Question

Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His consumer surplus is:_______
a. $0.50.
b. $0.60.
c. $0.70.
d. $1.00.

Answer 1

Answer:

c. $0.70.

Explanation:

The consumer surplus is determined by subtracting Equilibrium price from willing price

Here there are 3 willing prices which are greater than Equilibrium price. The price to buy the forth can is $0.40 which is below the equilibrium price of $0.55, so he will not buy the forth can.

Willing price for first can (W1) = $0.95

Willing price for second can (W2) = $0.80

Willing price for third can (W3) = $0.60

The Equilibrium price (E) is $0.55

Consumer Surplus = (W1 - E) + (W2 - E) + (W3 - E)

Consumer Surplus = ($0.95 - $0.55) + ($0.80 - $0.55) + ($0.60 - $0.55)

Consumer Surplus = $0.40 + $0.25 + $0.05

Consumer Surplus = $0.70.