Econ 290 Tutorial #2 Week 3 1. The following table shows how the total social benefit and total social cost of summer outdoor concerts in Burnaby vary with the number of performances. Number of Concerts 1 2 3 4 5 Total Social Benefit Total Social Cost Total Net Benefit $20,000 $28,000 $33,000 $38,000 $41,000 $16,000 $20,000 $26,000 $32,000 $41,000 $4,000 $8,000 $7,000 $6,000 $0 What is the efficient number of concerts? The efficient number of concerts is 2. 2. The following table shows how the marginal social benefit and marginal social cost of summer fireworks shows in Vancouver vary with the number of performances. Number of Fireworks Shows 1 2 3 4 5 Marginal Social Benefit $5,000 $4,500 $3,800 $3,000 $2,500 Marginal Social Cost $2,000 $3,000 $3,800 $4,500 $5,000 Marginal Net Benefit $3,000 $1,500 $0 -$1,500 -$2,500 What is the efficient number of fireworks shows? The efficient number of fireworks shows is 3. 3. Melissa buys an iPod for $120 and gets consumer surplus of $80. a. What is her willingness to pay? $200 b. If she had bought the iPod on sale for $90, what would her consumer surplus have been? $110 c. If the price of an iPod were $250, what would her consumer surplus have been? $0 1 Econ 290 Tutorial #2 Week 3 4. Amy has a demand function for apples given by Q = 200 – 20P. a. Graph and calculate her MWTP (or MB) and TWTP (or TB) at a quantity of 60 apples. MWTP = MB = $7 TWTP = TB = ½ × 60 × $ (10 + 7) = $510 b. Calculate Amy’s consumer surplus (CS) if the price of apples is $1.50. CS = ½ × 170 × $ (10 - $1.5) = $722.5 c. If the apples are free and Amy could have as many as she wants, what would be her CS? CS = ½ × 200 × $10 = $1000 d. If the apples are free but the quantity is restricted to 100 apples, what would be her CS? CS = ½ × 100 × $ (10 + 5) = $750 2 Econ 290 Tutorial #2 Week 3 5. Ivy grows apples, and her supply function is given by Q = 20P – 4. a. Graph and calculate her MC and TC at a quantity of 20 apples. MC = $1.2 TC = ½ × 20 × $ (0.2 + 1.2) = $14 b. Calculate Ivy’s producer surplus (PS) if the price of apples is $1.50. PS = ½ × 26 × $ (1.5 - 0.2) = $16.9 c. If the price of apples remains at $1.50, but Ivy’s MC of producing apples decreases by 20 percent. By how much will Ivy’s PS change? New Supply Curve: MC = (1 – 0.20)×(0.2 +0.05Q) ⇒ P = 0.16 + 0.04 Q ΔPS = ½ × 33.5 × $ (1.5 - 0.16) - ½ × 26 × $ (1.5 - 0.2) = $5.545 6. A friend of yours is considering two cell phone service providers. Provider A charges $100 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of calling is given by the equation QD = 150 − 50P, where P is the price of a minute. a. With each provider, what is the cost to your friend of an extra minute on the phone? Provider A: $0 Provider B: $1 3 Econ 290 Tutorial #2 Week 3 b. In light of your answer to (a), how many minutes would your friend talk on the phone with each provider? With Provider A: Q = 150 With Provider B: Q = 100 c. How much would he end up paying each provider every month? With Provider A: $100 With Provider B: $100 d. How much consumer surplus would he obtain with each provider? With Provider A: CS = ½ × 150 × $3 − $100 = $125 With Provider B: CS = ½ × 100 × $ (3 – 1) = $100 e. Which provider would you recommend that your friend choose? Why? Your friend should choose Provider A because the net benefits are higher. 4

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