Question

Consider an individual with the following demand function: 21 = 150 – 5p1 At a price: P1 =10, what is the consumer surplus? (Write your answer in the box below] (Hint: We typically graph inverse demand function.)

Answer 1

The consumer surplus can be calculated by finding the area between the market price and the demand curve using the given demand function. The consumer surplus at a price of p1 = 10 is 540 units.

Step-by-step explanation:

The consumer surplus can be calculated by finding the area between the market price and the demand curve. In this case, the demand function is given by 21 = 150 - 5p1, where p1 represents the price. To find the consumer surplus at a price of p1 = 10, we substitute the price into the demand function:

21 = 150 - 5(10)

Solving the equation yields p1 = 10. From the demand curve, we can determine that the quantity demanded at this price is 18. Therefore, the consumer surplus is the area between the market price and the demand curve, which can be represented as a triangle:

The formula to calculate the consumer surplus is:

Consumer Surplus = 1/2 * base * height = 1/2 * (18) * (150 - 5(10)) = 540

So, the consumer surplus at a price of p1 = 10 is 540 units.