Problem Set 3Sol

# Problem Set 3Sol - 1 ECONOMICS 100 PROBLEM SET #3 (Consumer...

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1 ECONOMICS 100 PROBLEM SET #3 (Consumer Theory) Notes on the Solutions 1. Consumers Surplus, Using Utility Theory Consider the diagram below, and answer the questions that follow: Price 3 \$15 1 2 \$10 20 30 Quantity 1.0 If price is \$15, consumer surplus is area a. 1 b. 2 c. 3 d. 1 + 2 e. 1 + 2 + 3 Answer: C (area under D schedule above price) 1.1 If price falls from \$15 to \$10, then the consumer gain is a. area 1 b. area 2 c. area 3 d. area 1 + 2 e. area 1 + 2 + 3 Answer: D (additional area under D schedule above new price)

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2 1.2. If price falls from \$15 to \$10, then the consumer gain is a. \$5 b. \$15 c. \$100 d. \$125 e. \$150 Answer: D (calculate area of 1 + 2, as follows: \$5*20 + ½*\$5*10 = \$125) 1.3. If price falls from \$15 to \$10, area 1 represents a. the consumer gain, because more units are now being consumed b. the consumer gain, because the units originally purchased at \$15 can now be purchased for \$10 c. the consumer surplus after the price change d. the total benefit to the consumer from all units purchased e. the marginal benefit to the consumer from the last unit purchased Answer: B 1.4 If price falls from \$15 to \$10, area 2 represents a. the consumer gain on the new units now being purchased b. the consumer gain on the units originally purchased, that can now be purchased for \$5 less c. the consumer surplus after the price change d. the total benefit to the consumer from all units purchased e. the marginal benefit to the consumer from the last unit purchased. Answer: A 1.5 If price falls from \$15 to \$10, areas 1 + 2 + 3 represents a. the consumer gain on the new units now being purchased b. the consumer gain on the units originally purchased, that can now be purchased for \$5 less c. the consumer surplus after the price change d. the total benefit to the consumer from all units purchased e. the marginal benefit to the consumer from the last unit purchased Answer: C (area under D schedule above new price)
3 1.6 If price increases from \$10 to \$15, which of the following areas represents the loss to the consumer? a. 1 b. 2 c. 3 d. 1 + 2 e. 1 + 2 + 3 Answer: D (this is the loss in consumers’ surplus due to the increase in price i.e. reduced area under D schedule) 1.7 If price increases from \$10 to \$15, area 1 represents a. the loss to the consumer on the units which are no longer purchased b. the loss to the consumer on the units that are still purchased

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## This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto.

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Problem Set 3Sol - 1 ECONOMICS 100 PROBLEM SET #3 (Consumer...

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