3 Consumer surplus 3.1 Consumer Surplus I A standard question Consider a consumer whose inverse demand for a good is p(x) = a - bx, where a > 0 and b > 0. What is the consumer's surplus in the market for this good if p = a/2? 3.2 Consumer Surplus II A standard question Consider a consumer whose preference is represented by the utility func- tion u(x1, x2) = ln(x1+1) + x2 where good 2 represents all other goods. Suppose the consumer's income is m > 1, let p2 = 1. 3.3 a) Derive x1 (p1, m), the consumer's demand function for good 1. b) Letting m = 10, graph the consumer's demand curve, with x on the horizontal axis and pi on the vertical axis. c) Suppose that at first the price of good 1 is p = 1, but then the price rises to p = 1. What is the loss of consumer surplus associated with this price increase? Consumer Surplus III A standard question Consider a consumer whose preference is represented by the utility func- tion u(x1,x2) = min{x1,x2} where good 2 represents all other goods. Suppose the consumer's income is m = 12, and let P2 = 1. a) Derive x1(p1), the consumer's demand function for good 1. b) Graph the consumer's demand curve, with x on the horizontal axis and p on the vertical axis. c) Suppose that at first the price of good 1 is p = 8, but then the price increases to p = 18. What is the loss of consumer surplus associated with this price increase?