Question

Individual demand and consumer surplus

Consider the market for yachts. The market price of each yacht is $180,000, and each buyer demands no more than one yacht.

Suppose that Clancy is the only consumer in the yacht market. His willingness to pay for a yacht is $315,000. Based on Clancy's willingness to pay, the following graph shows his demand curve for yachts.

Shade the area representing Clancy's consumer surplus using the green rectangle (triangle symbols).

360 T Clancy's Demand ? 315? Clancy's Consumer Surplus 270 8 225 Market Price 135 45 2 QUANTITY (Yachts) 4

Now, suppose another buyer, Eileen, enters the market for yachts, and her willingness to pay is $225,000.

Based on Eileen's and Clancy's respective willingness to pay, plot the market demand curve on the following graph using the blue points (circle symbol). Next, shade Clancy's consumer surplus using the green rectangle (triangle symbols), and shade Eileen's consumer surplus using the purple rectangle (diamond symbols).

Note: Plot your points as a step function in the order in which you would like them connected. Line segments will connect the points automatically.

Suppose Hubert is willing to pay a total of $135,000 for a yacht.

True or False: Keeping his maximum willingness to pay for a yacht in mind, Hubert will not buy the yacht because it would be worth less to him than its market price of $180,000.

True

False

Answer 1

Suppose that there is a market- market for yachts. The price of each yacht is S180,000. Assume that consumer buys only one good. There are two consumers consumer C and consumer E. Consumer C s willingness to pay $315,000 and consumer E's willingness to pay $225,000 Consumer's surplus is the area between the market price and willingness to pay. 90 QUANTITY The green portion is the consumer's surplus of consumer C and purple portion is the consumer surplus of consumer E The blue line is the demand curve. The steps in the black line are step functions. Consumer surplus for consumer C is Consumer surplus of consumer C (315,000-180,0001-0) $135,000 Consumer surplus for consumer E is Consumer surplus of consumer E (225,000-180,000 2-1) = $45.000

Suppose there is one person- person H enter in the market. The willing to pay is $135,000. Since his willing to pay is less than the market price, he will not buy that product. Thus, the statement is true.