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**preview**shows page 1. to view the full**5 pages of the document.**Econ 103 Tutorial #5 Week 8

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1. Melissa buys an iPod for $120 and gets consumer surplus of $80.

a. What is her willingness to pay?

$200

b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?

$110

c. If the price of an iPod were $250, what would her consumer surplus have been?

$0

2. Amy has a demand function for apples given by Q = 200 – 20P.

a. Graph and calculate her MWTP (or MB) and TWTP (or TB) at a quantity of 60 apples.

MWTP = MB = $7

TWTP = TB = ½ × 60 × $ (10 + 7) = $510

b. Calculate Amy’s consumer surplus (CS) if the price of apples is $1.50.

CS = ½ × 170 × $ (10 - $1.5) = $722.5

c. If the apples are free and Amy could have as many as she wants, what would be her CS?

CS = ½ × 200 × $10 = $1000

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Econ 103 Tutorial #5 Week 8

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d. If the apples are free but the quantity is restricted to 100 apples, what would be her CS?

CS = ½ × 100 × $ (10 + 5) = $750

3. Ivy grows apples, and her supply function is given by Q = 20P – 4.

a. Graph and calculate her MC and TC at a quantity of 20 apples.

MC = $1.2

TC = ½ × 20 × $ (0.2 + 1.2) = $14

b. Calculate Ivy’s producer surplus (PS) if the price of apples is $1.50.

PS = ½ × 26 × $ (1.5 - 0.2) = $16.9

c. If the price of apples remains at $1.50, but Ivy’s MC of producing apples decreases by 20

percent. By how much will Ivy’s PS change?

New Supply Curve: MC = (1 – 0.20)×(0.2 +0.05Q) ⇒ P = 0.16 + 0.04 Q

ΔPS = ½ × 33.5 × $ (1.5 - 0.16) - ½ × 26 × $ (1.5 - 0.2) = $5.545

4. A friend of yours is considering two cell phone service providers. Provider A charges $100

per month for the service regardless of the number of phone calls made. Provider B does not

have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly

demand for minutes of calling is given by the equation QD = 150 − 50P, where P is the price

of a minute.

a. With each provider, what is the cost to your friend of an extra minute on the phone?

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