Question

The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment: First bottle $5, Second bottle $4, Third bottle $3, Fourth bottle $2, Fifth bottle 1, Further bottles 0 a. The cost of producing Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.)
How many bottles will each Whovillian consume?
What is each person’s consumer surplus?

Answer 1

Answer:

Each Whovillian would be willing to consume up to four bottles of Zlurp, since the firth bottle will only yield a utility equivalent to $1, while the price is $1.50. Consumers will always be willing to purchase products as long as the price of the product is equal to or less than the utility perceived by the consumers.

Each Whovillian's consumer surplus = ($5 - $1.50) + ($4 - $1.50) + ($3 - $1.50) + ($2 - $1.50) = $3.50 + $2.50 + $1.50 + $0.50 = $8