Question

Problems and Applications

Answer 1

Answer and Explanation:

The calculations are shown below:

1) 4 is choosen because the marginal utility should be less than the marginial cost and if he choose beyong this point, the cost of the drink is more than the willingness to pay

2) The consumer surplus is  

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5) + (2 - 1.5)

= 8

3) Total surplus decreases to

= Consumer surplus - external cost

= 8 - 4

= 4

4) Cindy's Consumer surplus is  

= (5 - 1.5) + (4 - 1.5) + (3 - 1.5)

= 7.5

5) Increases

6) 8 - 7.5 = 0.5

7) Consumption = 3 bottles

8) Consumer surplus is

= (5 - 2.5) + (4 - 2.5) + (3 - 2.5)

= 4.5

9) External cost = 3  × 1 = 3 bottle

10) Government revenue  = 3  × 1 = 3 bottle

11) Total surplus is

= Consumer surplus - external cost + government revenue

= 4.5 - 3 + 3

= 4.5

12) would

13) increases