John has a marginal benefit of $7 for 1 slice of pizza, $5 for a second slice, $3 for a third slice, $1 for a fourth slice, and $0.50 for a fifth slice. The price of pizza is $1.50 per slice. Which of the following statements is correct?
A) John will purchase 3 slices of pizza and have consumer surplus of $10.50.
B) John will purchase 4 slices of pizza and have consumer surplus of $12.00.
C) John will purchase 2 slices of pizza and have consumer surplus of $1.50.
D) John will purchase 3 slices of pizza and have consumer surplus of $4.50.
E) John will purchase 2 slices of pizza and have consumer surplus of $3.00.

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ewomazinoade ewomazinoade · Answer 1 · 2020-02-26T06:53:35+01:00

Answer:

A) John will purchase 3 slices of pizza and have consumer surplus of $10.50.

Explanation:

It is assumed that a rational consumer would continue consumption only if marginal benefit is greater or equal to marginal cost.

Marginal Cost here is the cost of the pizza which is $1.50.

After the 3rd slice, the marginal cost becomes greater than marginal benefit, so it expected that John would stop consuming pizza at the 3rd slice.

Consumer surplus is the difference between the willingness to pay of a consumer and the price of the product.

Here the willingness to pay of John is represented by his marginal benefits.

Consumer surplus = ($7 - $1.50) + ($5 - $1.50) + ($3 - $1.50) = $10.50

I hope my answer helps you