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**preview**shows half of the first page. to view the full**3 pages of the document.**Chapter 3 Textbook Analytical Problem Answers

1. The individual demand curves represent the maximum amount of water that each

individual is willing to purchase at a given price. Rearrangement to isolate price

gives the maximum price each individual is willing to pay (marginal willingness to

pay; MWTP) for the Qth unit. MWTP

A

= 16-2Q

d

A

and MWTP

B

= 6-Q

d

B

.

For a

quantity of 4 units per individual, MWTP for Alvin is $8, while MWTP for Betty is

$2. Total WTP for Alvin is the area under his marginal WTP curve from Q

d

A

=0 to

Q

d

A

=4, and similarly for Betty. Total WTP

A

= (8

×

4)

×

[(16-8)

×

4]/2=$48. Total

WTP

B

=(4 ×4) ×[(6-4) ×4]/2 = $64 . Students may need to be reminded that the area of

a square is base

×

height, while the area of a triangle is (base

×

height)/2.

16

mWTP

A

mWTP

B

$/unit $/ unit

8

6

2

0 4 8 Q

A

0 4 6 Q

B

2. To get the aggregate demand for Alvin and Betty, add up the quantity demanded at a

given price (horizontal aggregation). The demand curve is kinked, the kink is at a

price of $6, where Alvin purchases 5 and Betty purchases 0. The price intercept is

$16 and the quantity intercept is 14. For a price of 0 to 6, both consumers will

demand water, aggregating the quantities demanded gives the aggregate demand

curve of Q

d

A&B

= 14-3P/2. For a price greater than $6 only Alvin demands water,

giving an aggregate demand curve of Q

d

A&B

= 16-2P.

16

margWTP

A&B

($/ unit)

6

0 5 14 Q

d

A&B

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