Unit 5 Assignment: Elasticity of Demand and Consumer Surplus

Course Number and Section: AB224–0X

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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

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.

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. 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.

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

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?

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References:

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