Discussionproblems 7 - Lecture notes dis 7 PDF

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1DISCUSSION PROBLEMSCHAPTERCH7. Problems and Applications 8There are four consumers willing to pay the following amounts for haircuts:Gloria: $7 Jay: $2 Claire: $8 Phil: $ There are four haircutting businesses with the following costs:Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $ Each firm has the capa...

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DISCUSSION PROBLEMS CHAPTER #7

CH7. Problems and Applications 8 There are four consumers willing to pay the following amounts for haircuts: Gloria: $7 Jay: $2 Claire: $8 Phil: $5 There are four haircutting businesses with the following costs: Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2 Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair and which consumers should have their hair cut? How large is the maximum possible total surplus?

Answer Figure 13 shows supply and demand curves for haircuts. Supply equals demand at a quantity of three haircuts and a price between $4 and $5. Firms A, C, and D should cut the hair of Claire, Gloria, and Phil. Jay’s willingness to pay is too low and firm B’s costs are too high, so they do not participate. The maximum total surplus is the area between the demand and supply curves, which totals $11 ($8 value minus $2 cost for the first haircut, plus $7 value minus $3 cost for the second, plus $5 value minus $4 cost for the third).

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CH7. Problems and Applications 10 A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of calling is given by the equation QD =150-50P, where P is the price of a minute. a. With each provider, what is the cost to your friend of an extra minute on the phone? b. In light of your answer to (a), how many minutes with each provider would your friend talk on the phone? c. How much would she end up paying each provider every month? d. How much consumer surplus would she obtain with each provider? (Hint: Graph the demand curve and recall the formula for the area of a triangle.) e. Which provider would you recommend that your friend choose? Why? Answer a. With Provider A, the cost of an extra minute is $0. With Provider B, the cost of an extra minute is $1.

b. With Provider A, my friend will purchase 150 minutes [= 150 – (50)(0)]. With Provider B, my friend would purchase 100 minutes [= 150 – (50)(1)].

c. With Provider A, she would pay $120. With Provider B, he would pay $100.

Figure 17 2

d. Figure 17 shows the friend’s demand. With Provider A, she buys 150 minutes and her consumer surplus is equal to (1/2)(3)(150) – 120 = 105. With Provider B, her consumer surplus is equal to (1/2)(2)(100) = 100.

e. I would recommend Provider A because she receives greater consumer surplus when buying from that provider.

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