Question

In: Economics

There are four consumers willing to pay the following amounts for haircuts: Gloria: $7 Jay: $2...

There are four consumers willing to pay the following amounts for haircuts:
Gloria: $7 Jay: $2 Claire: $8 Phil: $5
There are four haircutting businesses with the following costs:
Firm A: $3 Firm B: $6 Firm C: $4 Firm D: $2
Each firm has the capacity to produce only one haircut.

a. Draw the “staircase” shaped demand curve and supply curve (as we did in class) on the
same graph for the market of haircuts. Label both vertical axis (Price) and horizontal axis
(Quantity) accurately with exact numbers.

b. For efficiency, how many haircuts should be given?

c. Which consumers should have their hair cut?

d. Which businesses should cut hair?

e. How large is the maximum possible total surplus? Calculate the exact numeric value.
(Hint: it is the area in between the demand curve and the supply curve on your graph.)

Solutions

Expert Solution

a. Market of haircuts

b. 3 haircuts; Supply and demand equal at $4 and      $5.                                                                                                    

c. Claire, Gloria, Phil, jay don't participate in haircut his willingness is too low.

d. Firms A, C, D cuts, Firm B's cost are too high.

e.Maximum possible total surplus = $8-$2 ( cost for first)= $6.

                                                                   +

                                                    $7-$3 ( cost for second) = $4

                                                                     +

                                                     $5-$4( cost for third ) = $1

                                                                   =       $11

Rahul Sunny answered 2 years ago
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