Deck 2: Benefits and Costs, Supply and Demand

Question 1

Use the logic of willingness to pay to interpret the statement "I like clean air more than you do."

Answer 1

"I like clean air more than you do": Willingness to pay
"I like clean air more than you do" can be interpreted through willingness to pay logic.
Willingness to accept (WTA) is the minimum amount that Person A would accept in exchange for his right to clean air. Willingness to pay (WTP) is the maximum amount that Person A would pay for the right to clean air.
The statement assigns the clean air rights to Person A; he will not allow Person B to degrade the air unless Person B pays him enough money (M) to offset the intrusion.
Example:
If Person B would be willing to pay for the air right sat $M and Person A would accept to sell its air rights at that amount ($M), then WTA=WTP for Person B.
Assuming Person A's WTA M WTP. If Person A initially owns the air rights, he will refuse to sell them to Person B. If Person B initially owns the air rights, Person A will refuse to buy.
At a maximum, if WTA M WTP at every air quality level, then Person A will neither sell any rights to Person B (if Person A owns the rights), nor buy any rights to clean air (if Person B owns the rights).
Hence, those who are willing to pay/sacrifice more for additional clean air measure the individual/aggregate values. If someone gets a benefit from a commodity, they will have a willingness to pay for that commodity.

Question 2

Below is the marginal willingness to pay of a consumer for organic apples.
a. What is this individual's total willingness to pay at a consumption level of 4 apples?
b. If the price of organic apples is $2.40, how many apples would this person consume?

Answer 2

Given information:
Table-1: Marginal and total willingness to pay for organic apples
a)
Total willingness to pay:
Total willingness to pay is the sum of marginal willingness to pay for each additional unit of consumption, which can be calculated by using the following formula:
TWTPn = MWTPn-1 + MWTPn
Total willingness table:
Table -1 show the value of total willingness pay for the good at different level of quantity that obtained by using above Equation.
Table -1
Thus, total willingness to pay for 4 apples = $17.40
b)
When P=$2.40, a total of 3 apples would be consumed. This is because this is the nearest level of apples consumed when P=MWTP.

Question 3

Below are the marginal willingness-to-pay schedules for organic apples for two individuals.

Construct the aggregate marginal willingness-to-pay (the demand) curve for this group of two people.

Answer 3

Given information:
The marginal willingness to pay schedules for organic apples consumed by two individuals; individual A and individual B, is shown in Table-1.
Table-1
Aggregate marginal willingness-to-pay/Demand curve for organic apples:
Aggregate marginal willingness to pay for a good is defined as the sum of marginal willingness to pay of each individual for that good in an economy. Aggregate marginal willingness to pay for a good can also be referred as the demand curve for that good.
The aggregate marginal willingness to pay curve or the demand curve for organic apples consumed by two individuals can be drawn by using the information given in Table-1, which is shown in Figure-1.
Figure-1
In Figure-1, quadrant A shows the marginal willingness-to-pay curve
of individual A for organic apples, where individual A is willing to pay $4 for 1 st unit of organic apple and $1.30 for the 7 th unit of organic apple.
Similarly, in quadrant B, individual B is ready to pay $4 for 2 nd unit of organic apple and $1.30 for the 5 th unit of organic apple.
In the quadrant (A+B), aggregate marginal willingness-to-pay curve
is drawn by the horizontal summation of marginal willingness-to-pay curve
and marginal willingness-to-pay curve
. At price $4, individual A demand 1 unit and individual B demand 2 units. Thus, market demand at $4 is 3
units. Similarly, at price $1.30 Individual A demands 7 units and individual B demands 5 units. Thus, market demand at price $1.30 is 12
units

Question 4

What are the advantages and disadvantages of using willingness to pay as a measure of value? What are some alternatives?

Question 5

Figure 3.10 illustrates the derivation of an industry supply curve under competitive conditions where each firm receives the same price for its output. What is the relationship of this procedure to the equimarginal principle discussed earlier in the chapter?
FIGURE 3.10 Derivation of Aggregate (Market) Supply from Individual Firm Supply Curves

Question 6

Consider the marginal cost curve associated with cleaning your dorm room. Label the vertical axis "time" and the horizontal axis "percent clean." What would this marginal cost curve look like?

Question 7

Somebody invents a small machine that electrostatically is able to remove dust from rooms very quickly. What does this do to the marginal cost curve depicted in question 6?