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Chapter 5: Consumer Choice
Solutions Manual
Learning Objectives for Chapter 5
After reading this chapter, you should know
LO 05-01. Why demand curves are downward sloping.
LO 05-02. The nature and source of consumer surplus.
LO 05-03. The meaning and use of price discrimination.
LO 05-04. How consumers maximize utility.
Questions for Discussion
1. What does the demand for enrollments in your college look like? What is on the axes? How
do tuition, enrollment, and total revenue interact? (LO 05-01)
2. If the marginal utility of pizza never diminished, how many pizzas would you eat?
(LO 05-01)
Answer: An infinite number of pizzas! Suppose the period of a day is chosen to examine
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3. How do total and marginal utility change as you spend more time tweeting your friends?
(LO 05-01)
Answer: Although total utility usually increases as you spend more time tweeting, marginal
4. Can you think of any product that violates the law of diminishing marginal utility?
(LO 05-01)
Answer: This discussion question can have varying answers; however, any addictive
substance could potentially function as an example of a product that violates the law of
diminishing marginal utility. The more addictive the product, the easier it is to show a
5. If all consumers had identical demand curves, could producers price discriminate?
(LO 05-03)
Answer: If all consumers had identical demand curves, producers would have no ability to
price discriminate. Recall that our definition of price discrimination is charging individual
6. When the producer price discriminates in Figure 5.4, what happens to unit sales? Total
revenue? Total profit? (LO 05-03)
7. Under what circumstances could a producer extract the entire consumer surplus in Figure
5.5? (LO 05-02)
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
8. How does a car dealer determine where a buyer is on the market demand curve? (LO 05-03)
9. Why do airlines charge different fares for the same flight? (LO 05-03)
10. When you eat out and have $25 to spend, what information do you need to maximize your
utility? (LO 05-04)
Problems
1. According to Table 5.1,
(a) With which box of popcorn does marginal utility first diminish?
(b) With which box does marginal utility become negative? (LO 05-01)
Answers:
Feedback:
(a) Marginal utility equals the change in total utility obtained by consuming one additional
(b) The situation changes significantly with the sixth box of popcorn. The good sensations
2. In Figure 5.4, how much consumer surplus is received by
(a) Fred?
(b) Carlos?
(c) John? (LO 05-02)
Answers:
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Feedback: A person’s position on the market demand curve expresses the maximum price
she or he is willing to pay. The difference between that individual’s maximum price and the
price paid (the market price) represents consumer surplus.
(c) In this scenario, John’s willingness to pay is below the market price. John will not
3. In Figure 5.4, if Bob’s maximum price is increased by 50 percent,
(a) Would he buy a Spyder?
(b) How much consumer surplus would he have? (LO 05-02
Answers:
Feedback:
(a) The maximum price a consumer is willing and able to pay for a good determines where
(b) The difference between Bob's maximum price threshold and the price paid is his
4. What is the combined consumer surplus for the five consumers who buy Spyders when the
price drops to $800,000? (LO 05-02)
Feedback:
The only people who purchase a product are those whose maximum price equal or exceed the
market price. Therefore, all consumers buying the good reap some consumer surplus. The
5. What is the total revenue (price × quantity) received by the car dealer in Figure 5.4 if he
charges
(a) A uniform price of $750,000?
(b) Maximum individual prices to Fred, Michel, Hua, Carlos, John, and Marty? (LO 05-03)
Answers:
Feedback:
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(a) In this case only six people have a price threshold above the uniform price of $750,000.
(b) The most a car dealer could charge a customer is her or his maximum price threshold.
6. The following data reveal how much each consumer is willing to pay for an Alaskan cruise:
Amy $900 Ed $2,000
Bob $1,100 Gigi $1,300
Carol $1,500 Hugo $1,800
Eduardo $400 Isabelle $1,500
(a) Draw the market demand for these eight consumers on the accompanying graph.
(b) If the cruise costs $1,000, how many passengers will there be?
(c) If the cruise costs $1,000, how much total revenue will be collected?
(d) If the cruise costs $1,000, how much consumer surplus will those passengers enjoy?
(e) If the cruise ship could perfectly price discriminate, how much more
revenue could it take in? (LO 05-03
Answers:
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…
Feedback:
a A person’s position on the market demand curve expresses the maximum price he or she
is willing to pay. Plot the price-quantity combination for each of the eight consumers. Ed is
willing and able to pay the most for this Alaskan Cruise, so he will be at the top of the market
demand curve (price = $2,000 and quantity = 1). Eduardo will be at the bottom of the market
(a) People do not buy things that are priced above their maximum price thresholds, so only
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(e) Price discrimination means charging individual consumers different prices for the same
good. In effect, price discrimination occurs when producers pick off each consumer from
7. Suppose movie downloads cost $2 apiece and game downloads cost $3. If the marginal
utility of movie downloads at the optimal mix of consumption is 10 utils, what is the
marginal utility of a game download? (LO 05-04)
Feedback:
Optimal consumption refers to the mix of output that maximizes total utility for the limited
8. Suppose the accompanying graph depicts the demand for football tickets at Grand University.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(a) What is total revenue at the price of $24?
(b) If the price drops to $12, how many tickets would consumers purchase?
(c) What is total revenue at that point?
(d) If the team has a losing streak that shifts the demand curve and the price is still $24, at
what point do we end up?
(e) What is total revenue at that point? (LO 05-01)
Answers:
(a) $120,000.
(b) 9,000.
Feedback:
(a) Total revenue = Price × Quantity. At a price of $24 (point A), the quantity of football
(b) A downward-sloping demand curve expresses the law of demand: the quantity of a good
(c) Total revenue = Price × Quantity. When the price drops to $12, customers will now
(d) When the team is on a losing streak, the fans are less enthusiastic about attending the
(e) Total revenue = Price × Quantity. When the price stays at $24, but demand decreases,
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9. Suppose the following table reflects the total satisfaction derived from consumption of pizza
slices and Pepsis. Assume that pizza costs $1 per slice and a large Pepsi costs $2. With $20
to spend, what consumption mix will maximize satisfaction? (LO 05-04)
Feedback:
We know we’ve reached maximum utility when we’ve satisfied the following rule:
Quantity
Consumed
Total Pleasure
from Pizza
Slices
Marginal Pleasure of
Pizza per Slice
Marginal Pleasure of Pizza
per Dollar ($1 per
Pizza Slice)
1 47 47 47
2 92 45 45
3 132 40 40
Quantity
Consumed
Total Pleasure
from Pepsi
Marginal Pleasure of
Pepsi
Marginal Pleasure of Pepsi
per Dollar ($2 per
Pepsi)
1 111 111 55.5
2 200 89 44.5
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
10. Use the following data to illustrate the relevant demand curve:
Price $1 2 3 4 5 6 7 8 9 10
Quantity 20 18 16 14 12 10 8 6 4 2
(a) If the price increases from $4 to $8, by how much does the quantity demanded
decline?
(b) If a successful advertising campaign increases the quantity demanded at every price by 4
units,
(i) Draw the new demand curve D2.
(ii) How many units are now purchased at $8? (LO 05-01)
Answers:
ii. 10 units.
Feedback:
(a) Optimal consumption refers to the mix of output that maximizes total utility for the
limited amount of income you have to spend. Because the opportunity costs associated with
(b) i. A person’s position on the market demand curve expresses the maximum price she or
he is willing to pay. To find the endpoints (for example) of the market demand curve, plot the
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
