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problem set 3

# problem set 3 - Michael Samuels Ping Kang 37 G12358459...

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Michael Samuels 10/15/06 Ping Kang 37 G12358459 Problem Set #3 1. An economist would point out the difference in service and display. For some customers, it is worth the extra money to shop in a place where you are greeted by friendly individuals, who can help you find what you are looking for, and will answer any questions you have regarding the item. It is faster and easier for a customer to shop in the store with those amenities. Some customers look at shopping as the overall experience, while others just look at the bottom line price of the items. 2 a. S = 600 – 10P. S = 600 – 10 (40) S = 200 sheep. Marginal Valuation = \$40 Total Expenditure = 200 x 40 = \$8000 Total Valuation = 200 x 40 = \$8000 Consumer Surplus: She is willing to pay up to \$60 per sheep, but she is only paying \$40. Her consumer surplus is \$20 per sheep. 2b. S = 600 – 10(50) S = 100 Sheep Marginal Valuation = \$50 Total Expenditure = 200 x 50 = \$10000 Total Valuation = 200 x 50 = \$10000 Consumer Surplus: Since the price of sheep rose from 40 to 50, bo-peep’s consumer surplus was cut in half, from 20 to 10. The other half of her old consumer surplus is now going to the government for taxes. 50 x 10 = \$500 of taxes were raised. 2c.

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problem set 3 - Michael Samuels Ping Kang 37 G12358459...

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