Question

Individual demand and consumer surplus
Consider the market for apartments. The market price of each apartment is $180,000, and each buyer demands no more than one apartment.
Suppose that Van is the only consumer in the apartment market. His willingness to pay for an apartment is $315,000. Based on Van's willingness to pay, the following graph shows his demand curve for apartments.

Shade the area representing Van's consumer surplus using the green rectangle (triangle symbols). 360 Van's Demand 315 Van's Consumer Surplus ︵ 270 O225 Market Price D 180 匕135 90 45 C.0 2 QUANTITY (Apartments)

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

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

Answer 1

Consumer surplus (CS) = Maximum willingness to pay (WTP) - Market price

(1) Van's CS is as follows.

360 Van's Demand 315 1 Van's Consumer Surplus 270 O 225 Market Price O 180 135 CO a 90 0 QUANTITY (Apartments)

(2) When Amy enters the market, her WTP > Market price and therefore, at price of $180,000, quantity demanded = 2 (= Number of consumers: Van & Amy). Demand curve is drawn and CS are marked as follows. Since the area of CS overlaps, I've labelled them as follows (do not include the labels in your actual graph):

Van's CS = Area ABCD

Amy's CS = Area DGFE

360 315 Demand Curve 270 O 225 Van's Consumer Surplus Market Price 180 135t Amy's Consumer Surplus a 90 45 2 3 4 5 QUANTITY (Apartments)

(3) TRUE

Since Carlos's WTP < Market price, Carlos will not buy.