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
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.

1. (a) For Person A:

- Person A is willing to pay a maximum of €10 for the first drink, but the price is €4.50, so they will buy the first drink.
- Person A is willing to pay a maximum of €8 for the second drink, but the price is €4.50, so they will buy the second drink.
- Person A is willing to pay a maximum of €5 for the third drink, but the price is €4.50, so they will buy the third drink.
- Person A is willing to pay a maximum of €1 for the fourth drink, but the price is €4.50, so they will not buy the fourth drink.

Therefore, Person A will buy a total of 3 drinks.

For Person B:
- Person B is willing to pay a maximum of €12 for the first drink, but the price is €4.50, so they will buy the first drink.
- Person B is willing to pay a maximum of €10 for the second drink, but the price is €4.50, so they will buy the second drink.
- Person B is willing to pay a maximum of €8 for the third drink, but the price is €4.50, so they will buy the third drink.
- Person B is willing to pay a maximum of €6 for the fourth drink, but the price is €4.50, so they will buy the fourth drink.
- Person B is willing to pay a maximum of €4 for the fifth drink, but the price is €4.50, so they will not buy the fifth drink.
- Person B is willing to pay a maximum of €2 for the sixth drink, but the price is €4.50, so they will not buy the sixth drink.

Therefore, Person B will buy a total of 4 drinks.

(b) For Person A:
- The total surplus for Person A is the difference between what they are willing to pay and what they actually pay.
- For the drinks they buy, the total surplus would be: €10 - €4.50 + €8 - €4.50 + €5 - €4.50 = €14.50 - €9 = €5.50.
- This total surplus is the maximum surplus for Person A because any additional drinks beyond the ones they bought would have a maximum price lower than the price of €4.50, so they would not buy them.

For Person B:
- The total surplus for Person B is the difference between what they are willing to pay and what they actually pay.
- For the drinks they buy, the total surplus would be: €12 - €4.50 + €10 - €4.50 + €8 - €4.50 + €6 - €4.50 = €36 - €18 = €18.
- This total surplus is the maximum surplus for Person B because any additional drinks beyond the ones they bought would have a maximum price lower than the price of €4.50, so they would not buy them.

(c) The total demand curve for these two people would depend on the price of the drinks. For any possible price, the total demand would be the sum of the number of drinks each person is willing to buy at that price. In this case, Person A would buy 3 drinks, and Person B would buy 4 drinks, so the total demand for any possible price would range from 0 (if the price is higher than both individuals' maximum willingness to pay) to 7 (if the price is lower than both individuals' maximum willingness to pay).

(d) If the temperature for the coming week turns out to be much lower than originally expected, it is likely that both individuals' maximum willingness to pay for an iced coffee drink would decrease. This is because lower temperatures may decrease the demand for cold drinks. As a result, both Person A and Person B would likely decrease their maximum willingness to pay.

The likely effect of this change on the total amount of iced coffee drinks purchased during the week at the given price of €4.50 would be a decrease in demand. With a decrease in the maximum willingness to pay, both individuals may purchase fewer drinks, resulting in a decrease in the total amount of iced coffee drinks purchased during the week at that price.