Friday

February 24, 2017
Posted by **yalomami** on Thursday, September 27, 2012 at 5:55am.

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

price.

(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

is €4.50.

(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

price.

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.