Consumer Surplus and Market Demand-Micro Economics Solved Solution Sample

QUESTION

There are two parts to this assignment. You must answer both part A and part B.

A. Consumer Surplus from Drinking Beer

Jasmine and Leonard are EC 120 students who regularly get together at a bar for beer Friday after class. The table shows their Friday marginal benefit (MB) schedules for beer, with marginal benefit measured as “number of dollars per beer.” The price of a beer is \$5. Jasmine and Leonard each buy two beers.

 Beer Marginal Benefit Jasmine Leonard First 20 13 Second 15 3 Third 4 2 Fourth 1 1

A1. Compute Jasmine’s consumer surplus. Make sure you state exactly how consumer surplus is measured—not just a number, a number of something. In purchasing two beers, is Jasmine behaving rationally or irrationally? Explain your answer.

A2. Compute Leonard’s consumer surplus. Make sure you state exactly how consumer surplus is measured—not just a number, a number of something. In purchasing two beers, is Leonard behaving rationally or irrationally? Explain your answer.

B. Market Demand for McDonald’s Hamburgers

What happens to the market demand for McDonald’s hamburgers when ­­­______?

B1. McDonald’s reduces the price of its hamburgers, while the price of Burger King’s hamburgers remains unchanged.

B2. Burger King increases the price of its hamburgers, while the price of McDonald’s hamburgers is unchanged.

B3. Scientific studies show that eating hamburgers increases the risk of cancer comparable to tobacco use.

These are three questions, each presenting a change in the demand environment for McDonald’s hamburgers. The assumption of “ceteris paribus” (other things being equal) is made in each case.

For each question, you should begin by drawing a typical market demand curve for McDonald’s hamburgers. For each question, you must both explain your answer verbally and illustrate your answer graphically. Label the axes of your graph and label or otherwise identify the curve(s) in your graph. If you use abbreviations, state what the abbreviations mean. Each question is independent of the others and assumes “other things being equal.”

For each of B1, B2, B3, your answer should include the following statements:

(a) the demand curve to which the result pertains (it is: “the demand curve for McDonald’s hamburgers”).

(b) whether the result involves “a movement along” the demand curve or “a shift in” the demand curve.

(c) specification of the direction of the “movement along” or “shift.”

(d) why the “moving along” or “shift” occurs.

There are two parts to this assignment. You must answer both part A and part B.

A. Consumer Surplus from Drinking Beer

Jasmine and Leonard are EC 120 students who regularly get together at a bar for beer Friday after class. The table shows their Friday marginal benefit (MB) schedules for beer, with marginal benefit measured as “number of dollars per beer.” The price of a beer is \$5. Jasmine and Leonard each buy two beers.

 Beer Marginal Benefit Jasmine Leonard First 20 13 Second 15 3 Third 4 2 Fourth 1 1

A1. Compute Jasmine’s consumer surplus. Make sure you state exactly how consumer surplus is measured—not just a number, a number of something. In purchasing two beers, is Jasmine behaving rationally or irrationally? Explain your answer.

Consumer surplus of Jasmine for first beer is 15 i.e. Benefit- Cost, similarly for second beer it is 10. Consumer surplus is the willingness of consumer to pay for a good over and above market price. In purchasing two beers Jasmine is not behaving rationally as her marginal benefit has not declined much. Consumer is less willing to consume the second good after consuming the first good, after consuming first beer usually very few people are willing to consume the next one unless they are habituated of it or they are celebrating something. A habitual or addicted consumer or a person celebrating is not rational. Hence it can be inferred that jasmine is not a rational consumer.

A2. Compute Leonard’s consumer surplus. Make sure you state exactly how consumer surplus is measured—not just a number, a number of something. In purchasing two beers, is Leonard behaving rationally or irrationally? Explain your answer.

Consumer surplus of Leonard for first beer is 8 i.e. Benefit- Cost, similarly for second beer it is -2. Consumer surplus is the willingness of consumer to pay for a good over and above market price. In purchasing two beers Leonard is behaving rationally as his marginal benefit has declined to the point that he is not eager to consume next beer for \$ 5 i.e. market price. Consumer is less willing to consume the second good after consuming the first good, after consuming first beer usually very few people are willing to consume the next one unless they are habituated of it or they are celebrating something or it is the brand which they prefer the most. Leonard doesn’t seem to be either of the above and is behaving rationally while consuming the second beer.

B. Market Demand for McDonald’s Hamburgers

What happens to the market demand for McDonald’s hamburgers when ­­­______?

B1. McDonald’s reduces the price of its hamburgers, while the price of Burger King’s hamburgers remains unchanged.

Market demand of McDonald’s will increase.

As per law of demand, every factor remaining constant, if a price of a commodity decreases its demand increases.

In the graph above for the demand curve of McDonalds, when Price of McDonald’s hamburger was P1, Quantity demanded was Q1, when price decreased from P1 to P2, Quantity demanded increased from Q2 to Q1. This shift of demand is movement along the demand curve.

Specification

• the result involves “a movement along” the demand curve curve.
• Downward movement along the demand curve
• “moving along” occurs when demand has changed due to change in the price of goods under consideration

B2. Burger King increases the price of its hamburgers, while the price of McDonald’s hamburgers is unchanged.

Market demand of McDonald’s will increase.

The relationship between demand of a good and price of its substitute is direct. Demand of the good increases, if price of its substitute increases.

In the graph above for the demand curve of McDonalds, when the burger king increases the price of its hamburgers, demand curve of McDonald’s will shift to right which indicates the increase in demand at current price P1, from Q1 to Q2. Q1 is quantity demanded for McDonald’s before and Q2 quantity demanded for McDonald’s after burger kings price change.

Specification

• the result involves shifting of the demand curve
• Rightward Shift of the demand curve
• “Shifting” occurs when demand has changed due to changes other than the price of goods under consideration.

B3. Scientific studies show that eating hamburgers increases the risk of cancer comparable to tobacco use.

Market demand of the McDonald’s will decrease.

In the graph above for the demand curve of McDonalds, D1 is the demand curve before the declaration of result of studies, and the quantity demanded is Q1 at current price P1, after the declaration of result of studies the demand of McDonalds got reduced at current price which can be seen by shift in demand curve from D1 to D2 due to which quantity demanded got reduced from Q1 to Q2.

Specification

• the result involves shifting of the demand curve
• Leftward Shift of the demand curve
• “Shifting” occurs when demand has changed due to changes other than the price of goods under consideration.

These are three questions, each presenting a change in the demand environment for McDonald’s hamburgers. The assumption of “ceteris paribus” (other things being equal) is made in each case.

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