Posted by yalomami on Thursday, September 27, 2012 at 5:55am.
1. (1 point) Consider two individuals considering how many iced coffee drinks to buy during the
coming week. Person A is willing to pay a maximum of €10 for the first drink, €8 for the
second, €5 for the third, and €1 for the fourth. Person B would be willing to pay a maximum
of €12, €10, €8, €6, €4, and €2 for their first through sixth drinks, respectively. Neither
person would pay anything for any more drinks during the week. Assume that the price of an
iced coffee drink is €4.50.
(a) For each person determine how many drinks will be bought during the week.
(b) For each person determine their total surplus at this quantity, i.e. find the total difference
between what the person is willing to pay and what they actually pay for the drinks they
buy. Also, explain why this total surplus is the maximum surplus for each person given the
(c) Describe the total demand curve for these two people, i.e. describe how many drinks these
two people will buy in total for any possible price.
(d) If the temperature for the coming week turns out to be much lower then originally
expected then what would you expect to happen to the maximum amount each person is
willing to pay for an iced coffee drink? What is the likely effect of this change on the total
amount of iced coffee drinks purchased during the week at the given price?
2. (1 point) Consider a competitive seller of iced coffee drinks. Suppose that this seller’s marginal
cost of producing an amount of such drinks per week is given by the following. The first 200
drinks per week each cost €2, the next 100 drinks each cost €3, the next 100 drinks each cost
€4, and each additional drink after that costs €5. Assume that the price of an iced coffee drink
(a) How many drinks will this seller produce during the week?
(b) What is this seller’s total surplus at this quantity, i.e. what is the total difference between
what the seller receives from selling the drinks and the cost of producing those drinks?
Also, explain why this total surplus is the maximum surplus for this seller given the price.
(c) Suppose that there are 100 sellers of iced coffee drinks with exactly the same marginal
costs as given above. Describe the total supply curve for all of these sellers, i.e. describe
how many iced coffee drinks these sellers would want to sell in total at any possible price.
(d) Suppose these 100 sellers of iced coffee drinks are in a competitive market with 10000
consumers identical to person A and 2500 consumers identical to person B of the previous
problem. Explain why €4.50 can be a competitive equilibrium price for such a market.
Are there other prices that could also be a competitive equilibrium price in this situation?
Explain why and what they are, or explain why there cannot be any other equilibrium
3. (1 point) For each of the following explain whether the given change will shift the demand curve
or the supply curve for pre-made sandwiches in a competitive market. Also explain in which
direction that curve will shift and why.
(a) The price of bread rises.
(b) Other restaurants in the are offer a discount on pizza.
(c) The government cuts income taxes, which increases the average after-tax income by 100
euros per month.
(d) There is an decrease in the number of bakeries that sell sandwiches.
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