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Chapter 4: Problem 1

Determine the amount of consumer surplus generated in each of the following situations. a. Leon goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to \(\$ 10 .\) He picks out one he likes with a price tag of exactly \(\$ 10 .\) When he is paying for it, he learns that the T-shirt has been discounted by \(50 \%\). b. Alberto goes to the music store hoping to find a used copy of Nirvana's Nevermind for up to \(\$ 30\). The store has one copy of the record selling for \(\$ 30,\) which he purchases. c. After soccer practice, Stacey is willing to pay \(\$ 2\) for a bottle of mineral water. The 7 -Eleven sells mineral water for \(\$ 2.25\) per bottle, so she declines to purchase it.

Short Answer

Expert verified
Question: Calculate the consumer surplus for each individual in their respective situations. Answer: Leon's consumer surplus is $5, Alberto's consumer surplus is $0, and Stacey has no consumer surplus generated in her situation.

Step by step solution

01

Situation a: T-shirt

Leon is willing to pay up to \(10 for the T-shirt. The price tag is exactly \)10, but the T-shirt is discounted by 50%. Calculate the price after the discount: $$New\;Price = Original\;Price \times (1 - Discount\;Percentage)$$ $$New\;Price = \$10 \times (1 - 50\%) = \$10 \times (1 - 0.5) = \$10 \times 0.5 = \$5$$ Find the consumer surplus for Leon: $$ConsumerSurplus = WillingnessToPay - PricePaid$$ $$ConsumerSurplus = \$10 - \$5 = \$5$$
02

Situation b: Nirvana's Nevermind

Alberto is willing to pay up to \(30 for Nirvana's Nevermind. The store has one copy of the record selling for exactly \)30. Since Alberto purchases it at his maximum willingness to pay, his consumer surplus is: $$ConsumerSurplus = WillingnessToPay - PricePaid$$ $$ConsumerSurplus = \$30 - \$30 = \$0$$
03

Situation c: Mineral Water

Stacey is willing to pay up to \(2 for a bottle of mineral water. The store sells mineral water for \)2.25 per bottle. As Stacey does not purchase the water due to its price being higher than her maximum willingness to pay, there is no consumer surplus generated in this situation.

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Most popular questions from this chapter

There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay \(\$ 40\) for a computer game, consumer 2 is willing to pay \(\$ 35\), consumer 3 is willing to pay \(\$ 30\), consumer 4 is willing to pay \(\$ 25\), consumer 5 is willing to pay \(\$ 20\), and consumer 6 is willing to pay \(\$ 15\). a. Suppose the market price is \(\$ 29 .\) What is the total consumer surplus? b. The market price decreases to \(\$ 19 .\) What is the total consumer surplus now? c. When the price falls from \(\$ 29\) to \(\$ 19\), how much does each consumer's individual consumer surplus change? How does total consumer surplus change?

Determine the amount of producer surplus generated in each of the following situations. a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of \(\$ 75 .\) After five days of bidding, the final high bid is exactly \(\$ 75 .\) He accepts the bid. b. So-Hee advertises her car for sale in the used-car section of the student newspaper for \(\$ 2,000,\) but she is willing to sell the car for any price higher than \(\$ 1,500 .\) The best offer she gets is \(\$ 1,200,\) which she declines. c. Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is \(\$ 80,000\)

a. In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example, in two auctions of identical iPods, the one with the larger number of bidders brought a higher selling price. According to Galinsky, this explains why smart sellers on eBay set absurdly low opening prices (the lowest price that the seller will accept), such as 1 cent for a new iPod. Use the concepts of consumer and producer surplus to explain Galinsky's reasoning. b. You are considering selling your vintage 1969 convertible Volkswagen Beetle. If the car is in good condition, it is worth a lot; if it is in poor condition, it is useful only as scrap. Assume that your car is in excellent condition but that it costs a potential buyer \(\$ 500\) for an inspection to learn the car's condition. Use what you learned in part a to explain whether or not you should pay for an inspection and share the results with all interested buyers.

11\. Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will receive \(10 \%\) of the revenue from every video rental of a movie they authored. They have no such agreement for movies shown on on-demand television. a. When the new writers' agreement comes into effect, what will happen in the market for video rentals-that is, will supply or demand shift, and how? As a result, how will consumer surplus in the market for video rentals change? Illustrate with a diagram. Do you think the writers' agreement will be popular with consumers who rent videos? b. Consumers consider video rentals and on-demand movies substitutable to some extent. When the new writers' agreement comes into effect, what will happen in the market for on-demand movies-that is, will supply or demand shift, and how? As a result, how will producer surplus in the market for on-demand movies change? Illustrate with a diagram. Do you think the writers' agreement will be popular with cable television companies that show on-demand movies?

Assume that due to an increase in demand, the average domestic airline fare increased from \(\$ 319.85\) in the fourth quarter of 2013 to \(\$ 328.12\) in the first quarter of \(2014,\) an increase of \(\$ 8.27\). The number of passenger tickets sold in the fourth quarter of 2013 was 151.4 million. Over the same period, the airlines' costs remained roughly the same: the price of jet fuel averaged around \(\$ 2\) per gallon in both quarters, and airline pilots' salaries remained roughly the same, averaging \(\$ 117,060\) per year in 2013). Can you determine precisely by how much producer surplus has increased as a result of the \(\$ 8.27\) increase in the average fare? If you cannot be precise, can you determine whether it will be less than, or more than, a specific amount?
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