Eco 333
Problem Set 1
Name_______________________________
9 July 2013
1. Tammy loves donuts. The table shown reflects the value Tammy places on each donut she
eats:
VALUE OF FIRST DONUT
VALUE OF SECOND DONUT
VALUE OF THIRD DONUT
VALUE OF FOURTH DONUT
VALUE OF FIFTH DONUT
VALUE OF SIXTH DONUT
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
b. If the price of donuts is $0.20, how many donuts will Tammy buy?
At a price of $0.20, Tammy would buy 5 donuts.
c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she
have at a price of $0.20?
The figure to the left shows
Tammy's consumer surplus. At a
price of $0.20, Tammy's consumer
surplus would be $1.00.
d.
If the price of donuts rose to $0.40, how many donuts would she purchase now? What
would happen to Tammy's consumer surplus? Show this change on your graph.
If the price of donuts rose to $0.40, Tammy's consumer surplus would fall to $0.30 and she
would purchase only 3 donuts.
2. Let’s think about the demand for plasma TVs.
a. If the price for a 50" plasma TV is $2,010, and Newhart would be willing to pay $3,000,
what is Newhart’s consumer surplus?
Individual consumer surplus = $990 (= 3,000 - 2,010).
b. Consider the figure below for the total demand for plasma TVs. At $2,010 per TV, 1,200
TVs were demanded, what would be the total consumer surplus?
Total consumer surplus =
$1,794,000: It’s CS = ½ (Base ×
Height). CS = ½ (2,990 × 1,200).
The short, vertical dashed line
to the left reflects Newhart’s
consumer surplus: $990, which is
$3,000–$2,010.
3. The following table shows the total costs of producing strawberries on a small plot of land.
Pounds of
Strawberries
0
1
2
3
4
5
Total
Costs ($)
10
11
14
18
25
34
MC
($)
-1
3
4
7
9
a. Calculate the marginal cost schedule.
b. Draw the farmer’s supply curve.
c. Suppose the price of 1 pound of strawberries is $4. How much would this
farmer produce?
3 pounds. Seller gains = Area A.
d. Suppose the price of strawberries rises
to $7 per pound. How much will the farmer
produce now?
4 pounds. Seller gains = Areas A+B.
3. To earn extra money in the summer, you grow tomatoes and sell them at the farmers' market
for 30 cents per pound. By adding compost to your garden, you can increase your yield as
shown in the table below. If compost costs 50 cents per pound and your goal is to make as much
money as possible, how many pounds of compost should you add?
Pounds
Pounds
of
of
compost tomatoes
0
100
1
120
2
125
3
128
4
130
5
131
6
131.5
Marginal
Cost
($)
Marginal
Benefit
($)
Net
Benefits
---0.50
0.50
0.50
0.50
0.50
0.50
--6.00
1.50
($)
0.90
0.60
0.30
0.15
0
5.50
6.50
6.90
7.00
6.80
6.45
Marginal
Net
Benefits
--5.50
1.00
0.40
0.10
- 0.20
- 0.35
The benefit of adding a pound of compost is the extra revenue you’ll get from the
extra tomatoes that result. The cost of adding a pound of compost is 50 cents. By
adding the fourth pound of compost you’ll get 2 extra pounds of tomatoes, or 60
cents in extra revenue, which more than covers the 50-cent cost of the extra
pound of compost. But adding the fifth pound of compost gives only 1 extra pound
of tomatoes, so the corresponding revenue increase (30 cents) is less than the cost
of the compost. You should add 4 pounds of compost and no more.