The following Table refers to four buyers’ willingness to pay for papadums. Each buyer is willing to buy at most one papadum and no more. buyer Willingness to pay ($) for one papadum Lincoln 17.00 Jefferson 15.00 Franklin 9.00 Washington 3.00 (a) Let the competitive market price be $4.00: calculate the total consumer surplus in the market at this price. (b) Assume now that there is only a single seller of papadums, and she knows each buyer’s willingness to pay. Assume that this seller incurs a cost of $4.00 per unit of papadum produced (i.e., the marginal cost is constant). If she intends to maximise profits, how many papadums would this seller supply to the market, and what price would she charge? Remember, the price has to be the same for each unit sold. Hint: start at a price of $17 and calculate what profit would be. Then lower the price just enough to attract an additional buyer and calculate what the new profit would be. Repeat this until all four buyers are purchasing the good and then check which price yields the highest profit. Alternatively, you can calculate the marginal revenue from lowering the price to attract an additional buyer and compare it to marginal cost. (c) Calculate the producer surplus and consumer surplus at the monopoly price and production level from (b). Are consumers better off or worse off in the monopoly situation relative to the competitive market? Why?
The following Table refers to four buyers’ willingness to pay for papadums. Each buyer
is willing to buy at most one papadum and no more.
| buyer | Willingness to pay ($) for one papadum |
| Lincoln | 17.00 |
| Jefferson | 15.00 |
| Franklin | 9.00 |
| Washington | 3.00 |
(a) Let the competitive market
in the market at this price.
(b) Assume now that there is only a single seller of papadums, and she knows each
buyer’s willingness to pay. Assume that this seller incurs a cost of $4.00 per
unit of papadum produced (i.e., the marginal cost is constant). If she intends to
maximise profits, how many papadums would this seller supply to the market,
and what price would she charge? Remember, the price has to be the same for
each unit sold. Hint: start at a price of $17 and calculate what profit would be.
Then lower the price just enough to attract an additional buyer and calculate
what the new profit would be. Repeat this until all four buyers are purchasing
the good and then check which price yields the highest profit. Alternatively, you
can calculate the marginal revenue from lowering the price to attract an
additional buyer and compare it to marginal cost.
(c) Calculate the
production level from (b). Are consumers better off or worse off in the
monopoly situation relative to the competitive market? Why?
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