Posted: November 21st, 2022

Assignment: Elasticity of Demand and Consumer Surplus

Unit 5 Assignment: Elasticity of Demand and Consumer Surplus
Name:
Course Number and Section:
Date:

Learning Activity
It is strongly recommended that you complete this learning activity after completing all the unit readings and before beginning your assignment. This will help you practice important concepts related to skills needed for the assignment.

General Instructions:

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 name_first name_unit number
Example: BU224_Section02_David_Alex_Unit1

2. At the top of the template, insert the appropriate information: Your name, course number and section, and the date.

3. Insert your answers in the appropriate space provided for the question. Your answers should
a. follow current APA format with citations to your sources,
b. include a list of references at the bottom of your last page,
c. be in Standard English with correct spelling, punctuation, grammar, and style,
d. be double-spaced,
e. be formatted in Times New Roman,12-point, black font, and
f. 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 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: Examine 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 1,000

a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $10 to $20. What kind of elasticity is this value that you computed for the price elasticity of demand, and what does it mean for how demand will change based on a change in price within this price range?

(Enter your response here.)

b. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $70 to $80. What kind of elasticity is this value that you computed for the price elasticity of demand, and what does it mean for how demand will change based on a change in price within this price range?

(Enter your response here.)

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

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 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 MU/$
Music downloads 3 $3 60 20
Video downloads 2 $3 45 15

As an assignment for her microeconomics course, Matilda used the marginal utilities that she gave to her third music download and her second video download to complete the Experiment Tally Sheet below. Her available budget was $19.00.

Downloads of mu (score) from
1 to 100 Price of each

$3.00
Money spent on
Downloads of mu (score) from 1 to 100 Price of each

$3.00
Money spent on
Total money

Total budget
music mu mu/$ music videos mu mu/$ videos spent remaining
1st ? ? $3.00 1st ? ? $3.00 $6.00 $13.00
2nd ? ? $3.00 2nd 45 15 $3.00 $12.00 $7.00
3rd 60 20 $3.00 3rd $15.00 $4.00
4th 4th

Total money spent on music: $9.00
Total money spent on videos: $6.00
Total money spent: $15.00
Total budget remaining: $4.00
Marginal utility per dollar for music downloads of the last item purchased: 20 mu/$
Marginal utility per dollar for video of the last item purchased: 15 mu/$
Using Matilda’s Experiment Tally Sheet, answer the following questions. (You will need to enter marginal utility scores and calculate marginal utility per dollar amounts, based upon the law of diminishing marginal utility, to be able to answer all of the questions 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 (MU/$). Is Matilda maximizing her utility by choosing the combination of 3 music downloads and 2 video downloads, based upon the optimal consumption rule? Explain your answer.

(Enter your response here.)

b. Should Matilda consume one more video download, resulting in a final consumption bundle of 3 music downloads and 3 video downloads, to move her closer to her optimum utility? Explain your answer.
(Enter your response here.)

c. Should Matilda consume one less music download and one more video download, resulting in a final consumption bundle of 2 music downloads and 3 video downloads, to move her closer to her optimum utility? Explain your answer.
(Enter your response here.)

d. Should Matilda consume one more music download, resulting in a final consumption bundle of 4 music downloads and 2 video downloads, to move her closer to her optimum utility? Explain your answer.
(Enter your response here.)

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 movie rentals Willingness to pay each rental
1st $7
2nd $6
3rd $5
4th $4
5th $3
6th $2
7th $1
8th $0

a. If 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, and show your work.
(Enter your response here.)

b. If 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, and show your work.

(Enter your response here.)

c. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time fee of $25.00, how many movie rentals will Brandon download, and how much consumer surplus will Brandon receive? Explain your answer, and show your work.

(Enter your response here.)

d. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time fee of $35.00, how many movie rentals will Brandon download, and how much consumer surplus will Brandon receive? Explain your answer.

(Enter your response here.)

e. If 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 fee for all the downloads that the customer wanted?
(Enter your response here.)

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?

(Enter your response here.)

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References:
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