Question

Janice really likes potatoes. Potatoes cost $1 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30.

a. How many pounds of potatoes will she purchase?
b. What if she only had $2 to spend?
Explanation:_______
a. Janice will purchase potatoes until the value of potatoes is less than the cost of potatoes or until her income has been exhausted. For example, assume Janice has $5.00 to spend on potatoes or other items and the cost of a pound of potatoes is $1. Now assume the first pound of potatoes is worth $1.50 to Janice. She will purchase this pound of potatoes, since the value of the pound of potatoes ($1.50) is greater than the cost ($1). If the second pound is worth $1.14 and the third pound is worth $1.05, then Janice will purchase these as well, since the value exceeds the cost of $1. If all remaining pounds are worth $0.30, then Janice will not purchase these because the value is less than the cost. Thus, Janice will purchase 3 pounds of potatoes at a total cost of $3.00.
b. Now assume Janice only has $2.00 to spend on potatoes. She will purchase the first pound because it is worth $1.50 to her and it only costs $1. She will purchase the second pound because it is worth $1.14. She has now spent her entire income on potatoes. She would like to purchase the third pound because the value of this pound of potatoes is $1.05, but she does not have the income to make this purchase. Thus, Janice will purchase 2 pounds of potatoes at a total cost of $2.00.

Answer 1

A) Janice will purchase 3 pounds of potatoes since she will buy them until her consumer surplus ≤ 0. The fourth pound of potatoes costs $1, and Janice is willing to pay only $0.30, so her consumer surplus s negative (-$0.70).

Consumer surplus is the difference between the price that a customer is willing and able to pay for a good and the good actual price.

B) If Janice only had $2 to spend, she would buy 2 pounds of potatoes, since her consumer surplus is positive at 2 pounds.

first pound costs $1, and Janice is willing to pay $1.50, consumer surplus = $0.50

second pound costs $1, and Janice is willing to pay $1.14, consumer surplus = $0.14