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QUESTION
Economics
Scenario: More than half of all residential water connections in Britain are not metered. Residential customers pay a flat fee regardless of usage. Scottish Water, which supplies water in Scotland, says there is no evidence that the installation of meters encourages lower than normal usage of water.
Answer these questions:
1.The Salmond family lives in a home that is not metered. The family consumes around 10,000 gallons a month. What is the family’s monthly demand curve for water, assuming that the demand curve is a straight line, and (the price is of water is £50 per 1,000 gallons) the Salmond family consumes nothing.
2.Calculate the total benefit and marginal benefit from water when the Salmond family consumes 10,000 gallons a month. What is the family’s buyer surplus?
3.Suppose that Scottish Water installs a water meter at the Salmond’s home and charges a price of £5 per 1,000 gallons. How much water would the family buy, and how much would it spend each month?
4.What is the maximum amount Scottish Water could charge the Salmond family for the consumption in question 3?
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| Subject |
Economics |
Pages |
3 |
Style |
APA |
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Answer
Economics Assignment
Question One
The fact that Salmon family have s demand curve, which is straight line, it means that their demand is perfectly elastic. This is to mean that a slight variation in the price of water would lead to an infinite change in the amount of water consumed by this family. The total demand curve for this family is calculated as follows.
Total demand curve = Approximate consumption x price of water
= 10,000/10,000 x £50
= 10 x£50
= £500
Question Two
Marginal benefit refers to the amount that a customer is willing to pay in order to obtain one more unit.
Therefore, the total benefit = the total sum of marginal benefits
This family does not sell water, which is what makes their marginal benefit to be equal to total benefit
= = 10 x£50
= £500
Surplus is the measurement of the net benefit a consumer gains from consuming a certain amount of good
Consumer Surplus = Total Benefit – (Price x Quantity)
= £500 – (£50 x 10)
= 0
Question Three
The total amount of water
Variation in price = £50-5
= £45
This means that that the family will be able to afford ten times the amount they can afford now which is as follows.
10,000 x 10
100,000 liters
Question Four
The maximum amount which could be charged is at the point in which marginal cost = marginal revenue. Therefore.
= 100,000/1,000
= £100
.
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