# Econ 290 Tutorial #2 Week 3

```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
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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
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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
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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
```