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Assignment 1
1- (40 points, parts a-d 5 points each; part e and f 10 points each)
The following table presents the marginal benefit of consuming six can of Pepsi for an individual
consumer.
Units of Pepsi Marginal Benefit (MB), in $ value
First can 10
Second can 5
Third can 4
Fourth can 0
Fifth can -6
Sixth can –10
a- As the table suggest, MB of consuming Pepsi is falling for this consumer. Does this make sense? Why or
why not? Specifically, discuss whether or not you need additional assumptions in order to make sense of
these numbers. Hint: We do need additional assumptions that were discussed in the notes. You have to
mention those here.
- Illustrate the relationship between units of Pepsi consumed (??) and the price consumer willing to
pay for each unit (WTP) on a graph, where the Y-axis denotes WTP, and X-axis indicates quantity.
c- Assume that the price of a can of Pepsi is 4$. How many can of Pepsi this individual is going to buy? You
can illustrate your answer with the help of the graph.
Show your calculations as a part of your answer. Giving me just a number is not enough; you should show
me how you got that number.
d- For the price of 4$ and given your answer to part (e), find the consumer’s total spending and surplus.
Show your calculations as a part of your answer. Giving me just a number is not enough; you should show
me how you got that number.
e- Concern with the public health effects of sugar consumption, the government imposes a 5$ tax on
sugary soda. This tax increases the price of a can of Pepsi to 9$. How does this tax policy affect our
consumer? Precisely, determine the change in the number of cans demanded, change in consumer
surplus, and change in consumer total spending resulting from this tax.
Show your calculations as a part of your answer. Giving me just a number is not enough; you should show
me how you got that number. Note that the question is asking you to determine the “change,” which means
that you should calculate the values of Qd, Consumer surplus (CS), and Total Spending (TS) with and without
the tax and determine how much they are changing as a result of the tax policy. Also remember that
Change=New Values-Old Values, which for this particular question means that [Change=After tax values-
Before tax values].
f- How can we induce this individual to buy and consume six can of Pepsi? Explain and Show your
calculations as a part of your answer. Giving me just a number is not enough; you should show me how you
got that number
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2- (60 points, each part 10 points)
a- Why does an individual’s demand curve have a negative slope? Explain.
- What factors cause a movement on the demand curve? Explain and use a demand diagram to illustrate
your answer.
c- What factors cause a shift in the demand curve? Just Name them.
d- How does consumer behavior concerning an inferior good change if her income increases? Explain and
use a demand diagram to illustrate your answer.
e- How does an event like the cu
ent pandemic affect consumers’ demand for mask? Explain and use a
demand diagram to illustrate your answer.
f- Does the development and availability of electric cars affect the price elasticity of demand for standard
gas cars (cars with combustion engines)? Explain and use a demand diagram to illustrate your answer.