Week 3 Homework
Please answer the following questions:
1. The following information describes the value Lori Landlord places on having her five apartment houses repainted. She values the repainting of each apartment house at a different amount depending on how badly it needs repainting.
Value of new paint on 1st apt house $5,000
Value of new paint on 2nd apt house $4,000
Value of new paint on 3rd apt house $3,000
Value of new paint on 4th apt house $2,000
Value of new paint on 5th apt house $1,000
Plot Lori Landlord’s willingness to pay. (Note don’t worry about turning in the plotted graph, just do it on paper.)
If the price to repaint her apartments is $5,000 each, how many will she repaint? What is the value of her consumer surplus?
Suppose the price to repaint her apartments falls to $2,000 each. How many apartments will Lori choose to have repainted? What is the value of her consumer surplus?
What happened to Ms. Landlord’s consumer surplus when the price of having her apartments repainted fell? Why?
To plot Lori Landlord's willingness to pay, you would need to create a graph with the number of apartments on the x-axis and the value of new paint on the y-axis.
1. Start by plotting the first apartment house at $5,000 on the y-axis.
2. Plot the second apartment house at $4,000.
3. Plot the third apartment house at $3,000.
4. Plot the fourth apartment house at $2,000.
5. Plot the fifth apartment house at $1,000.
Connect the dots to form a downward sloping line. This represents Lori Landlord's willingness to pay for repainting each apartment house.
Now, let's answer the questions:
1. If the price to repaint her apartments is $5,000 each, Lori will only repaint the first apartment house since its value is exactly $5,000. Her consumer surplus will be $0 because she is willing to pay the exact price for the repainting.
2. Suppose the price to repaint her apartments falls to $2,000 each. To determine how many apartments Lori will choose to have repainted, you need to compare the price to the value she places on each apartment house. Lori will repaint the first three apartment houses, because their value is greater than $2,000. Her consumer surplus will be $2,000 for these three apartments, which is the difference between the value she places on the paint and the price she pays.
3. When the price of having her apartments repainted fell, Ms. Landlord's consumer surplus increased. This is because she can now repaint more apartments at a lower price. With the lower price of $2,000 each, she is able to repaint three apartments instead of just one, which increases her consumer surplus.