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Chapter 7

4. It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water:

Value of first bottle $7

Value of second bottle $5

Value of third bottle $3

Value of fourth bottle $1

a. From this information, derive Bert’s demand schedule. Graph his demand curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus does Bert get from his

purchases? Show Bert’s consumer surplus in your graph

When the price of a bottle of water is $4, Bert buys two bottles of water. His consumer surplus is
shown as area A in the figure. He values his first bottle of water at $7, but pays only $4 for it, so has
consumer surplus of $3. He values his second bottle of water at $5, but pays only $4 for it, so has
consumer surplus of $1. Thus, Bert’s total consumer surplus is $3 + $1 = $4, which is the area of A in
the figure.

. c. If the price falls to $2, how does quantity demanded change? How does Bert’s consumer surplus change? Show these changes in

your graph.

When the price of a bottle of water falls from $4 to $2, Bert buys three bottles of water, an increase
of one. His consumer surplus consists of both areas A and B in the figure, an increase in the amount
of area B. He gets consumer surplus of $5 from the first bottle ($7 value minus $2 price), $3 from
the second bottle ($5 value minus $2 price), and $1 from the third bottle ($3 value minus $2 price),
for a total consumer surplus of $9. Thus, consumer surplus rises by $5 (which is the size of area B)
when the price of a bottle of water falls from $4 to $2.

5. Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a

bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:

Cost of first bottle $1

Cost of second bottle $3

Cost of third bottle $5 Cost of fourth bottle $7

a. From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water.

b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get

from these sales? Show Ernie’s producer surplus in your graph.

c. If the price rises to $6, how does quantity supplied change? How does Ernie’s producer surplus change? Show these changes in your

graph.

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