PS3_AK - Econ 110, Spring 2010, L1 & L2 HW3 Solution A....

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HW3 Solution A. Chapter 5, problem 2, [(5.2)] The table provides information on the demand schedules for train travel for Ann, Beth, and Cy, who are the only buyers in the market. a. Construct the market demand schedule. The market demand schedule shows the sum of the quantities demanded by Ann, Beth, and Cy at each price. When the price is $3 per mile, the market quantity demanded is 75; when the price is $4 per mile, the market quantity demanded is 60; when the price is $5 per mile, the marker quantity demanded is 45; when the price is $6 per mile, the market quantity demanded is 30; when the price is $7 per mile, the market quantity demanded is 15; when the price is $8 per mile, the market quantity demanded is 5; and when the price is $9 per mile, the market quantity demanded is 0. b. What are the maximum prices that Ann, Beth, and Cy are willing to pay to travel 20 miles? Why? Each person’s demand schedule shows the maximum price that person is willing to pay to travel 20 miles. The maximum price Ann is willing to pay to travel 20 miles is $5, the maximum price Beth is willing to pay is $4, and the maximum price Cy is willing to pay is $3. c. What is the marginal social benefit when the total distance travelled is 60 miles? The marginal social benefit when the quantity is 60 miles is $4 per mile. The marginal social benefit is determined from the consumers’ demands and equals the maximum price that consumers will pay for the quantity. The demand schedule shows that the maximum price consumers will pay for 60 miles is $4 per mile and this price equals the marginal social benefit. 1 Price $/mile Quantity demanded (miles) Ann Beth Cy 3 30 25 20 4 25 20 15 5 20 15 10 6 15 10 5 7 10 5 0 8 5 0 0 9 0 0 0
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d. What is the marginal benefit for each person when they travel a total distance of 60 miles and how many miles does each of the people travel? The three travel a total distance of 60 miles when the price is $4 a mile. Each person’s marginal benefit is $4 per mile. At this price Ann travels 25 miles, Beth travels 20 miles, and Cy travels 15 miles. e. What is each traveler’s consumer surplus when the price is $4 a mile? Ann’s consumer surplus is $62.50; Beth’s consumer surplus is $40.00; and, Cy’s consumer surplus is $22.50. When the price is $4 per mile, Ann buys 25 miles. Ann’s consumer surplus is the triangular area under her demand curve and above the price. The demand curve is linear, so Ann’s consumer surplus is 1/2 × ($9 - $4) × 25, which equals $62.50. When the price is $4 per mile, Beth buys 20 miles. Beth’s consumer surplus is the triangular area under her demand curve and above the price. The demand curve is linear, so Beth’s consumer surplus is 1/2 × ($8 - $4) × 20, which equals $40.00 When the price is $4 per mile, Cy buys 15 miles. Cy’s consumer surplus is the triangular area under his demand curve and above the price. The demand curve is linear, so Cy’s consumer surplus is 1/2 × ($7 - $4)
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This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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PS3_AK - Econ 110, Spring 2010, L1 & L2 HW3 Solution A....

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