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Determining the incremental reference price

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There is only one buyer and her incremental Reference Price (RP) for various amounts of SOMA are shown in the table below:

Quantity: A's RP

First Unit: 7

Second Unit: 5

Third Unit: 3

Fourth Unit: 1

You may assume that the RP for the fifth and higher units is 0. Notice that her RP for the fourth unit is less then her RP for the third unit and so on. She exhibits diminishing marginal returns.

1) If SOMA sells for $5/unit , and she buys just one unit, what will her consumer surplus be?

2) If SOMA sells for $5/unit, and she buys 2 units, what will her consumer surplus be?

3) IF SOMA sells for $5/unit, how many units will she buy to maximize her consumer surplus?

Reference no: EM13893802

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