Suppose that Bill is a big movie buff and enjoys renting movies from the local video rental outlet
Assume that he is willing to pay $5 for the first movie he rents for the weekend but would only pay $4 for a second and still only $3 for a third movie. If the video rental franchise charges $3.50 per movie what will Bill's consumer surplus be and why? Assume now that the video rental franchise now has a new package deal in which it offers to rent three movies to customers at a price of $9.00 would Bill be interested? How much consumer surplus would he enjoy now? What is the maximum price that the video rental franchise could charge and still make Bill interested in the package deal?
Bill will enjoy a consumer surplus of $2.00 . He'll rent the first movie and enjoy a surplus of $1.50 ($5.00 - $3.50) and he'll rent the second movie and enjoy a surplus of $.50 ($4.00 - $3.50). He will not rent the third movie since this will result in negative consumer surplus. If the video rental franchise offers a package deal for $9.00 Bill will take it. The reason is that his consumer surplus will be $3.00 ($5 + $4 + $3 - $9). The maximum price that could be charged for the package deal would be one in which the consumer surplus is the same for Bill as it would be if he had to pay for each of the movies separately. Since the $9 price leaves him with a consumer surplus of $3 it must be that $10 would be the maximum that he would be willing to pay since that deal still provides him with a $2 surplus.
You might also like to view...
Use the following graph to answer the next question.
If the economy is currently in equilibrium at output level Q2, but full-employment output is at level Q1, which of the following fiscal policy actions would be the most effective at bringing the economy back to its full-employment output level?
A. Increase taxes and increase government purchases. B. Reduce government purchases and cut taxes. C. Cut taxes. D. Increase taxes.
________ are revenue and spending items in the federal budget that automatically change with the ups and downs of the economy so as to stabilize disposable income, consumption, and real GDP
a. Multipliers b. Discretionary fiscal policies c. Discretionary monetary policies d. Automatic stabilizers
The two general approaches to reducing global poverty include the redistribution of incomes and economic growth.
Answer the following statement true (T) or false (F)
Refer to the information provided in Table 8.4 below to answer the question(s) that follow. Table 8.4ProduceUsing TechniquesUnits of Variable KInputs L1 unit of outputA4 4?B2 6????2 units of outputA 7 6?B410????3 units of outputA 8 6?B 6 11Refer to Table 8.4. Assuming the price of capital (K) is $10 per unit and the price of labor (L) is $5 per unit, the marginal cost of producing the third unit of output is
A. $15. B. $20. C. $25. D. indeterminate from this information.