Question

In: Economics

You are the producer of ice-cold drinks. The more you produce, the more it costs you...

You are the producer of ice-cold drinks. The more you produce, the more it costs you to produce. Below is your production schedule. Cost to produce one bottle $1 Cost to produce a second bottle $3 Cost to produce a third bottle $5 Cost to produce 1 fourth bottle $7

a) If the price of an ice-cold drink is $2, how many bottles would be produced and consumed, and what is the total surplus?

b) If the price of an ice-cold drink is $4, how many bottles would be produced and consumed, and what is the total surplus?

c) If the price of an ice-cold drink is $6, how many bottles would be produced and consumed, and what is the total surplus?

Expert Solution

The production and cost schedule is given as follows,

Production Cost

1 $1

2 $3

3 $5

4 $7

a. When the price of ice-cold drink is $2 then as you can see we shouldn't produce more than 1 bottle since the cost of producing 1 bottle is $1 and the second bottle is $3 which is higher than price. And producing more than 1 bottle at a price of $2 would result in loss.

And total surplus will be equal to,

=( price × quantity - cost)

= 2 × 1 - 1 = $1

b. If the price of ice-cold drink is $4 then we shouldn't produce more than 2 bottles since producing 3rd bottle would cost us $5 which is more than $4 which will result in a loss.

So we should produce 2 bottles.

And the total surplus will be equal to,

= price×quantity - cost

= the cost of producing 2 bottles will be equal to $4 ($1 + $3).

And since the price of 1 bottle is $4 then selling two bottles will result in $4×2 = $8

Surplus = $8 - $4 = $4.

C. If the price of ice-cold drink is $6 then we shouldn't produce more than 3 bottles since producing 4th bottle will cost $7 and the price is only $6 which means producing 4th bottle will result in a loss.

So we should produce 3 bottles.

And the total surplus will be equal to,

= price × quantity - cost

The total cost of producing 3 bottles will be equal to,

= $1 + $3 + $5

= $9

And since the price is equal to $6 and we selling 3 bottles,

= price × quantity

= $6 × 3

= $18

Surplus = $18 - $9 = $9

I Hope I was able to help you, if you find this answer helpful please consider giving an upvote. Thank you

Rahul Sunny answered 2 years ago

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