Question

1.A.7.1 1. S willin 1/30 uppose that Michele is realy hungry Her wilingness to pay for one slice of purraHe ST. enssto pay for a second slice of pizza is $5. Her willingness to pay for a thrd sluce of piza is Ffer wallingness to pay for a fourth slice of pizza is $0.50. Why do you think that her willingness to pay decrease with each additional slice of pizza? 2. The pizzeria that Michele likes sells pizza by the sbce. Each slice is $2. Will she bay the fint shice W so, what is her consumer surplus for the first slice? Will she buy the second sbce? IE so, what is her consumer surplus for the second slice? Will she buy the third slice? If so, what is her consamer surpla for the third slice? Will she buy the fourth slice? If so, what is her consumer surphis for the fosurth slice? 3. Draw a generic supply and demand diagram (do NOT try to use the information from #1 and 2 Label each axis, the demand curve, the supply curve, the equilibrium price, and the eqaiäbrium quantity.Label the consumer surplus, producer surplus, and total surplas

Answer 1

Solution:

1). Michele's willingness to pay for each additional slice of pizza decreases due to diminishing marginal utility with each slice. By diminishing marginal utility we mean that as a person consumes more and more of a commodity, he/she receives lower and lower satisfaction with each additional unit of consumption.

Following the same reasoning, since Michele receives lesser satisfaction with each additional slice of pizza, she wishes to pay lesser for each additional slice.

2). Price of each pizza slice = $2

Maximum willingness to pay (MWP) for first slice = $6

Since, the amount she has to pay is lower than what she is willing to pay ($6 > $2), she will buy the first slice.

Consumer surplus is the gain a person receives from buying a commodity. So, here, Michele's consumer surplus = $6 - $2 = $4

Following the same reasoning as above, since Michele's MWP for second slice = $5 > $2 = price she has t pay for it, she will buy the second slice as well. In this case, her consumer surplus (for the second slice) = $5 - $2 = $3.

Similarly, for the third slice, her MWP = $1 < $2 which is the price of third slice. Now if she buys it, she loses, and thus, Michele won't buy the third slice. Similarly, Michele will not buy the fourth slice as the MWP corresponding to the fourth slice is $0.5 which is lower than the price she will have to pay to acquire it.

3).

From the above figure, we can see the downward sloping demand curve, as there is a negative relation between price and quantity demanded since if price increases, quantity demanded will decrease. Similarly, supply curve is an upward sloping curve as with increase in price, sellers would prefer to supply more of that good in order to earn a higher profit.

Equilibrium is attained in the market where the supply curve intersects the demand curve, as at that point whatever sellers wish to sell at the particular price, buyers wish to buy the same quantity at that price. This point is denoted by (Q*, P*), so, Q* is the equilibrium quantity and P* is the equilibrium price.

For consumer surplus, as already been noted by the meaning, it is denoted by the blue triangle as this is the total gain all consumers together get by paying the market price (note that demand curve marks the MWP for a particular quantity of a good at all points on it). Same way, since supply curve marks the minimum willingness to receive for particular quantity of good at all points on it, so the area above the supply curve and below the market price denotes the producer surplus (orange triangle).

Total surplus is the total welfare in the society, which is simply consumer surplus plus the producer surplus (blue and orange triangle taken together).