Question

Assume we have a society with 1 producer and 1 consumer and we are looking at the market for coconuts. Let us simplify further and assume that the producer can harvest only 1 coconut with a marginal cost of $5. The marginal benefit to the consumer for the coconut is $10. From question b and onwards, assume the two economic agents agree to a price of $9 for the coconut.

What is the maximum possible price for these two agents to engage in a sale? Minimum? Why?

What are the marginal costs and benefits for the consumer?

What are the marginal costs and benefits for the producer?

What are the marginal costs and benefits for society? Explain your

answer.

Answer 1

a) The maximum possible price for the agents to engage in sale is $ 10 since beyond taht the consumer will not be willing to buy the coconut ie its his marginal benefit. the minimu cost is $5 since the producer wont sell below it. that is the mrginal cost of the producer.

b) the marginal benefit when the coconut is sold at $ 9 is $10 for the consumer because the pice would have varied between $5 and $10 . the agents had agreed to the price at $ 9 but that doesnt change the marginal beneift of the consumer . however he gets a consumer surplus of $1 since his ability and willingness to pay was more than the price of the good. there is no costs to the consumer since he is not the producer of the good . though it could be considered that if the producer would have given him at $5 the consumer benefit would have increased.

c)the marginal cost of the producer is the same ie at $ 5 although with the price being $9 , he gets a producer surplus of $4 which would have been maximised when the consumer would have chosen to pay $10 . producer surplus is the difference between what the consumer is paying or the price and what the marginal cost of producer is.

d) the marginal benefits to the society are the benefits the society receives when an additional coconut is produced which would include both the benfits to the producer and the cosnumer ie $1 to consumer as consumer surplus and $4 to producer as producer surplus . so a total of $5 would be the marginal benefit to the society and marginal social cost would be the cost of private and the cost to society. since we dont have any cost to the society like pollution etc , we take the private ,marginal cost of $5.