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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
$100
0
$90
100
$80
200
$70
300
$60
400
$50
500
$40
600
$30
700
$20
800
$10
900
$0
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?
Elasticity =
% change in quantity demanded = = -11.76%
% change in price = = 66.67%
Coefficient of elasticity = = -0.18
Given that, the coefficient of elasticity is below 1, the demand for gosum berries when the price is between $10 and $20 is inelastic. This implies that consumers demand is less affected by price changes when the prices are low.
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?
Elasticity =
% change in quantity demanded = = -100%
% change in price = = 13.33%
Coefficient of elasticity = = -7.50
As the price increases, the willingness and ability to purchases gosum berries declines. At prices between $70 and $80, the coefficient of elasticity is above 1, therefore, elastic. This implies that consumers demand is much more affected by price changes when the prices are high.
Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?
Coefficient of elasticity is the ratio of percentage changes in quantity to percentage change in quantity (Mankiw, 2006). As long as the two variables are changing, the percentage changes will vary changing the elasticity in the process.
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
$3
45
As an assignment for her Microeconomics course, Matilda used the marginal utilities that she gave to her 3rd music download and her 2nd video download to complete the Experiment Tally Sheet below.
A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is Matilda maximizing her utility? Explain your answer.
Matilda is not maximizing her utility. She gets more satisfaction (20mu/$) from the last dollar spent on downloads of music compared to the last dollar spent on downloads of videos (15mu/$).
Should Matilda consume one more video download, to move her closer to her optimum utility? Explain your answer.
No, she should not. According to the principle of diminishing marginal utility, she would be less satisfied upon consuming another video download pushing her further away from her optimum utility.
Should Matilda consume one less music download and one more video download, to move her closer to her optimum utility? Explain your answer.
No, she should not. To try to equate the last dollar spent music downloads to the last dollar spent on video downloads she should consume one more music downloads reducing her marginal utility on the product and one less video downloads, which would raise her marginal utility on the item.
Should Matilda consume one more music download, to move her closer to her optimum utility? Explain your answer.
Yes, she should. This would reduce the marginal utility per dollar derived from consuming a music download moving it closer to that of a video 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
1st movie rental
$7
2nd movie rental
$6
3rd movie rental
$5
4th movie rental
$4
5th movie rental
$3
6th movie rental
$2
7th movie rental
$1
8th movie rental
$0
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.
Brandon buys 5 movie rentals. The consumer surplus is the difference between the amounts one is willing to spend to get a good and the actual amount spent (Mankiw, 2006). In this case, Brandon pays, 5*$3=$15 and is willing to pay $7+$6+$5=$18. Therefore, the consumer surplus is $18-$15=$3.
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 buys 3 movie rentals. In this case, Brandon pays, $3*5=$15 and is willing to pay $7+$6+$5+$4+$3=$25. Therefore, the consumer surplus is $25- $15=$10.
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.
Brandon buys 7 movie rentals. He is willing to pay nothing for the 8th movie. Consumer surplus would be therefore ( $7+$6+$5+$4+$3+$2+$1)-$25 = $3
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.
Brandon would still buy 7 movie rentals. His consumer surplus would be $28- $35= -$7 which means that instead of having a surplus, he has a deficit of $7.
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?
Xanadu could charge an annual fee of $28. At this rate the consumer is neither better off or worse off. There is no consumer surplus or deficit.
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?
The satisfaction obtained from reading the first newspaper from the newspaper’s vending machines is total. This means that once you read a newspaper you do not need to obtain another copy and the marginal utility of an additional paper is zero. However, for other goods such as sodas, candy and snacks there is diminishing marginal utility which. Consuming more of the goods still yield some level of satisfaction. Were the vending machines for such goods made in a way that they dispensed multiple items; consumers would take more until they are fully satisfied.
--------------------------------------------
References:
Mankiw, N. (2006). Principles of microeconomics. Cengage Learning.
Unit 5 Assignment: Elasticity of Demand and Consumer Surplus Grading Rubric:
Content
Percent Possible
Points Possible
Full Assignment
100%
80
Overall Writing:
20%
16
Correct coversheet information at the top of 1st page
5%
4.00
APA format for answers
3%
2.40
Correct citations
3%
2.40
Standard English, no errors
4%
3.20
At least one, or more, references
5%
4.00
Answers: provides complete information demonstrating analysis and critical thinking:
80%
64
Individual Questions:
1. a. - Calculate price elasticity of demand ($10-$20), Explain.
10%
8.00
1. b. - Calculate price elasticity of demand ($70-$80), Explain.
10%
8.00
1. c. - Why do these Dpe estimates change at various prices?
10%
8.00
2. a. Is utility maximized at 3rd music and 2nd video? Explain.
5%
4.00
2. b. Is utility maximized at 3rd music and 3rd video? Explain.
5%
4.00
2. c. Is utility maximized at 2nd music and 3rd video? Explain.
5%
4.00
2. d. Is utility maximized at 4th music and 2nd video? Explain.
5%
4.00
3. a. Brandon's number of video rentals and Consumer Surplus at $3/rental.
5%
4.00
3. b. Brandon's number of video rentals and Consumer Surplus at $5/rental.
5%
4.00
3. c. Brandon's number of video rentals and Consumer Surplus at $25 subscription price.
5%
4.00
3. d. Brandon's number of video rentals and Consumer Surplus at $35 subscription price.
5%
4.00
3. e. Xanadu's maximum subscription price.
5%
4.00
4. - What are the differences between newspaper and snack vending machines (considering utility)?
5%
4.00
Sub-total for Individual Questions:
80%
64
