Question

4. Consumer surplus for an individual and a market The following graph shows Lorenzo's weekly demand for apple ple, represented by the blue line. Point A represents a point along his weekly demand curve. The market price of apple pie is $3.00 per slice, as shown by the horizontal black line. Lorenzo's Weekly Demand 7.50 6.75 6.00 5.25 Demand 4.50 RICE (Dollars per slice) 3.75 Price 3.00 [POST CLASS) Homework (07) Price PRICE (DO 3.00 225 150 0.75 0 2 4 10 20 6 3 10 12 14 10 QUANTITY (Slices of apple pio) From the previous graph, you can tell that Lorenzo is willing to pay 5 for his eth slice of apple pie each week. Because he has to pay only $3.00 per slice, the consumer surplus he gains from the 8th slice of apple pie is $ from the Suppose the price of apple pie were to foll to $2.25 per slice. At this lower price, Lorenzo would receive a consumer surplus of Bth slice of apple ple he buys. The following graph shows the weekly market demand for apple pie in a small economy. Use the purple point (diamond symbol) to shade the area representing consumer surplus when the price (P) of apple pie is 53.00 per slice. Then, ose the green point (triangle symbol) to shade the area representing additional consumer surplus when the price fails to $2.25 per slice. Use the purple point (diamond symbol) to shade the area representing consumer surplus when the price (P) of apple pie is $3.00 per stice. Then, use the green point (triangle symbol) to shade the area representing additional consumer surplus when the price falls to $2.25 per slice. Small Economy's Weekly Demand 7.50 5.25 Initiat Consumer Surplus p$3.00) 6.00 A Demand Additional Consumer Surplus (P = $2.25) 450 PRICE (Dollars per slice 3.75 P$3.00 300 2.25 P = $225 150 0.75 0 40 60 B 100 120 140 to 10 200 QUANTITY (Thousands of slices of apple ple)

Answer 1

The total consumer surplus in the market increases by $192,500 when the price of apple pie falls to $2.25 per slice.

Lorenzo's Weekly Demand Graph:

The blue line represents Lorenzo's weekly demand for apple pie.

Point A on the graph represents a specific point along his weekly demand curve.

Market Price:

The market price of apple pie is $3.00 per slice (shown by the horizontal black line).

Consumer Surplus for Lorenzo:

From the graph, Lorenzo is willing to pay $5.00 for his 8th slice of apple pie.

Since he only has to pay $3.00 per slice, his consumer surplus for the 8th slice is $2.00.

Price Falls to $2.25:

Suppose the price falls to $2.25 per slice.

Lorenzo's consumer surplus for the 8th slice at this lower price needs to be calculated.

Weekly Market Demand Graph:

Purple diamond symbolizes consumer surplus when the price is $3.00 per slice.

Green triangle symbolizes additional consumer surplus when the price falls to $2.25 per slice.

Shading Areas:

Shade the area under the demand curve and above the price line for both $3.00 and $2.25 using the respective symbols.

Calculation of Consumer Surplus at $2.25:

Calculate the additional consumer surplus at $2.25 per slice by finding the difference in the shaded areas.

At the initial price of $3.00 per slice, consumer surplus is represented by the shaded area under the demand curve and above the price line with the purple diamond symbol. When the price falls to $2.25 per slice, additional consumer surplus is represented by the shaded area under the demand curve and above the new price line with the green triangle symbol. Ensure the shading accurately reflects the changes in consumer surplus due to the change in price.

Answer 2

The total consumer surplus in the market increases by $192,500 when the price of apple pie falls to $2.25 per slice.

How to solve

Lorenzo's Individual Consumer Surplus

Lorenzo's willingness to pay for the 8th slice of apple pie is $5.00 per slice, but he only has to pay $3.00 per slice. Therefore, his consumer surplus for the 8th slice of apple pie is:

Consumer Surplus = Willingness to Pay - Actual Price

Consumer Surplus = $5.00 - $3.00 = $2.00

Market Consumer Surplus

When the price of apple pie falls to $2.25 per slice, the consumer surplus for each slice of apple pie increases. The additional consumer surplus for each slice is:

Additional Consumer Surplus = Willingness to Pay - New Price

Additional Consumer Surplus = $5.00 - $2.25 = $2.75

The total additional consumer surplus for all apple pies sold in the market can be calculated by finding the area of the triangle formed by the new demand curve, the old demand curve, and the new price level. This area is:

Additional Consumer Surplus = 0.5 * (Base) * (Height)

Additional Consumer Surplus = 0.5 * (140,000) * ($2.75)

Additional Consumer Surplus = $192,500

Therefore, the total consumer surplus in the market increases by $192,500 when the price of apple pie falls to $2.25 per slice.