Question

A pizza baker can bake pizzas at a constant marginal cost equal to twelve crowns. He likes his job, but unfortunately he lives on the planet Mars together with just one other person, a pizza eater. The communications with Earth are broken and will remain so for the next several decades. On the other hand, the pizza baker knows everything about the pizza eater, including his willingness to pay at the margin for each time period. Furthermore, the pizza eater never eats anything but pizza and so the pizza baker is his only source for food.

i. Describe why we can or cannot say that the pizza baker makes a profit from the pizza eater, as well as whether this depends on how much the pizza baker knows about the willingness to pay of the pizza eater.

Answer 1

The pizza baker will make profit by selling pizzas to the consumer. The pizza baker knows the willingness to pay of the pizza eater, and thus the baker will charge the price according to the willingness to pay of the consumer.

How much profit the baker will make depends on the information the baker have about the eater. More information the baker has, more will he be able to earn profit by selling to the eater. And less information the baker has, less will he be able to earn profit by selling to the eater.

If both the eater and the baker donot have perfect knowledge about each other then the price will lie between the willingness to pay of the eater and the willingness to get of the baker. This is a situation of the bilateral monopoly where there is a signge seller and the single buyer.

Since, in baker has perfect knowledge about the willingness to pay of the buyer, the baker can make profit.

Hope, I solved your query.Give good feedback.

Comment, I'll get back to you ASAP.

Stay safe. Thank you.