A consumers income elasticity of demand for a good is zero. Thedemand curve the

ID: 1234972 • Letter: A

Question

A consumers income elasticity of demand for a good is zero. Thedemand curve the the same consumer is:

p = 120 - 3x
a. What is the maximum sum that the consumer will pay in orderto have 30 units of garlic rather than none?
b. If he currently cannot buy the good at any price, what isthe maximum amount that he will pay to buy it at a price of $60 perunit? p = 120 - 3x
a. What is the maximum sum that the consumer will pay in orderto have 30 units of garlic rather than none?
b. If he currently cannot buy the good at any price, what isthe maximum amount that he will pay to buy it at a price of $60 perunit?

Explanation / Answer

I don't think the other poster has read the questioncorrectly. . The answer to part (a) is fairly straightforward, except thatthe question wording is a trifle ambiguous. It asks for themaximum sum, not the maximum price, which implies to me that youare supposed to give the total amount paid, or 30 times theprice. I would give both answers (the price and the totalpayment), since the wording is a bit ambiguous. . Part (b), however, does NOT appear to be asking how much theconsumer would buy at a price of $60 per unit, though the questionis worded sufficiently weirdly that, in the absence of morecontext, I'm not surprised the other poster got confused. Ihave a PhD in economics and years of college teaching experience,and I've taught this exact issue, and I still had to think aboutthe question wording for a couple of minutes to figure itout. As it is, without the context of knowing what materialyou've covered in your class, I'm just making a best guess. . What I believe the question is looking for isthe Consumer Surplus generated by purchasing at a price of $60per unit. This appears to be an "entry fee" question. The consumer has two choices: don't buy anything at all in thismarket, or pay an entry fee in order to get the right to shop inthe store and buy the product at a price of $60. The consumershould be willing to pay up to the total amount of Consumer Surplusgained from buying the product (though the consumer would clearlyprefer to pay quite a bit less than that!). . Your class appears to be making the subtle point that CSshould be calculated from Hicksian Demand, not MarshallianDemand. (I really wish I knew the terminology used in yourbook, here!) The key here is that, when there are no incomeeffects, Marshallian and Hicksian demand are identical. Soyou can use the same demand curve both to predict behavior (thetotal number of units the consumer will choose to purchase if shepays the entry fee) and to calculate CS (the area between thedemand curve and the price). . I assume your class has covered how to calculate CS by takingthe area of the relevant triangle. You will need to figureout how much the consumer demands at a price of 60 in order tocalculate the CS.

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A consumers income elasticity of demand for a good is zero. Thedemand curve the

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