978-1259291814 Chapter 5 Solution Manual

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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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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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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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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(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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(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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(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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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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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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