Question

8. Consumer surplus using utility curves Suppose Becky has an allowance of $42 to spend on movies and other goods each month (represented by budget constraint CF). The following graph shows her initial utility ( U1 ) at point A from spending $21 of her total allowance on three movies ($7 each) and the remaining $21 on other goods. Tool tip: Mouse over the points on the graph to see their coordinates 60 D 50 40 B A 20 10 G E 0 36 45 54 0 18 27 MONEY SPENT ON MOVIES MONEY SPENT ON OTHER GOODS 30 Now suppose Becky's parents decide not to allow her to see movies. As a result, she now spends alll of her allowance on other goods, moving her to At this point, her utility is it was at point A. point Although her parents do not want her to see movies, they don't want to reduce the overall utility Becky gets from her allowance; therefore, they decide to increase her total monthly allowance by just enough to make her as happy as she was when she was allowed to see movies. This amount is represented by the distance between points and is equal to The consumer surplus Becky gets from movies at point A is equal to which of the following? The area between points G and F The amount by which her parents increase her allowance The area between Ui and her budget constraint The area between points G and E

Answer 1

If Becky spends all her allowance son other things , she will move to point C (where she is spending 0 on movies)

At this point her utility is lower than it was at point A because lower the indifference curve lower will be utility (Draw IC parallel to point A starting fro point c )

To keep her utility constant she should be at point D . The amount of compensation is represented by difference between point C and D i.e. 60-40=20

The consumer surplus is the difference between the consumer's willingness to pay and what market has actually charged . So Becky's consumer surplus at point A is the area between point G and F