Question

Hugo decides to buy his Christmas gifts on Black Friday. To simplify his life, he is giving his 10 closest friends scarves for Christmas and everyone else Christmas cards. Hugo is willing to spend $200 on the 10 scarves. When he arrives at Macy’s at 5:00 A.M. on Black Friday, he discovers that scarves are on sale for $12 each. Hugo buys 10 scarves and uses the remaining $80 to buy himself a some clothes.

How much consumer surplus did Hugo receive from the tenth scarf he purchased?

a. Consumer surplus from the tenth scarf: $

b. Assuming Hugo follows the Rational Rule for Buyers, why did Hugo only purchase 10 scarves when they were on sale? Shouldn't he have purchased more since they were such a good deal compared to what he was willing to pay?

At a price of $12, Huge determined that

buying an eleventh scarf gave him less than $8 in consumer surplus.

the price exceeded his marginal cost.

buying an eleventh scarf gave him less than $12 in benefit.

buying an eleventh scarf gave him more than $12 in benefit.

Now suppose the manager at Macy’s was hoping to sell all 100 scarves Macy's had in inventory. She decided to put the scarves on sale for $10, but an employee accidently listed the sales price as $12. To the manager’s surprise, the store sold all 100 scarves at the $12 sales price.

How much producer surplus did Macy’s receive from the hundredth scarf sold?

c. Producer surplus from the hundredth scarf sold is equal to $

Answer 1

a) Hugo's willingness to pay for 10 scarves = $200

Hugo's willingness to pay per scarf = $200/10 = $20

Price of the tenth scarf = $12

Hugo's consumer surplus on the tent scarf = Hugo's willingness to pay for the tenth scarf - Actual price paid by Hugo = $20 - $12 = $8

Ans: $8

b) For a rational buyer, a decision of buying an additional unit of a good depends on the marginal benefit and marginal cost of the good. If the marginal benefit exceeds the marginal cost of the good, the buyer should buy an additional unit of the good. If the marginal benefit is less than the marginal cost of the good, the buyer should not buy an additional unit.

At the price of $12, Hugo's marginal cost = $12. If Hugo didn't buy an additional unit (11th unit) of the good, it implies than his marginal benefit from the 11th unit of the good is less than the marginal cost of the 11th unit.

Ans: buying an eleventh scarf gave him less than $12 in benefit.