Assignment:
Elasticity of Demand and Consumer Surplus
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?
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?
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

1^{st} movie rental

$7

2^{nd} movie rental

$6

3^{rd} movie rental

$5

4^{th} movie rental

$4

5^{th} movie rental

$3

6^{th} movie rental

$2

7^{th} movie rental

$1

8^{th} 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 ontime 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 ontime 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 onetime 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?