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Problem set 4

# Problem set 4 - MyP.Le EC133C Microeconomics...

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My P. Le EC 133 – C Microeconomics Problem Set 4 - Part IV 1. A local restaurant has a pizza special that Doris really likes. Her willingness to pay for each slice of pizza is as follows: Quantity of pizza (slices), Willingness to pay for pizza (per slice) 1, \$8 2, \$6 3, \$4 4, \$2 5, \$1 6, \$0 a. If the price of a slice of pizza is \$2, how many slices will she buy? How much consumer surplus does she receive (assume that if she is indifferent, she will buy the slice!)? D oris will buy 4 slices of pizza at the price of \$2 and will receive \$12 of consumer surplus. b. If the price of a slice of pizza rises to \$3, how many slices will she buy? By how much has her consumer surplus decreased compared to a.? Doris will buy 3 slices of pizza at the price of \$3 and will receive \$9 of consumer surplus. Her consumer surplus will decrease by \$3. c. Doris discovers that the restaurant has an "all-you-can-eat" special for \$15. How many slices of pizza will she eat now and how much consumer surplus does she receive now? Doris won’t eat at that restaurant because: 1 slice : Willingness = \$8 x 1 = \$8 2 slices: Willingness = \$6 x 2 = \$12 3 slices: Willingness = \$4 x 3 = \$12 4 slices: Willingness = \$2 x 4 = \$8

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5 slices: Willingness = \$1 x 5 = \$5 6 slices: Willingness = \$0 x 6 = \$0 The highest price that Doris is willing to pay is \$12, lower than the price at the restaurant. So Doris won’t eat at the restaurant. d. Suppose you own the restaurant and Doris is a typical customer. What is the highest price you can charge for the "all-you-can-eat" special and still attract customers? The highest price possible to attract customers is \$12. At this price, consumer surplus is \$0, and according to the assumption, customers will buy pizza even if they are indifferent. 2. The cost of producing computers has fallen substantially over the past decade. Use a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of computers sold. In your diagram, show precisely what happens to consumer surplus, producer surplus, and total surplus, i.e. clearly mark the respective areas.
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