at $35 subscription price. 3. e. Xanadu's maximum subscription price. 4. - What are the differences between newspaper and snack vending machines (considering utility)? Sub-total for Individual Questions: v.6.16.17 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% 5% 4.00 4.00 5% 4.00 80% 64 Page 7 of 7 Hints for Unit 5 Assignment - Remember the “mid-point method of computing Dpe from the Hints for Unit 4 Assignment, and If Dpe is less than 1, what is it called and what does it mean? If Dpe is more than 1, what is it called and what does it mean? Why are Dpe’s different at different price ranges (look in the textbook)? - Remember Marginal Utility, what does it mean? - What happens to marginal Utility as you get MORE of something? What about when you get LESS of that thing? - Satisfaction is MAXIMIZED when marginal utility PER DOLLAR is equal between two items. SAMPLE_ nuggets problem (what does the demand schedule actually mean. And an “all you can eat” example for $10.00. Number of Chicken Nugget servings (servings) 1 2 3 4 5 6 Willingness to pay for chicken nuggets (per serving) $5 $4 $3 $2 $1 $0 Nina's demand schedule says: Nina is willing to pay $5 for the first, serving, plus Nina is willing to pay $4 more for a second, serving, plus Nina is willing to pay $3 more for a third, serving, plus Nina is willing to pay $2 more for a fourth, serving, plus Nina is willing to pay $1 more for a fifth, serving, plus Nina is willing to pay $0 more for a sixth, serving, and, no matter what the price is, she wants no more after the sixth serving. Nina’s demand schedule also means that: if the price was $5, Nina would buy ONLY 1 serving, but, if the price was $4, Nina would buy 2 servings, but, if the price was $3, Nina would buy 3 servings, but, if the price was $2, Nina would buy 4 servings, but, If the price was $1, Nina would buy 5 servings, and, if the price was FREE, Nina would get 6 servings. ========================== From the above information: v.6.8.17 If we add what Nina is willing to pay for all six servings we see that Nina is willing to spend 5 + 4 + 3 + 2 + 1 + 0 = $15 for six servings If she could get all 6 servings for $10, that would be great for her, and she would save some money because the price she had to pay was less than what she was willing to pay. Remember that consumer surplus is the same thing as SAVINGS beyond what the person was WILLING to pay, but did not have to pay because the price was lower. ========================== If the price were $2 per serving, then, according to her demand schedule, she would buy 4 servings and would spend $8, but she would have been willing to spend $14 for 4 servings, 5+4+3+2 = $14 she would have been willing to pay 2+2+2+2 = $8 what she did spend at a price of $2 $14 - $8 = $ 6 …………. so her savings (Consumer Surplus) would be $6. v.6.8.17
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

Running head: BU224 MICROECONOMICS

Elasticity of Demand and Surplus
Student’s Name:
Instructor’s Name:
Course:
Date:

2

BU224 MICROECONOMICS

Questions
1. The accompanying table shows the price and monthly demand for barrels of gosum berries in
Gondwanaland.

Price of
gosum
berries
per
barrel
$100

Native
Demand
for gosum
berries
per
month
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 barrel of gosum berries rises from $10 to $20. What does this estimate
imply about the price elasticity of demand of gosum berries?

800.00 – 900.00= -100.00 =-100.00/850.00= - 0.1176= -0.1765(900.00 + 800.00)/2 =
1700.00/2= $10.00/$15.00= 0.6667$20.00 - $10.00 = $10.00($10.00 + $20.00)/2 =$30.00/2Price
is less than one so this would be inelastic. Increase in price causes few customers to stop buying
and increases revenue.

3

BU224 MICROECONOMICS

b. 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?

200 – 300 -100.00/250.00 = -0.4000/0.1333 = -3.000(300 + 200)/2$10.00/$75.00$80.00 +
$70.00($70.00 - $80.00)/2-100.00$500.00/2$10.00$150.00/2Price is greater than one so this
elastic. Increase in price may cause customer to stop buying and decrease the revenue.
c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of
demand estimates change along the demand curve?
There are...


Anonymous
Great! 10/10 would recommend using Studypool to help you study.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Related Tags