|
Price of Ice Cream Cones |
Quantity of Ice Cream Cones Demanded |
|
$1 |
3000 |
|
$2 |
2400 |
|
$3 |
1600 |
|
$4 |
800 |
- Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $1 to $2. What does this estimate imply about the price elasticity of demand for ice cream cones? (I've provided an example for you below.)
- Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from $3 to $4. What does this estimate imply about the price elasticity of demand for ice cream cones?
- Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?
2. 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?
3. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination.
|
|
Quantity |
Price per Unit |
MU per unit |
|
Bracelets |
5 |
$1 |
30 |
|
Sodas |
4 |
$1 |
40 |
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 this consumer maximizing her utility?
b. If not, should she consume more bracelets or more sodas? Explain.
Answer the following assuming that one more bracelet is purchased and one less soda is consumed:
c. Recall the law of diminishing marginal utility. What happens to the Marginal Utility of bracelets and the Marginal Utility of soda?
d. What happens to the Total Utility received?
e. What happens to the total dollars spent?
4. On Tuesday nights, a local restaurant has a kid’s meal special. Nina’s son, Braden likes the restaurant’s chicken nuggets, but Braden seems to be growing bigger every day and the kid’s meal is usually not enough. The restaurant does allow for additional purchase of chicken nugget servings. Nina’s willingness to pay for each serving is shown in the table below.
|
Number of Chicken Nugget servings (servings) |
Willingness to pay for chicken nuggets (per serving) |
|
1 |
$5 |
|
2 |
$4 |
|
3 |
$3 |
|
4 |
$2 |
|
5 |
$1 |
|
6 |
$0 |
Keep in mind that consumer surplus is the difference between what someone pays vs. what that person is willing to pay. Below is an example to help you with this question:
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.
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.
a. If the price of an additional serving of chicken nuggets is $3, how many servings will Nina buy for Braden? How much consumer surplus does he receive?
b. The following week, Nina and Braden are back at the restaurant again, but now the price of a serving of chicken nuggets is $4. By how much does his consumer surplus decrease compared to the previous week?
c. One week later, they return to the restaurant again. Nina discovers that the restaurant is offering an “all-you-can-eat” special for $12. How many chicken nugget servings will Braden eat, and how much consumer surplus does he receive now?
d. Suppose you own the restaurant and Braden is a “typical” customer. What is the highest price you can charge for the “all-you-can-eat” special and still attract customers?
