## Elasticity of Demand and Consumer Surplus

The accompanying table shows the price and monthly demand for barrels of gosum berries in Gondwanaland.

 Price of gosum berries per barrel Native Demand for gosum berries per month \$100 0 \$90 100 \$80 200 \$70 300 \$60 400 \$50 500 \$40 600 \$30 700 \$20 800 \$10 900 \$0 1000

1. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from \$10 to \$20. What kind of elasticity is this value that you computed for the price elasticity of demand and what does it mean for how demand will change based on a change in price within this price range? (10 points)
2. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve? (10 points)

As an assignment for her Microeconomics course, Matilda used the marginal utilities that she gave to her 3rd music download and her 2nd video download to complete the Experiment Tally Sheet below. Her available budget was \$19.00.

 Downloads of mu (score) from 1 to 100 Price of each   \$3.00 Money spent on Downloads of mu (score) from 1 to 100 Price of each   \$3.00 Money spent on Total Money Total Budget music mu mu/\$ music videos mu mu/\$ videos Spent Remaining 1st ? ? \$3.00 1st ? ? \$3.00 \$6.00 \$13.00 2nd ? ? 2nd 45 15 \$3.00 \$12.00 \$7.00 3rd 60 20 \$3.00 3rd \$15.00 \$4.00 4th 4th Total money spent on music \$9.00 Total money spent on videos \$6.00 \$15.00 \$4.00

1. A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is Matilda maximizing her utility? Explain your answer. (3 points)

3. Brandon and his family often rent movies from the new internet movie streaming service, Xanadu. The table below shows Brandon’s demand schedule for eight movie rentals that Brandon’s family is interested in watching.

 Number of internet movie rentals Willingness to pay each rental 1st \$7 2nd \$6 3rd \$5 4th \$4 5th \$3 6th \$2 7th \$1 8th \$0

1. If the price of each movie rental from Xanadu is \$3, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer. (5 points)