Ms. Quasimodo in Problem 3 has the utility function U(x, m) , where x is her consumption of earplugs and m is money left over to spend on other stuff. If she has $10,000 to spend on earplugs and other stuff and if the price of earplugs rises from $50 to $70, then her net consumer's surplus

Question

Ms. Quasimodo in Problem 3 has the utility function U(x, m)  , where x is her consumption of earplugs and m is money left over to spend on other stuff. If she has $10,000 to spend on earplugs and other stuff and if the price of earplugs rises from $50 to $70, then her net consumer's surplus

Quizplus · Accepted Answer

To find Ms. Quasimodo's net consumer's surplus, we need to find the area under her demand curve and above the price line for earplugs. Due to the increase in price from $50 to $70, her demand curve shifts downward (to the left).

Using the same method as in Problem 3, we can find her new consumption bundle to be (110, $3,000) and her new consumer's surplus to be:

U(110, 3,000) - (70 * 110) = $4,800 - $7,700 = -$2,900

Her original consumer's surplus was $1,900 (found in Problem 3), so her net consumer's surplus falls by:

-$2,900 - $1,900 = -$4,800

This is a decrease of $4,800, or 800%. Therefore, the correct answer is D) falls by 800.

Ms Quasimodo in Problem 3 Has the Utility Function U(x