Consider the following markets. a. Veronica lives in Hawaii and has a business producing leis for...

Consider the following markets.

a. Veronica lives in Hawaii and has a business producing leis for tourists. The first lei she produces costs her $1. Every lei she produces costs an additional $1 (so the second costs $2, the third $3, and so on). Suppose the market price of leis is $9. Draw a graph to explain each of your answers. How many leis will Veronica produce? What is the marginal cost to Veronica of producing the last lei? What is the net marginal cost to Veronica of producing the last lei? What is Veronica’s total cost from producing leis? What is Veronica’s net cost from producing leis? Carefully explain the role of the “margin” in Veronica’s decision making.

b. David loves video games. The first game he consumes provides him so much utility he would pay $69 for it. He burns out a little bit on gaming with each game he plays (assume we are talking about a given year), meaning he is willing to pay $1 less for each additional game he consumes. Assume David can buy as many games as he wants at $59 each. Draw a graph to explain each of your answers. How many games will David consume? What is the marginal benefit to David of consuming the last game? What is the net marginal benefit to David of consuming the last game? What is David’s total benefit from consuming games? What is David’s net benefit from consuming games? Carefully explain the role of the “margin” in David’s decision

Solutions

Expert Solution

Unfortunately, I don't have the graphing software right now, so I'm unable to draw graphs, but I will give you the points so that you can plot them and draw them yourself.

a) We have to assume that Veronica is going to produce leis until TR=TC or TR>TC, which means that she can go on until her last lei costs her $9. This also happens to be the role of margin in Veronica's decision making. As long as her Revenue is more than, or equal, to the cost of producing, she will keep producing, since she is incurring profit. But the minute, her profit margin dips below 0, she will stop producing. Hence, she can produce at most 9 leis, after which the process has to restart.

Unit of Lei (1)	Cost of Lei (2)	Revenue from Lei (3)	Profit (3 - 2)
1	$1	$9	$8
2	$2 (MC=$1)	$9	$7
3	$3 (MC=$1)	$9	$6
4	$4 (MC=$1)	$9	$5
5	$5 (MC=$1)	$9	$4
6	$6 (MC=$1)	$9	$3
7	$7 (MC=$1)	$9	$2
8	$8 (MC= $1)	$9	$1
9	$9 (MC=$1)	$9	$0

Hence, Veronica will produce 9 leis at most. The MC remains $1 throughout. Net MC is $8. Total cost of producing all the leis is $45.

b) The same exact theory applies to this answer. However, instead of cost, we have to take Utility, and Devin will keep buying until the price of the last game is $59.

Game	Price of one Game	Total Utility (assumed)	Marginal Utility
1	$69	100	0
2	$68	95	5
3	$67	89	6
4	$66	82	7
5	$65	74	8
6	$64	65	9
7	$63	55	10
8	$62	44	11
9	$61	32	12
10	$60	19	13
11	$59	5	14

Rahul Sunny answered 1 year ago

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