Elasticity of Demand and consumer Surplus

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Elasticity of Demand and consumer Surplus

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Elasticity of Demand and consumer Surplus Genaral Instruction for all Assignment: 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. 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. 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. 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? 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. As an assignment for her Microeconomics course, Matilda used the marginal utilities that she gave to her 3 music download and her 2 video download to complete the Experiment Tally Sheet below. rd nd 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. 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. 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 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? -------------------------------------------References:
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Running head: ELASTICITY OF DEMAND AND CONSUMER SURPLUS

Elasticity of Demand and consumer Surplus
Student’s name
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Date

1

ELASTICITY OF DEMAND AND CONSUMER SURPLUS
Questions:
1. The accompanying table shows the price and monthly demand for barrels of gosum
berries in Gondwanaland.

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?

2

ELASTICITY OF DEMAND AND CONSUMER SURPLUS
(800 – 900) ÷ (900 + 800)/2 ÷ (20 – 10) ÷ (10 + 20)/2
-100 ÷ (1700 / 2) ÷ (10 ÷ (30 / 2)
(-100 ÷ 850) ÷ (10 ÷ 15)
-0.1176 ÷ 0.6667
= 0.1765
= 0.1765
Since the price elasticity of demand is less than 1, the price elasticity of demand for the
gosum berries is inelastic in this price range. A change in price will cause a smaller
change in the amount demanded while revenue increases.

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) ÷ (300 + 200)/2 ÷ (80 – 70) ÷ (70 + 80)/2
-100 ÷ (500 / 2) ÷ (10 ÷ (150 / 2)
(-100 ÷ 250) ÷ (10 ÷ 75)
-0.40 ÷ 0.1333
=3
With a price elasticity of demand greater than 1, this means that gosum price is elastic.
Increase in price may cause customer to stop buying the product and thereby decreasing
the revenue.

c. Notice that the estimates from (a) and (b) above are different. Why do price
elas...


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