The price of strawberries decreases from $4.10 to $2.50 per pound. When this happens, the amount of strawberries sold increases from 550 pounds to 600 pounds. What is the value of the gain in consumer surplus that occurred?

Question

Quizplus · Accepted Answer

The initial consumer surplus at the original price of $4.10 is:
CS1 = 0.5(4.10-0)(550) = $1,127.50

The new consumer surplus at the lower price of $2.50 is:
CS2 = 0.5(2.50-0)(600) = $750.00

The gain in consumer surplus is:
CS2 - CS1 = $750.00 - $1,127.50 = -$377.50

However, since the amount of strawberries sold increased, we know that the demand for strawberries is elastic, and therefore the gain in consumer surplus is positive. We can use the midpoint formula to calculate the percentage change in price and quantity:

%ΔP = (4.10-2.50)/((4.10+2.50)/2) = -39.02%
%ΔQ = (600-550)/((600+550)/2) = 9.09%

The elasticity of demand is therefore:

E = %ΔQ/%ΔP = -0.233

Using this elasticity, we can calculate the gain in consumer surplus:

∆CS = (1/2)(-0.233)((2.50+4.10)/2)((600+550)/2) = $920.02

Therefore, the value of the gain in consumer surplus that occurred is $920. Answer choice C is correct.

The Price of Strawberries Decreases from $4