Hints for Unit 5 Assignment
- Remember the “mid-point method of computing Dpe from the Hints for Unit 4 Assignment, and
If Dpe is less than 1, what is it called and what does it mean?
If Dpe is more than 1, what is it called and what does it mean? Why are Dpe’s different at different price ranges (look in the textbook)? - Remember Marginal Utility, what does it mean?
- What happens to marginal Utility as you get MORE of something? What about when you get LESS of that thing?
- Satisfaction is MAXIMIZED when marginal utility PER DOLLAR is equal between two items.
SAMPLE_ nuggets problem (what does the demand schedule actually mean.
And an “all you can eat” example for $10.00.
Number of Chicken Nugget servings
(servings) Willingness to pay for chicken nuggets
(per serving)
1 $5
2 $4
3 $3
4 $2
5 $1
6 $0
Nina's demand schedule says:
Nina is willing to pay $5 for the first, serving, plus
Nina is willing to pay $4 more for a second, serving, plus
Nina is willing to pay $3 more for a third, serving, plus
Nina is willing to pay $2 more for a fourth, serving, plus
Nina is willing to pay $1 more for a fifth, serving, plus
Nina is willing to pay $0 more for a sixth, serving, and,
no matter what the price is, she wants no more after the sixth serving.
Nina’s demand schedule also means that:
if the price was $5, Nina would buy ONLY 1 serving, but,
if the price was $4, Nina would buy 2 servings, but,
if the price was $3, Nina would buy 3 servings, but,
if the price was $2, Nina would buy 4 servings, but,
If the price was $1, Nina would buy 5 servings, and,
if the price was FREE, Nina would get 6 servings.
==========================
From the above information:
If we add what Nina is willing to pay for all six servings we see that Nina is willing to spend
5 + 4 + 3 + 2 + 1 + 0 = $15 for six servings
If she could get all 6 servings for $10, that would be great for her, and she would save some money because the price she had to pay was less than what she was willing to pay.
Remember that consumer surplus is the same thing as SAVINGS beyond what the person was WILLING to pay, but did not have to pay because the price was lower.
==========================
If the price were $2 per serving, then, according to her demand schedule, she would buy 4 servings and would spend $8, but she would have been willing to spend $14 for 4 servings,
5+4+3+2 = $14 she would have been willing to pay
2+2+2+2 = $8 what she did spend at a price of $2
$14 - $8 = $ 6 …………. so her savings (Consumer Surplus) would be $6.
Sample Solution