QUESTIONS 1:

1. What is the diamonds-water paradox, and how is it explained?

2. Use the same reasoning as in question 1 to explain why bottled water costs so much more than tap water.

3. If consumers paid an amount for water that reflected the value of the total benefits they receive from consuming it, then what would consumer surplus equal?

QUESTIONS 2:

1. Medicare recipients pay a monthly premium for coverage, must meet an annual deductible, and have a co-payment for doctors' office visits. What impact would an increase in the monthly premium have on their consumer surplus? What would be the impact of a reduction in co-payments?

2. President George W. Bush introduced some new coverage for prescription medications. What is the impact on consumer surplus of offering some coverage for prescription medication?